THE US economy would see a two per cent annualised hit to household income, or roughly 1.3 per cent of GDP, if the Bush tax cuts were allowed to expire as scheduled at the end of this year, according to a note published by Bank of America Merrill Lynch chief North American economist Ethan Harris yesterday.
That hit could trigger a double-dip recession, he said.
Democrats and Republicans are fighting over the provision, with the Obama administration wanting to permanently extend lower rates and permanently raise the two upper rates, while Republicans want the tax cuts extended.
“We don’t find either view compelling,” Harris said. “The longer this game of chicken goes on, the bigger the risk of an economic accident.”
Harris says there’s a 55 per cent probability of a compromise after the mid-term election and a 35 per cent chance of gridlock without any compromise.
Bank of America said Congress was failing to heed the lessons of Japan, which raised consumption taxes in 1997 before recovery was strong enough. It suggests that it was because of this tax that Japan ended up in deflation.