Do-nothing Congress may find a way to raise taxes

Do-nothing Congress may find a way to raise taxes
Nov 21st 2011, 16:39 by R.A. | WASHINGTON

Economist

THE supercommittee has failed. When Congress finally struck its deal to raise the debt ceiling during the summer, it agreed to find just over a trillion in budget savings through a bipartisan committee (said supercommittee), which would be empowered to develop recommendations that would then be subject to a Congressional vote in a process mercifully stripped of most of the procedural bottlenecks that now choke so much legislation. Should Congress fail in this endeavour, a number of automatic cuts would instead kick in in 2013. The nastiness of the proposed cuts was supposed to encourage lawmakers to strike a deal. Instead, it seems that they'll strike out. It now appears that Congressional leaders have been unable to reach a consensus.

This failure is leading some to wonder whether debt worries might hamstring a struggling American economy. Eventually, perhaps, but not yet; for now, crisis is sending international investors rushing into the arms of the Treasury, and the yield on 10-year American debt is back below 2%. A bigger concern is the rising possibility that Congress will be unable to prevent a big fiscal tightening from occurring at the end of the year.

Last year, as part of the deal to extend the expiring Bush tax cuts, Congress approved a stimulative payroll tax cut and an extension of federal emergency unemployment benefits. Both are scheduled to expire at the end of the year. Should they do so, the economy may face a fiscal hit next year equivalent to about 2 percentage points of growth. America's economy has looked surprisingly buoyant in recent months, but few expect growth to continue to accelerate. A tightening of that magnitude would push America uncomfortably close to the threshold of recession, and that's assuming no new headwinds, as from a euro-zone collapse.

Until recently, it had been assumed that whatever their differences, Republicans and Democrats could come together to protect a tax cut for working people amid an extremely fragile recovery. The failure to reach any supercommittee deal may have poisoned the water sufficiently to cast even that into doubt.

How long might an impasse persist? With an election looming in November of 2012, it is difficult to imagine matters getting any easier. Republicans have drawn a line in the sand on the raising of new revenue to help close the deficit, and Democrats are unwilling to support big spending cuts without at least some contribution on the revenue side. Neither group will want to face voters having stepped away from that principle.

It's impossible to say what the composition of Congress might look like post-election, but the fiscal cuts scheduled for the end of next year are bigger still; they include the expiration of the Bush tax cuts (again) as well as the automatic cuts that kick in as a result of the supercommittee's superfailure. If this Congress can't agree on anything before the election, and the new Congress is no better, then the drag on the economy from government will grow from small but manageable to debilitating.