Former Sen. Judd Gregg (R-NH) weighs in on the impact of "taxmaggedon" in The Hill today. While the tax increases would likely lead to more revenue, he said, the sudden rise of the payroll tax, expiration of the 2001/2003 tax cuts, and other tax increases could have a devastating impact on a still weak economy. Gregg explains:
The likely consequences are obvious. Such a massive increase in taxes will lead to a significant slowdown in the economy as investment and disposable income both drop dramatically.
People and businesses will have to retrench in order to deal with these higher taxes. This will result in less economic activity and potentially less revenue for the federal government. The opportunity to partly address deficit problems through economic growth will be lessened, and this will ensure that our deficits and debt situation will continue to grow and become even more of a drag on our prosperity and national culture.
Gregg makes a strong case regarding the negative short- and long-term economic consequences of the tax increases in current law. Importantly, though, extending current tax policy in its entirety would add $5 trillion to the debt relative to that scenario, which would contribute to a slowing of long-term growth or possibly even a fiscal crisis. As with the rest of the fiscal cliff, policymaker should be looking to replace the immediate expiration of all the tax cuts with a gradual plan which brings the debt under control. Indeed, comprehensive tax reform could reduce the deficit while lowering marginal tax rates by going after tax expenditures.
The expiration of the tax cuts is just one part of the fiscal cliff, which also includes the $1.2 trillion sequester, the expiration of the doc fix, and the expiration of extended unemployment benefits. Taken together, we estimate the fiscal cliff would slow economic growth by about two percentage points over the next two years (the impact split roughly evenly between the tax increases and spending cuts). On the other hand, the debt accrued from continuing these policies will lower GDP by about one percent within ten years and much more beyond that. Any actions must therefore balance these dualing concerns by enacting a gradual and smart plan to stabilize the debt.