The news media is breathlessly counting down the days until the arrival of the fiscal cliff on December 31. It may make for good television (tune in tomorrow) but it’s not good economics…or good political analysis. Here’s why:
- As we all know, “fiscal cliff” is shorthand for a broad array of tax increases and spending cuts scheduled to take effect December 31. It’s a catchy phrase but a misleading metaphor. It’s really more accurate to visualize the so-called fiscal cliff as a hill which the economy must climb if it is to continue moving forward.
- The steepness of that hill is variable: W2 withholding and Social Security taxes start taking a larger bite out of paychecks on January 1, but the higher taxes on 2013 capital gain and dividend income won’t be due until 16 months from now in April 2014. Likewise, the spending cuts, if they happen, will impact the economy at varying times.
- Another reason December 31 isn’t a drop-dead date is because Congress has the power to change tax rates retroactively. If we hit the cliff, the new tax rates would take effect, but they wouldn’t be carved in stone…they could be changed.
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