CBO: Scheduled tax increases will hinder recovery

"[The] scheduled increases in taxes and the waning of fiscal policy measures that supported the economy earlier in this recovery will hold down spending, especially in 2011," it states. "The weak demand for goods and services resulting from those various factors is the primary constraint on economic recovery."

Absent congressional action, tax cuts enacted by President George W. Bush will expire this year. 

Democratic leaders have vowed to extend the breaks benefitting the middle-class while allowing tax cuts for wealthier taxpayers to expire on schedule at the end of the year. That strategy has met significant headwinds from Republicans and several rank-in-file Democrats who feel the weak recovery should prompt the extension of all the tax cuts, at least temporarily. 

The CBO noted that continuing the Bush tax cuts, along with extending tax cuts that expired last year, would help the recovery. 

"All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity," it stated.

However, it adds that "All else being equal, lower tax revenue increase budget deficits and thereby government borrowing."

The CBO warned that lawmakers must strike a balance on tweaking tax and spending policies when trying to stimulate economic growth to keep the deficit from spiraling out of control. 

"Developing such a combination would be feasible, but not easy," it stated.