U.S. economy could withstand brief fall off 'fiscal cliff'

By Christopher S. Rugaber

Associated Press

Published: Wednesday, Dec. 12 2012 6:33 a.m. MST

Yet he's reluctant to absorb new costs until he's sure what tax changes are coming. A tax break for companies that invest in new equipment is set to expire. Companies can't claim that break unless new equipment is on site before year's end. Machinery can take weeks to arrive, meaning it's too late for Babb to claim the credit this year.

Many more people would be affected if something called the alternative minimum tax 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's 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. Previously, only 5 million taxpayers had to pay it. Taxpayers subject to the AMT must calculate their tax under both the regular system and the AMT and pay the larger amount.

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. In the meantime, nearly 60 million taxpayers couldn't file tax returns early next year because they couldn't determine whether they owe the AMT. Refunds would be delayed.

One immediate spending cut would be the end of extended unemployment benefits. Most states provide benefits for 26 weeks. But since 2008, the federal government has provided an emergency benefits program. This adds an average of 32 weeks, depending on the state, for a total of 58 weeks of benefits for long-term unemployed.

If the extended benefits end Jan. 1 as scheduled, about $30 billion would be saved next year. But without that money, about 2 million people who have been out of work for more than six months would lose benefits averaging about $320 a week.

Economists note that recipients of unemployment aid tend to spend that money quickly, giving a lift to the economy. The expiration of the extended benefits would cut economic growth by about 0.2 percentage point next year, the Congressional Budget Office estimates.

The gravest scenario would be if the budget talks collapsed, negotiators went home and the tax increases and spending cuts appeared to be permanent.

In that case, Macroeconomic Advisors, a forecasting firm, warns that the Dow Jones industrial average could plunge up to 2,000 points within days. Businesses would turn gloomier in anticipation of Americans paying higher taxes. Retailers would order fewer cars, appliances and clothing. Consumers' confidence would likely plummet, followed by their spending.

The economy would shrink at an annual rate of 0.6 percent in the first three months of 2013, estimates Joel Prakken, an economist at Macroeconomic Advisors. That compares with an estimated 1.9 percent growth rate if a deal is reached.

CBO forecasts that the economy would decline 0.5 percent in the first half of 2013 and fall into recession. The unemployment rate would rise to 9.1 percent from the current 7.7 percent.

Most economists are counting on fear of such a disaster to prod Congress and the White House to make a deal. But analysts expect the Social Security tax cut and extended unemployment benefits to end. Those two changes would lower growth by 0.7 percentage point next year, the CBO estimates.

Under that scenario, Social Security taxes would revert back to 6.2 percent on the first $110,000 of income, up from 4.2 percent. The increase would cost someone earning $50,000 an extra $1,000 a year, or nearly $20 a week.

For all their combative rhetoric, the White House and House Republicans have identified areas that could underpin a budget deal. Both sides concede, for example, that higher tax revenue and lower spending on programs like Medicare will be included.

Whatever the outcome, some trends could offset part of the economic damage. Ashworth notes, for instance, that the average retail price for gasoline has dropped 15 percent this fall. Lower gas prices give consumers more money to spend elsewhere.

And if the crisis is resolved, as many expect, the boost to business and consumer confidence would encourage more hiring and spending.

On Tuesday, the Business Roundtable, a group of large company CEOs, urged Congress and the White House to avoid the cliff by striking a budget deal containing about $4 billion in tax increases and spending cuts.

"We could end up with a much more robust recovery than anybody's envisioned" if a deal is reached, said David Cote, CEO of Honeywell International.

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