Up To 3.5% Of US 2013 GDP Could Evaporate Due To Enacted Tax Hikes
Submitted by Tyler Durden on 01/11/2013 15:16 -0500
When it comes to the impact of the just enacted 2013 tax hikes (payroll tax cut expiration affecting everyone together with the tax hike on those making over $400K), economists are in broad agreement on one thing: the first half of 2013 will be impacted by roughly a 1.0%-1.5% drop in GDP. However, a big question emerges when attempting to quantify the adverse impact on US growth as the year progresses past June 30. Most strategists and economists ignore this issue, and instead chose to believe that all shall be well as by July, the US population will be habituated to getting a smaller paycheck and general consuming behavior will no longer be impacted relative to a previous baseline.
Sadly, as we all know, there are three certain things in life: death, taxes, and the majority of economists being dead wrong, which is why it is prudent to consider an alternative, one which assumes that Americans don’t “habituate” to being poorer, and do not revert to a baseline spending model, regardless how much economists “will” a given outcome (especially since no estimates take into account spending cuts, which may happen, and which will serve as a double whammy to consumption in addition to already enacted tax hikes).
Which is why we were surprised to learn that according to at least one model created by Goldman, the total consumption hit for all of 2013 (not just H1), may well be higher than what most people assume. In fact, as Goldman shows, based on a model conceived by Christina and David Romer, it is possible that US GDP growth in the second half is slashed by an additional 2-2.5%, something which very likely will tip the country into recession as the combined impact over the entire year could be as high as 3.5%, eliminating even the most optimistic forecasts for organic growth in the US for the new year.
But it gets worse. As Goldman observes, “based on our reading of the debate in Washington, we have become more
concerned about our assumption that the automatic spending cuts (or
“sequester”) will be delayed into 2014. If the sequester takes effect as
scheduled from March 1, this would present an additional downside risk
to our growth forecast in the later part of the year.”
So the worst case scenario for GDP growth from tax hikes alone is already 3.5%, and one may have to add to that another several percent in GDP reduction from an spending cuts, which might well lead to a 4-5% GDP drop in 2013 in the worst case, a case determined solely by the dysfunction in Washington.
Should this happen, the implications for monetary policy and even further easing at that point (on top of the already enacted, indefinite $85 billion per month), not to mention risk and hard assets, are self-explanatory.
https://www.zerohedge.com/news/2013-01-11/35-us-2013-gdp-could-evaporate-due-enacted-tax-hikes