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Goldman’s Jan Hatzius Answers The 10 Most Important Questions For 2013

And the most important question of 2013 is….

1.Will the 2013 tax hike tip the economy back into recession? 

No. To be sure, it will likely deal a heavy blow to household finances, and we therefore expect consumer spending to be weak this year. Once we add the expiration of the payroll tax cut (a hit of $126bn), the expiration of the Bush-tax cuts for

families earning more than $450,000 ($50bn), and the increase in taxes to finance the Affordable Care Act ($24bn), it amounts to $200bn or 1.6% of disposable personal income. As shown in Exhibit 1, this could push real income growth in the first quarter into negative year-on-year territory—something that has never happened without a recession!

But we do not expect the impact to be as bad as suggested by Exhibit 1. We recently estimated the effects of higher taxes on consumption using three different econometric models: (1) a vector autoregression (VAR) model that traces out the dynamic impact of shocks to disposable income on consumption; (2) the Fed’s large-scale econometric model, FRB/US; and (3) the database of “exogenous” tax increases compiled by economists Christina and David Romer of the University of California, Berkeley. As illustrated in Exhibit 2, the estimates for the impact on real consumer spending growth in the first half of 2013 from the three models center around a 1-percentage-point hit to real consumer spending growth—a substantial impact, but not enough to cause an outright contraction in spending.

Goldman Sachs


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