Fiscal Cliff May Instead Be A Slope As Effects Of Current Tax Law Experation Happen More Gradually Than Commonly Thought

Thursday, October 11, 2012 22:03
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Fiscal Cliff May Instead Be A Slope As Effects Of Current Tax Law Experation Happen More Gradually Than Commonly Thought

Tags: economy | Federal Reserve | tax law

Fed chief Ben Bernanke coined the term fiscal cliff to describe the expiration of current tax laws at the end of the year.
 
But economists and economic analysts prefer the terms fiscal hill or fiscal slope, indicating that the effects of allowing current tax laws to expire at the end of 2012 would come into play gradually and, in some cases, would be reversible.

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The effects would be modest at first but the annual effects of the scheduled spending cuts and tax hikes would be significant.
 
The Congressional Budget Office (CBO) has estimated the US deficit would shrink by more than half a trillion dollars by the end of 2013. It has also said the country would likely enter another recession.
 
The potential damage has increased pressure by the International Monetary Fund (IMF), Wall Street, foreign capitals, and the Federal Reserve for Congress to act by the end of the year.
 
Both political parties have said that allowing the current laws to expire might put them both in a better position to negotiate. There is little confidence a deal can be put together before year end.
 
It might take households a while to feel the incremental loss of income if the tax increases hit in January.
 
But consumers are likely to be surprised at the increase in their overall tax bill if current laws expire.
 
But the effect in fact would be cumulative rather than immediate, lulling investors and businesses to think that the effects of the tax law expiration will not be so bad.
 
Perceptions that Congress is making progress on forestalling some of the effects of the fiscal cliff may ease concerns in January. But if it looks like there will be no deal, panic may ensue from increased uncertainty, erosion of consumer confidence, and the adverse effect on businesses.

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