|CHRISTOPHER S. RUGABER, AP Economics Writer|
The reality may be a lot less bleak.
And the impact of the tax increases would be felt only gradually. Most people would receive slightly less money in each paycheck.
"The simple conclusion that going off the cliff necessarily means a recession next year is wrong," says
It's always possible that negotiations between President
But most economists expect a deal, if not by
"The atmosphere is more important than whether the talks spill" into next year, said
Here's why many are optimistic that a brief fall over the cliff wouldn't derail the economic recovery:
_ Though the fiscal cliff would cost the economy an estimated
_ About a third of the tax increases wouldn't touch most Americans. Some would hit businesses. Others, such as higher taxes on investment income and estates, and the expiration of middle-income tax credits, wouldn't come due until Americans filed their 2013 taxes in 2014.
_ If a deal seemed imminent, some experts say the
Still, if budget talks dragged on, many businesses might put off investment or hiring. That's why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.
Already, uncertainty is causing some businesses to delay spending. Consider Apex Tool and Manufacturing, a 10-person shop in
Sales have picked up. Company President
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.
If it isn't fixed again, roughly 33 million taxpayers, including married couples with income as low as
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 the long-term unemployed.
If the extended benefits end
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
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,
The economy would shrink at an annual rate of 0.6 percent in the first three months of 2013, estimates
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
Under that scenario,
Some consumers have been getting nervous.
Consumer confidence fell sharply this month, according to a survey by the
For all their combative rhetoric, the
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
"We could end up with a much more robust recovery than anybody's envisioned" if a deal is reached, said
AP Business Writer Anne D'Innocenzio in
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