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Obama deficit plan: Is there ever a good time for a tax increase?

The Obama deficit plan would raise taxes on the wealthiest Americans, but would it hurt the economy? The answer to that question depends on what happens during the next two years.

By Ron SchererStaff writer / September 19, 2011

President Obama walks from the Rose Garden of the White House in Washington Monday after laying out a plan to cut the US deficit.

Jason Reed/REUTERS

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Would President Obama's tax-the-rich proposal, part of a plan to raise some revenue for deficit reduction, actually harm the economy?

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Critics say it would, but economists suggest a major part of the equation involves the state of the economy itself. By 2013, the earliest Mr. Obama's tax reform policies would go into effect, no one knows if the economy will be humming along, muddling through, or in a recession.

To that, economists suggest it's anyone's guess. Yes, the economic outlook is that uncertain, leaving any analysis of the economic impact of a potential $1.5 trillion in tax hikes equally uncertain. Congress, Greece, and the housing market could all play significant roles – but what those roles might be are yet to be determined, experts say.

The optimists believe the US housing market, suffering since 2008, will revive, giving the economy a significant boost.

Those who are less optimistic, think the economy will be moving ahead at a snail’s pace – not much different than today.

And the pessimists think the financial problems in Europe could send the US economy back into recession – assuming it’s not there already.

“Next year is probably more uncertain than 2013,” says economist Joel Naroff of Naroff Economic Advisors in Holland, Pa. “If we get through 2012 OK, then 2013 will be good. But if not, then 2013 will be a disaster.”

What Congress does

Some economists say that Congress could play a significant role in what happens next. It has already agreed to cut spending, but that will actually reduce economic activity, says Mark Zandi of Moody’s Analytics.com.

He estimates the impact of the fiscal austerity will cost the economy 1.7 percentage points of economic activity unless Congress does something such as renewing the reduction in payroll taxes (think Social Security and Medicare taxes). In 2013, the belt-tightening will cost the economy 1.5 percentage points.

It’s also not clear if Congress will agree to any of Obama’s job-creation plans – a combination of some tax reductions, some spending on new schools, and direct grants to the states. If Congress does nothing, it could mean the economy just “muddles along for the next two years,” says economist Richard DeKaser of the Parthenon Group, a Boston-based strategy consulting firm.

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