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Wall Street Journal Market Watch


Why the Fiscal Cliff Matters

November 23, 2012

By Diana Furchtgott-Roth

Businesses and individuals will be hurt by inaction

Rex Nutting has some good news for Washington politicians about the fiscal cliff. "There’s no urgency to reach a deal quickly," he wrote in these columns last week. Although tax and spending laws will change on Jan. 1, 2013, the effects of these changes will be spread out over a longer period, he writes.

Reducing government spending won’t have much effect, it’s true. Government outlays have risen from 20% of GDP in 2008 to 25% in 2012. But increasing taxes by $514 billion next year will make America less competitive and slow the economy. More businesses will go offshore and make fewer investments. People will spend less because more is going to Uncle Sam. (See table of tax changes.)

The Congressional Budget Office estimates that going off the fiscal cliff will reduce GDP growth in 2013 by half a percentage point, and that the unemployment rate will rise to over 9%. Ninety percent of households will face tax increases next year, according to the Brookings Institution-Urban Institute Tax Policy Center.

The Tax Foundation has estimated effects on households by state. At the upper end, a four-person household at median income in New Jersey would see a 7% increase in federal taxes of almost $7,000. Other states that would be hardest-hit include Maryland, Connecticut, and Massachusetts.

At the lower end, that same household in Hawaii would see a 4% increase, of $3,500. Similar states in that range include Colorado, Kansas, and Illinois.

Businesses plan ahead, and 48% of small business income is taxed at the 35% individual rate. If the Bush tax cuts expire and the top tax rate rises to 42%, including the new Medicare tax, some businesses will cut back. They may delay expansion and investment and lay off workers.

Ending the 2% payroll tax cut and extended unemployment benefits will reduce Americans’ spending power. Plus, the federal individual income tax rate for the lowest income earners would rise from 10% to 15%. Both come out of employees’ paychecks.

The failure to pass a change in the alternative minimum tax for 2012 will have consequences for 2013 first-quarter growth. Without the fix, 28 million more people will pay additional taxes under the AMT, a tax originally set up to catch high income earners but which now traps millions of middle-income earners as well.

Acting Internal Revenue Service Commissioner Steven Miller, in a letter to House Ways and Means ranking minority member Sander Levin (D-MI), reported that the IRS has programmed its computers in the expectation that Congress would adjust the AMT, as it has done in prior years. Reprogramming the computers would take months, and 60 million taxpayers would be unable to file returns or get refunds until late March.

Original Source:



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