Peter Hooper at Deutsche believes that an end of the Bush tax cuts could remove a full 2.5% form U.S. GDP in 2011. This could be enough to kill the economic recovery:
We assess the potential for fiscal drag over the year ahead based on (1) an update of the impending unwinding of the Obama stimulus program (ARRA), and (2) alternative scenarios for extension of the Bush tax cuts. If a political stalemate in Washington results in no extension, fiscal drag could reach 2.5% of GDP next year, enough to bring a sluggish recovery to the stalling point. This includes 1% drag from unwinding of ARRA, 1% from scheduled tax increases as the cuts expire at the end of 2010, and 0.5% from failure to pass a fix for the Alternative Minimum Tax.
If the Administration’s tax extension package is passed, the drag in 2011 will fall to a bit less than 1.5%, and if the Republican across-the-board extension passes, it will fall to around 1%. Either way, we think that pent-up private demand would be sufficient to keep a moderate recovery going.Thus the worst situation according to Mr. Hooper would be one where the government does absolutely nothing.
(Via Deutsche Bank, The growing risk of a fiscal drag on the US, Peter Hooper, 28 July 2010)