‘Fiscal cliff’ would take no prisoners if effected

Dana Pinero of New York waits in line to mail tax returns at the James A. Farley Main Post Office in New York. The package of tax increases and spending cuts known as the “fiscal cliff” takes effect Jan. 1, 2013, unless Congress passes a budget deal by then. Many economists say the economy would be hit so hard it would likely sink into recession in 2013. Enlarge photo

Tina Fineberg/Associated Press file photo

Dana Pinero of New York waits in line to mail tax returns at the James A. Farley Main Post Office in New York. The package of tax increases and spending cuts known as the “fiscal cliff” takes effect Jan. 1, 2013, unless Congress passes a budget deal by then. Many economists say the economy would be hit so hard it would likely sink into recession in 2013.

WASHINGTON – Everyone who pays income tax – and some who don’t –will feel its bite.

So will doctors who accept Medicare, people who get unemployment aid, defense contractors, air-traffic controllers, national park rangers and companies that do research and development.

The package of tax increases and spending cuts known as the “fiscal cliff” takes effect in January unless Congress passes a budget deal by then. The economy would be hit so hard that it would likely sink into recession in the first half of 2013, economists say.

And no matter who you are, it will be all but impossible to avoid the pain.

Middle-income families would have to pay an average of about $2,000 more next year, the nonpartisan Tax Policy Center has calculated.

Up to 3.4 million jobs would be lost, the Congressional Budget Office estimates. The unemployment rate would reach 9.1 percent from the current 7.9 percent. Stocks could plunge. The nonpartisan Congressional Budget Office estimates the total cost of the cliff in 2013 at $671 billion.

Collectively, the tax increases would be the steepest to hit Americans in 60 years when measured as a percentage of the economy.

“There would be a huge shock effect to the U.S. economy,” says Mark Vitner, an economist at Wells Fargo.

Most of the damage – almost two-thirds – would come from the tax increases. But the spending cuts would cause pain, too.

The bleak scenario could push the White House and Congress to reach a deal before year’s end. On Tuesday, Congress returned for a post-election session that could last through Dec. 31. At a minimum, analysts say some temporary compromise might be reached, allowing a final deal to be cut early next year.

Still, uncertainty about a final deal could cause many companies to further delay hiring and spend less. Already, many U.S. companies say anxiety about the fiscal cliff has led them to put off plans to expand or hire.

A breakdown in negotiations could also ignite turmoil in financial markets, Vitner said. It could resemble the 700-point fall in the Dow Jones industrial average in 2008 after the House initially rejected the $700 billion bailout of major banks.

Since President Barack Obama’s re-election, nervous investors have sold stocks. The Standard & Poor’s 500 index sank 2.3 percent last week, its worst weekly drop since June. The sell-off resulted in part from anxiety about higher tax rates on investment gains once the fiscal cliff kicks in.

Last week, Obama said he was open to compromise with Republican leaders. But the White House said he would veto any bill that would extend tax cuts on income above $250,000.

Republican House Speaker John Boehner countered that higher tax rates on upper-income Americans would slow job growth. Boehner argued that any deal must reduce tax rates, eliminate special-interest loopholes and rein in government benefits.

More than 50 percent of the tax increases would come from the expiration of tax cuts approved in 2001 and 2003 and from additional tax cuts in a 2009 economic-stimulus law.

The first set of tax cuts reduced rates on income, investment gains, dividends and estates. They also boosted tax credits for families with children. Deductions for married couples also rose. The 2009 measure increased tax credits for low-income earners and college students.

About 20 percent of the tax increase would come from the expiration of a Social Security tax cut enacted in 2010. This change would cost someone making $50,000 about $1,000 a year, or nearly $20 a week, and a household with two high-paid workers up to $4,500, or nearly $87 a week.

The end of the Social Security tax cut isn’t technically among the changes triggered by the fiscal cliff. But because it expires at the same time, it’s included in most calculations of the fiscal cliff’s effects.

And it could catch many people by surprise.

“Every worker in America is going to see a reduction in their paycheck in the first pay period of 2013,” Vitner noted.

An additional 20 percent of the tax increase would come from the end of about 80 tax breaks, mostly for businesses. One is a tax credit for research and development. Another lets companies deduct from their income half the cost of large equipment or machinery.

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