Earlier this week, the Congressional Budget Office projected that if Congress fails to act [on tax policy], the U.S. economy will enter a recession next year, with a 1.3% annual rate of contraction in the first half of 2013. It also said that if Congress extended current policy without “comparable restraint in future years,” federal debt levels would balloon, leading to negative consequences [that] include higher interest payments and less ability to use tax and spending policies to respond to economic challenges. [The CBO’s report is here.]
This is a fundamental lack of understanding—by the CBO, yet—of the role of government.
The Federal government has no business using “tax and spending policies to respond to economic challenges.” This is nothing less than the government’s attempt to centrally manage the economy. The Federal Reserve Bank has the goal—the responsibility—to seek price stability in our economy. The Federal government has a responsibility to maintain a stable environment within which a free market can operate without Federal interference. The optimal way—the only real way—for the government to achieve this is through low, and stable, tax rates that have no loopholes for special interests, and through low, and stable, spending rates that have no exceptions for special interests. Indeed, that is the only economic challenge to which the Federal government must respond. Moreover, answering this challenge enables the free market economy to achieve the full employment that is another claimed goal of the Fed.
And that, thereby, answers the question of what the government must do about the looming Obama tax increase.