Part 5 – What Happens If We Go Over the Fiscal Cliff?

There are 3 components in this section of The Fiscal Cliff Explained:

• Recession
• Deficit Reduction
• Tax Increases

Recession

Analysts expect that the austerity crisis will weaken the economic recovery and quite possibly plunge the United States back into a recession. The CBO predicts that the U.S. economy will shrink by 0.5 percent in 2013, and unemployment will spike up to 9.1 percent from its current level of 7.9 percent, if no fix is passed. However, if all policies, including the payroll tax cut, are extended, the economy will grow 2.4 percent. Analysts at the Levy Economics Institute and Goldman Sachs have predicted even more dire outcomes.

Deficit reduction

If the austerity crisis hits in full, both short and medium-term deficit problems in the US would vanish. The CBO projects that under current law, debt held by the public will fall to only 58 percent of GDP by 2022, below the 60 percent mark that many economists warn against exceeding. By contrast, debt would climb to 90 percent of GDP if current policies continue, the highest point since after World War II. This graph, from the CBO, shows just how sharp the austerity would be.

Tax increases

The Tax Policy Center estimates that if we go over the fiscal cliff, the average American will see their tax bill rise by $3,446 in 2013.

That average obscures a bigger hit to the rich than the poor: Taxpayers making more than a million dollars will, on average, see a $254,000 tax hike, equal to about 11 percent of their income, while taxpayers making between $40,000 and $50,000 will see a $1,700 tax hike, equal to about 4.4 percent of their income.

Still, it’s a big hit to both groups, and that’s before you get into the effects of the spending cuts, which will hit the poor much harder than the rich.

Tax Policy Center