A: It depends how long it lasts. If negotiations continue for a few weeks past Jan. 1 and a deal is in sight, it probably wouldn't slow the economy much. Few Americans would expect the tax hikes and spending cuts to last. And the cuts could be repealed retroactively. The Treasury secretary could even instruct the IRS to delay increased income-tax withholding if a deal was in sight. But if the negotiations collapse and the measures take effect permanently, it could be painful. The stock market would likely plunge. Consumers would probably cut spending. Anticipating fewer customers, retailers, restaurants, hotels, auto makers and many other companies could cut jobs. And defense contractors and other companies hurt by the drop in government spending would lay off workers. If the tax hikes and spending cuts remained in place for a full year, the CBO forecasts that the economy would shrink 0.5 percent in 2013.
Q. When would most people begin to feel the effects from going over the cliff?
A. For most Americans, the tax hit would be modest at first. The expiration of Social Security and income tax cuts would be spread throughout 2013. For taxpayers with incomes from $40,000 to $65,000, paychecks would shrink an average of about $130 in January, according to the nonpartisan Tax Policy Center.
Q. With the budget deficit topping $1 trillion, shouldn't we welcome spending cuts and tax increases to reduce the red ink?
A. Most economists favor reducing the deficit. But they'd prefer to phase in spending cuts and tax increases slowly, particularly because the economy is still recovering from the Great Recession. The tax increases would be the largest tax increases in 60 years as a percentage of the economy. And most budget experts think spending cuts should be targeted and include entitlement programs such as Medicare and Social Security, rather than indiscriminate across-the-board cuts.