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Fiscal cliff combines tax hikes, spending cuts
A Congressional Budget Office study in May estimated that the fiscal cliff would force tax hikes and spending cuts totaling over $600 billion in the first nine months of next year — or perhaps $800 billion or so over the entire year if allowed to stay in effect.
A subsequent less detailed CBO update estimates a somewhat smaller impact. The agency is expected to release a new estimate soon.
The fiscal cliff would require such a sharp cut in the deficit that the economy would contract, economists say.
Not all elements of the fiscal cliff are guaranteed to be averted. New taxes on family investment income exceeding $250,000 set to take effect Jan. 1 as a way to help pay for Obama's health care law are unlikely to be forestalled; and the common wisdom in Washington is that temporary payroll tax cuts and unemployment benefits won't be extended.
Some Democrats have called on Obama to propose renewing the payroll tax cut, but he has not taken a position.
Some experts say that the economy could withstand going over the fiscal cliff for a short period of time because the Treasury Department might be able to adjust tax withholding tables to mitigate its affects and that agency budget chiefs could be flexible in allocating the automatic cuts, known as a sequester, and buy several weeks' worth of time to negotiate.
Some Democrats want Obama to play hardball on the fiscal cliff to try to force Republicans to accept increased tax rates on income exceeding $250,000 for couples. Republicans warn that type of approach would get Obama's second term off to a bad start.
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