America's Upcoming Economic Train Wrecks: Tax Hikes, Budget Cuts

With the risk of a monumental tax hike and another economic downturn, businesses will remain reluctant to invest.

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David Sampson is the president and CEO of the Property Casualty Insurers Association of America. He served in the George W. Bush administration as the deputy secretary of the U.S. Department of Commerce and as assistant secretary of Commerce for Economic Development.

As property casualty insurers, evaluating risk is our core competency. For instance, auto insurers know from statistical evidence that there will be almost 30,000 car accidents each day.

However, you don't need to be an actuary to understand there are several figurative train wrecks about to derail our nation's economy—and they will all occur starting January 1, 2013. The question is whether or not our elected leaders can prevent going off what Federal Reserve Chairman Ben Bernanke has called the "fiscal cliff" before it's too late.

[See a collection of political cartoons on the budget and deficit.]

The first problem stems from the failure of the 2011 congressional "super committee," which was formed in the wake of the federal government's near default on sovereign debt. Because of the committee's inability to reach an agreement on budget cuts last fall, "automatic" budget cuts of $1.2 trillion, split between defense and nondefense spending, will take effect in January of 2013.

Couple that with the expiration of the Bush-era tax rates. All of the current tax rates on personal income, capital gains and dividends, and estates are set to expire on December 31, 2012. This means every American taxpayer and business is facing an automatic tax increase on New Year's Day, unless Congress acts to extend the current rates.

Former Federal Reserve vice chairman Alan Blinder believes the "resulting fiscal contraction—consisting of both tax increases and spending cuts—would be in the neighborhood of 3.5 percent of gross domestic product" and would "be a disaster for the United States, highly likely to stifle the recovery."

[Read the U.S. News debate: Is Obama Turning the Economy Around?]

We also have to deal with the debt ceiling again. The current ceiling of $16.4 trillion was supposed to take us into 2013. But now, many experts believe U.S. borrowing may reach that limit even sooner, likely around the election.

There is little hope that Congress will address any of these critical issues before the November elections. That means Americans will have to rely on lawmakers to fix these major problems in less than two months, during a lame duck session at the end of year.

All of these policy uncertainties are contributing to our nation's historically weak recovery. In the three years following the Great Depression, the U.S. economy rebounded with growth rates of 11 percent, 9 percent, and 13 percent. Following the Great Recession, which ended in 2009, economic growth was only 3 percent in 2010 and 1.7 percent in 2011.

[See a collection of political cartoons on the economy.]

Elected leaders' inability to deal with structural problems and their general hostility toward business and investors are keeping entrepreneurs and risk-takers on the sidelines and preventing what former Treasury official Tony Fratto calls a "Whole Foods Recovery"—one that is organic and sustainable. We are still relying on artificial stimulants to drive economic growth, such as low interest rates by the Federal Reserve, and temporary adjustments, such as the payroll tax cut extension.

With the risk of a monumental tax hike and another economic downturn next year, businesses will remain reluctant to invest and individuals will defer on big ticket items. Ultimately to fully recover from the 2008 financial crisis, we need elected leaders to address these policy uncertainties that are holding back our nation's economic growth.

There is significant political risk in making these difficult decisions, but the greater risk is pretending there is not a problem.

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