U. S. economy could handle short fall over 'fiscal cliff'

Even if New Year's passed with no deal, businesses and consumers would not likely panic as long as some agreement seemed imminent. The $671 billion in tax increases and spending cuts could be retroactively repealed.
By CHRISTOPHER S. RUGABER Modified: December 26, 2012 at 9:50 pm •  Published: December 27, 2012
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The Internal Revenue Service has delayed any increases in tax withholding that would otherwise kick in. Without a deal, the top income tax rate for single people with taxable income between about $36,000 and $88,000 would rise from 25 percent to 28 percent. But that won't start to reduce Americans' paychecks in early January, even if no deal is reached by then.

About $85 billion in spending cuts to defense and domestic programs would take weeks or longer to take effect.

If a short-term agreement is struck, some taxes would probably still go up. These would include a 2 percentage point cut in Social Security taxes that's been in place for two years. Its expiration would cost the typical household about $1,000 a year.

Unemployment funds

A temporary deal that delays some hard decisions could reduce business and consumer confidence. It would also mean:

Extended unemployment benefits would end for 2 million people. The federal government's program pays for about 32 weeks of extra benefits, on average, on top of the 26 weeks most states provide. Weekly unemployment checks average about $320 nationwide.

The stock market would probably drop, though maybe not by much. Many Wall Street analysts expect a partial deal of some kind.

The expiration of the Social Security tax cut and the end of emergency unemployment benefits would likely shave 0.7 percentage point off economic growth next year, the Congressional Budget Office estimates. The economy now is growing about a 2 percent annual pace.

If no deal at all was reached by January and budget talks dragged on, many businesses might put off investment or hiring. That's why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.

In addition, many more people would be affected if something called the alternative minimum tax (AMT) isn't fixed.

The financially painful AMT was designed to prevent rich people from exploiting loopholes and deductions to avoid any income tax. But the AMT wasn't indexed for inflation, so it has increasingly threatened middle-income taxpayers. Congress has acted each year for a decade to prevent the AMT from hitting many more people.

If it isn't fixed again, roughly 33 million taxpayers, including married couples with income as low as $45,000 — down from $74,450 in 2011 — could face the AMT.

The IRS has said it assumes Congress and the White House will fix the AMT in a deal to avoid the cliff. If they don't, the IRS will need weeks to reprogram computers and make other adjustments.



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