Congressional Budget Office: Yeah Guys, Jumping Off the ‘Fiscal Cliff’ Is as Bad as It Sounds

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The Congressional Budget Office (CBO) 2011 annual federal budget is displayed during a news conference in Washington, D.C., on Wednesday, Jan. 26, 2011

Breaking up partisan budgetary knife-fights can be perilous business, so in its new report on a cluster of expiring tax breaks and scheduled spending cuts, the Congressional Budget Office, home to Capitol Hill’s weary fiscal referees, exercises restraint. While most Washingtonians call it “Taxmageddon,” the CBO bean-counters refer to the event, set to take place January 1 if Congress doesn’t act, as “the Fiscal Restraint That Is Scheduled to Occur in 2013.” Catchy. But the stakes are high and the CBO’s warning is dire, so just for a second, they really let their inhibitions go:

In fact, under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013—a development that some observers have referred to as a “fiscal cliff”—and will dampen economic growth in the short term.

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“Some observers” call it the “fiscal cliff.” Growth will be “dampened.” That’s as hyperbolic as the CBO gets. It doesn’t do their findings justice. The CBO report is really about what will happen to the economy if Congress fails to figure out a solution in time:

“Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent,” the report reads. “CBO expects…. such a contraction in output in the first half of 2013 would probably be judged to be a recession.” In other words: If Congress does nothing–something it’s pretty good at, by the way–the country will plunge back into recession and the economy would shrink in the first six months of next year. Real human suffering. Long-term damage. Ashes falling from the sky-type stuff. European levels of economic wreckage.

So here’s what the CBO recommends:

…if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.

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This isn’t just what everybody recommends, this is what almost everybody in Congress already agrees upon. Spending cuts are already there and tax reform, in a general sense, is a consensus proposition. The problem, as it was during the budget showdowns of 2011 that put in motion this whole event, is that Democrats and Republicans can’t agree on the nature of the tax changes. Specifically, they can’t agree how much revenue, if any at all according to some Republicans, the government should raise by changing the tax code. This single question is basically gumming up all of Congress.

The Tax Policy Center’s Howard Gleckman, fresh off the National Tax Association’s spring conference (it’s like spring break but, you know, not fun), has a thought: a simple solution for a simple problem.

What if, instead, Congress and the President agreed that the new reformed tax code should raise xx percent of Gross Domestic Product in revenue in 2022? No baselines, no snarling argument over whether this would be a tax cut or a tax increase. Just…a number. I’m not saying that getting there will be easy in today’s political environment. It will, in fact, be extraordinarily difficult. But the prospects for consensus are much higher than if the debate never gets past what to do about decade-old tax cuts.

Sounds promising. Congress should get on it. It’s either that or the whole economy gets it.

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