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Memo to GOP: Don't Go Wobbly On Taxes

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James Pethokoukis has a simple message for Republicans:  "The last thing the economy needs is a tax hike."

 

 

It’s up to House Speaker John Boehner now. Democrats, the media and Wall Street will be pounding him to agree to raise taxes as part of a debt ceiling deal. But now is no time for Republicans to go wobbly. Here’s why the GOP should stick to its guns until Aug. 2 – and beyond if necessary:

1. The last thing the economy needs is a tax hike. If the economy was too weak to absorb a tax hike last December – when the White House and Congress agreed to extend all the Bush tax cuts for two more years – its health is even worse today. The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.)

 

In other words, the economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

2. Tax revenue isn’t the problem. Spending is. The recent Congressional Budget Office budget outlook was illustrative. The CBO forecast to note is its “alternative fiscal scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.”

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

 

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