History may well remember 2012 as the year our leaders finally drove the United States off a fiscal cliff due to their disastrous tax and spending policies. America's economy teeters on the brink of a media-dubbed "taxmaggedon," a ticking time bomb of policy triggers that, together with deep spending cuts that are scheduled to take effect around the same time, could send our economy back into recession if we fail to prevent them from taking effect.
Consider what's set to occur by the end of this year:
For starters, the so-called Bush tax cuts will expire on December 31 -- all of them, not just the tax cuts for the wealthy. That will mean across-the-board tax increases for most taxpayers. The capital gains tax will rise and the special break for dividends will end entirely. Also set to expire are key provisions in the economic stimulus bill of early 2009. As a result, taxpayers will see reductions in the child credit, earned income tax credit and American opportunity tax credit. The estate and gift tax rules return to where they were in 2001, and married couples will see a tax increase.
On top of this, the payroll tax holiday and 67 other tax provisions will expire this year, including a deduction for elementary and secondary school teacher expenses, a deduction for qualified tuition expenses and more. Already gone is protection from the effects of the Alternative Minimum Tax for millions of taxpayers. Without new legislation, millions of middle-class taxpayers will see their 2012 income taxes rise by thousands of dollars.
The spending side of the budget will bring another set of problems. The 2011 Budget Control Act stipulated that if policymakers did not craft a plan to reduce budget deficits by $1.2 trillion over the next 10 years, automatic spending cuts to achieve that goal would begin to kick in by early January.
But wait -- there's more. Analysts predict that the federal government will bump up against the existing legal limit on outstanding national debt (the "debt ceiling") late this year or early next, which could bring a repeat of last summer's congressional showdown on raising the debt ceiling that prompted Standard and Poor's to downgrade U.S. government debt from AAA to AA+.
Policymakers could begin to remedy many of these problems by enacting real tax reform rather than short-term fixes. But the chance of that this year is zero. Not only are we saddled with a Congress that has set a new standard for partisanship (a recent poll found that 42 percent labeled the 112th Congress as the "worst Congress ever"), but we face an election year in which both parties have a vested interest in ensuring that the other's legislative proposals fail.
Think about the potential consequences. The Congressional Budget Office (CBO) predicts that the current tax increases and spending cuts slated to take effect in January 2013 will likely lead to a recession. By its estimate, the economy will shrink 1.3 percent in the first half of 2013, followed by a meager 2.3 percent growth in the second half of 2013.
Another U.S. recession would certainly tip the global economic scale downward, particularly in Europe where countries like Greece and Spain already face their own fiscal crises.
How will taxpayers react to a double dip recession? What will happen to stocks if thousands of investors cash in this year to avoid higher taxes on their investments next year? What will happen to the economy when these kinds of massive tax changes occur because nobody did anything to stop them?
Perhaps fears of taxmaggedon will propel lawmakers into meaningful action, to setting aside their differences long enough to develop a fairer, saner tax code -- even if they do it just to save their own jobs. It's time that Washington stopped "kicking the can down the road" and started working for the people to repair a broken tax system. Until it does, American taxpayers and the global economy face an increasingly scary future.
Christopher Bergin is President and Publisher of Tax Analysts and an expert on federal tax policy. He has written extensively on federal tax issues, worked in tax publishing for almost 30 years, and is frequently cited in national media as an authority on federal tax policy. He also blogs for Tax.com. This article appeared in Roll Call on Monday, June 11, 2012.