By Peter Orszag

(Bloomberg News) The nation is hurtling toward what has been called "taxmageddon," the enormous tax increases and spending cuts scheduled for the beginning of 2013. At around the same time, we will also be spending some more quality time with our old friend: the debt limit.

No one can yet see a plausible way through the coming storm. But even though they are not particularly inspiring, paths away from catastrophe do exist.

First, some brief background. At the end of this year, all the Bush tax cuts expire -- amounting to about $250 billion a year. The payroll-tax holiday, at more than $100 billion a year, ends too, as do expanded unemployment-insurance benefits. And we face other spending cuts of about $100 billion, from the sequester set up by the 2011 debt-limit deal.

All told, this fiscal tightening adds up to about $500 billion -- or more than 3 percent of gross domestic product. The economy will be in no shape to handle that much of a squeeze. If we do nothing to reduce or stop it, the economy could be thrown back into a recession.

As if that were not challenging enough, we are expected to bump back up against the debt limit, which currently stands at $16.4 trillion. Projections suggest we will approach the limit in the fourth quarter of 2012. Then, the Treasury secretary will take temporary measures to allow continued issuance of debt. The Bipartisan Policy Center estimates those actions will get us to February 2013 -- at which point we will hit the debt-limit wall. If the economy is weaker than expected, it will widen the deficit faster, and we'll hit the wall sooner.

Alternate Scenarios

In thinking through the options for getting past this mess, let's assume that, after this fall's elections, the House of Representatives remains Republican. A presidential victory by Mitt Romney would then probably mean that nothing would get done during Congress's lame-duck session at the end of 2012. After all, why shouldn't House Republicans just wait to deal with the incoming Republican president?

After Romney took office, his administration would presumably negotiate a temporary deal to retroactively reinstate the tax cuts to the beginning of 2013, lift the spending reductions and raise the debt limit for a few months. Republicans would then try to pass a budget resolution and use the reconciliation process -- which allows measures to pass with only 51 votes in the Senate, rather than 60 -- to enact substantial and flawed structural reforms to Medicare and Medicaid (like block-granting Medicaid), and large reductions in programs such as food stamps and Pell Grants.

On the other hand, if Barack Obama is re-elected, an attempt may be made to reach a deal before Jan. 1. The key problem with this scenario is that the Obama administration and House Republicans have irreconcilable differences over the Bush tax cuts: The administration insists that the cuts for people with incomes above $250,000 not be extended again, and the House Republicans insist that they must be. With such a sharp line drawn in the sand, it's not clear how a deal could magically happen before the end of the year.

One possibility would be for the two sides to adopt, during the lame-duck session, a "framework" agreement that would set deficit-reduction goals but provide few, if any, specifics. The tax cuts could be extended and the debt limit raised temporarily as negotiators worked out the details.

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