Luskin warns of double-dip recession if Bush tax cuts aren't extended

Investment strategist and conservative columnist Donald Luskin on Monday warned that if Congress fails to extend all of the Bush-era tax cuts the economy will slide back into a recession. 

He reasons that the expiration of the tax cuts will create an average tax increase on income of 3.3 percent, which will directly affect consumption.

"Do the math: 94 percent of income goes to consumption, and consumption is 70 percent of gross domestic product," he writes in the Wall Street Journal. "All else being equal, if the Bush tax cuts don't get extended, that's a 2.3 percent hit to 2011 GDP. That means instant double-dip recession, starting at midnight, Dec. 31."

Democratic leaders have vowed to extend the tax cuts benefiting the middle-class. However, their argument that tax cuts for the wealthy should expire at the end of the year because they provide a poor economic stimulus has not been touted as much as it used to. 

The Tax Policy Center's William Gale recently noted in the New York Times that all of the Bush tax cuts provided a weak economic stimulus. 

"After the tax rebates in 2001, 2003, and 2008, households appear to have spent in relatively short order somewhere between 25 and 67 cents more for each dollar of tax cut," he wrote. "This makes tax cuts in general -- even the parts of those tax bills that were intended to stimulate -- a relatively weak way to help the economy compared to increases in governmental purchases, for which each dollar of increased deficit turns into an additional dollar of spending."

Congress is expected to debate the fate of the Bush tax cuts in the upcoming lame-duck session. 

While members of both parties agree that the middle-class tax cuts should be extended, Republicans and a growing number of Democrats have called for a continuation of all of the tax cuts to keep the economy from teetering toward another recession. Democratic leaders have appeared to resist this idea. 

Luskin suggests their resistance is more political than economic. 

"Why won't the Democrats who control both houses of Congress switch off this doomsday clock?" he writes. "It's because Democratic leaders and the Obama administration want to roll the dice for the sake of ideology, by giving tax relief to only the middle-class while letting rates rise for higher earners."

He adds, "When a bill comes before the House in the lame-duck session later this year, the games will really begin."