For example, if lawmakers do not patch the alternative minimum tax, that tax threshold, which applies to 4 million people today, could ensnare nearly 30 million people, raising their tax bills by an average of $2,700. Additionally, non-defense discretionary cuts would hit programs for low-income people such as housing and energy assistance. And more than 2 million Americans would lose their federal unemployment benefits.
Additionally, going over the fiscal cliff would likely lead to a recession, causing further job losses.
2. It’s okay to punt on the fiscal cliff for another year.
Some have called on lawmakers to postpone parts of the fiscal cliff by waiving the budget sequester or extending the tax cuts without offsetting the costs. As the end of the year inches closer, such calls are likely to increase.
But making either of these moves without putting in place the beginnings of a deficit-reduction plan would send a dangerous signal to global markets, businesses and the American public that Washington is not serious about fiscal responsibility and, frankly, can’t govern.
In recent months, Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings have said that the United States could lose its AAA credit rating — or face further downgrades in the case of S&P — if steps are not taken to reduce the national debt. Such a downgrade could harm economic confidence and growth down the road.
Furthermore, the threat of the fiscal cliff is the only thing propelling policymakers to work out a larger deal; without it, the prospects of fixing this problem dim significantly.
3. Going over the fiscal cliff wouldn’t immediately damage the economy.
Some experts have argued that going over the cliff wouldn’t cause much immediate economic harm and that any damage could quickly be reversed by retroactively waiving the tax increases and spending cuts. That’s like saying: “Don’t worry about being run over — the car will be off you shortly.” In most cases, the damage is already done.
There is no way to know how the economy and the markets would react to our going over the fiscal cliff, but we should not be willing to find out. As Alan Kreuger, chairman of the White House Council of Economic Advisers, said Friday, there would be a serious psychological effect as well, leading people to think “that government is not capable of solving problems that it’s there to solve.”
Thus far, the markets still believe that policymakers would not be so foolish as to willingly cliff-dive — but the moment they are proved wrong, the markets could go into an expensive tailspin. Like a good reputation, market confidence is hard to get back once you ruin it.