Forecast: Taxmageddon Would Cause Another Recession

Speaking this week at the Western Economic Association International, economic forecaster Allen Sinai talked about the damage the “fiscal cliff” of 2013 will cause the economy. Sinai concludes that a recession is unavoidable if Congress does not act to fix the fiscal cliff.

The fiscal cliff has two components: (1) Taxmageddon, a $494 billion per year increase in tax increases set to take effect on January 1, 2013, and (2) federal spending cuts of about $135 billion.

In the large-scale economic model that Sinai’s Decision Economics Inc. uses to predict economic growth and fluctuations, the fiscal cliff has catastrophic consequences, but those consequences are not symmetric.

In Sinai’s model, a $350 billion tax increase—Sinai’s analysis shows that even a modest estimate of the 2013 tax increases has a huge, negative economic impact—would lower growth in 2013 by two percentage points and by more than two percentage points in 2014. The negative effects would persist until the long-run trend aspects of the model outweigh the effects of current policy. Given that growth in the U.S. has hovered around 2 percent throughout the recovery-less recovery, a $350 billion tax increase alone would reduce growth to zero for years.



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