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Here’s how you might explain Congress and tax cuts to a third grader:
Congress cuts taxes, but it doesn’t necessarily make the cuts permanent. They last only as long as lawmakers can justify from a budgetary standpoint (more than a third grader needs to understand). Then the tax cuts expire, just as Congress mandated.
And then Congress goes: OMG, taxes are about to rise.
The same thing happens with scheduled spending cuts, or what lawmakers currently call sequestration. Congress in 2011 wrote a law mandating about $100 billion of them a year over a decade, starting in January 2013 and spread them across discretionary programs. These were supposed to be a poison pill as congressional negotiators tried to find some other way to stem the rising federal debt. But Congress failed, so the pill must be swallowed.
The result of these spending and tax policies kicking in simultaneously is described as the looming "fiscal cliff." And one of last year’s negotiators, U.S. Sen. Rob Portman, an Ohio Republican, recently described the consequences of going over that cliff.
In an interview with the Dallas Morning News, Portman said, "The nonpartisan Congressional Budget Office has just told us that these massive tax increases and defense cuts, and other aspects of so-called sequestration, will take us into a recession and kill jobs."
Did Portman accurately cite the CBO’s analysis? Could the cliff be that bad?
According to the Congressional Budget Office, or CBO, the answer is yes -- for a while.
On Nov. 8, the CBO posted a synopsis of a new report on its website, saying, "Significant tax increases and spending cuts are slated to take effect in January 2013, sharply reducing the federal budget deficit and causing, by CBO’s estimates, a decline in the nation’s economic output and an increase in unemployment. "
How awful might these be?
Allowing all of the scheduled tax hikes and spending cuts to take place would cut the gross domestic product, a measure of the nation’s economy, by 0.5 percent in 2013, says the full CBO report.
Economic growth is already less than robust -- the third quarter GDP growth was 2.0 percent, below the historic average since 1947 of 3.25 percent but higher than the 1.3 percent in the previous quarter. A contraction in the economy would cost jobs, with the unemployment rate rising to 9.1 percent in the fourth quarter of 2013, the CBO said. That compares with today’s national unemployment rate of 7.9. (The rate in Ohio is 7.0.)
There are ways to temper the pain, however, which is why the CBO conducted its analysis. Congress could allow some but not all the tax cuts to expire. It could limit the immediate spending cuts. Each of these might soften the harsher consequences.
So why not just stop the whole thing, extend all the tax cuts and keep spending money?
Because the resulting national debt -- a result of tax revenue being inadequate to keep up with spending (the political parties disagree on which of these bears the most blame) -- would continue to drag down the economy.
In fact, the CBO says that if the pending spending cuts and tax hikes are allowed to kick in as scheduled, "after next year, by the agency’s estimates, economic growth will pick up, and the labor market will strengthen." The unemployment rate would shrink to 5.5 percent by 2018, the CBO says.
In other words, next year’s pain would lead to eventual gain.
Conversely, the CBO says, if none of the tax cuts were to expire and government spending went on and on uninterrupted, "the economy would remain below its potential and the unemployment rate would remain higher than usual for some time."
And if this continued indefinitely. the federal debt would keep surging, raising the risk of a crisis "in which the government would lose the ability to borrow money at affordable interest rates."
So something must be done, or so you could assume from the CBO’s analysis. Congress just has to decide what and when. But with the economy still struggling and millions of Americans already looking for work, few lawmakers -- even the majority who agreed to the poison pill -- advocate tough fiscal medicine immediately.
The CBO provided Congress with some economic assumptions as it weighs its options, including phasing in some changes and delaying others.
And while Portman chose words with somewhat more rhetorical flair, his description of the consequences laid out in the CBO report is accurate.
The CBO did not use the word "recession," as Portman did, but a recession is generally defined as an economic contraction in two consecutive quarters. That fits the CBO’s technical explanation -- a decline in GDP in the first half of 2013 -- and "recession" has been used in media reports as the shorthand..
Portman also is accurate when describing the potential for higher unemployment, based on the CBO report.
It is important to note that Portman was not delivering a thesis on the CBO report. Rather, he was telling a newspaper interviewer about the desire to avoid the short-term pain while addressing the long-term problems.
Whether his solutions, which include corporate tax reform, would work is immaterial here. His claim about the immediate consequences of going over the cliff, based on the CBO’s analysis, is True.
Dallas Morning News, "Point Person: Our Q&A with Rob Portman of the GOP’s take," Nov. 11, 2012
Congressional Budget Office, "Economic Effects of Policies Contributing to Fiscal Tightening in 2013," Nov. 8, 2013
U.S. Bureau of Economic Analysis, third-quarter 2012 gross domestic product report, Oct. 26, 2012
U.S. Bureau of Labor Statistics, table of unemployment rate by month, accessed Nov. 13, 2012
Ohio Department of Job and Family Services, "Ohio and U.S. Employment Situation," Oct. 19, 2012
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