What Happens if We Go Over the Cliff?

What Happens if We Go Over the Cliff?

As others have pointed out, the so-called fiscal cliff maybe isn't the best metaphor to use in describing the current debate over the looming tax increases and spending cuts set to take place in the new year.

As others have pointed out, the so-called fiscal cliff maybe isn't the best metaphor to use in describing the current debate over the looming tax increases and spending cuts set to take place in the new year.

After all, when you jump off a cliff, you usually don't live to tell about it.
But that isn't necessarily the case in this debate. If tax rates go up and spending cuts go into effect after Dec. 31, Congress always has the ability to fix things retroactively at a later date.

Perhaps a better metaphor to use is the deadline for midterm paper -- you might fail your class or flunk out of school if you don't complete the paper on time, or you could successfully negotiate to turn it in a later date, or you could do other things to boost your grades and standing in school.

Another metaphor is the deadline for a collective-bargaining agreement in professional sports -- having the contract expire could mean the end to the football or hockey season, or the principals could eventually reach a deal (even if that means a shortened season).
So what happens -- and what doesn't -- if Congress, as it increasingly appears, fails to reach a fiscal deal before the new year?

On Christmas, the New York Times ran a good summary:

Some hits -- like a two percentage point increase in payroll taxes and the end of unemployment benefits for more than two million jobless Americans -- would be felt right away. But other effects, like tens of billions in automatic spending cuts, to include both military and other programs, would be spread out between now and the end of the 2013 fiscal year in September. These could quickly be reversed if a compromise is found.

Similarly, the expiration of Bush-era tax cuts on Jan. 1 would not have a major impact on consumers if Congress quickly agreed to extend them for all but the wealthiest Americans in early 2013, as is widely expected.

Other probable changes, like a jump in taxes on capital gains and dividends, would most likely be felt over a broader period rather than as an immediate blow to the economy.

So the world doesn't come to an end on Jan. 2 or Jan. 3. But the question will turn to: What does Congress and the Obama White House do to fix things and limit the damage?

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