In its latest 14-page report on the impact the “fiscal cliff” would have on the economy in 2013 and beyond, the non-partisan Congressional Budget Office (CBO) provided enough ammunition to both sides of the debate to guarantee a standoff in Washington. It would have simplified matters greatly if Doug Elmendorf, the CBO’s director, had simply said: “Pay me now or pay me later. You decide.”
The “fiscal cliff” is a convergence of tax increases and spending cuts scheduled to become effective on January 1, 2013 that are complex enough to, in the words of Tevye in the film, Fiddler on the Roof, “cross a Rabbi’s eyes.”
There are the Bush tax cuts from 2001 and 2003 that are due to expire, representing a tax increase that would affect most taxpayers, hitting higher earners especially hard. There are the mandatory spending cuts to military and domestic programs that resulted from the failure of Congress in August 2011 to make hard decisions about the deficit and national debt.
There is the expiration of the Alternative Minimum Tax (AMT) “patch,” which would effectively raise taxes on some 27 million people. There is the scheduled ending of the payroll tax “holiday” that temporarily reduced employees’ contributions to Social Security from 6.2 percent to 4.2 percent. There is the Medicare “Doc Fix” legislation which, when it expires, would cut Medicare providers’ fees by 27 percent. And there’s the Medicare surtax of 3.8 percent that would apply to high income earners along with the expiration of the Bush tax cuts.
Put altogether, if the Congress does nothing, the impact on the economy would mean a significant decrease in (but not elimination of) the deficit by an estimated $500 billion a year, but at a cost of a potential recession and significantly higher unemployment in 2013 and beyond.
On the other hand, if Congress prevents all of these measures from expiring, the CBO says the economy will likely continue its slow recovery from the Great Recession, but deficits would be $500 billion higher in 2013 and nearly $700 billion higher in 2014 than they would otherwise be.
Here’s how the CBO puts it:
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Photo: Buildings going over a cliff viaShutterstock