Thursday, November 8, 2012

Fiscal Cliff: Will Obama Yield On Tax Hikes In Time?

Until President Obama's victory Tuesday, going over the fiscal cliff seemed like a distant possibility.
Reality may have begun to set in on Wednesday. Unless Obama yields, at least for now, on a central campaign plank — that taxes rise for higher earners — the Republican-led House will have little to gain by striking a deal before the tax cliff hits.
If tax hikes come to be seen as hurting the economy, the Republicans won't want to share responsibility.
The U.S. "may at least briefly go off the fiscal cliff at the end of the year," IHS Global Insight wrote. "This would be a recipe for turmoil in the financial markets, and would threaten such a severe shock to the economy that the pressure to come to some sort of compromise would be extreme."
Come Jan. 1, a series of tax hikes would take effect totaling $400 billion through the end of fiscal 2013 — just nine months.
On top of that, automatic spending cuts would kick in on Jan. 2, divided between the Pentagon and domestic programs. Extended jobless benefits would lapse and Medicare would slash payments to physicians.
Over the full year, the combined tax hike and spending cut would be at least 4% of GDP.
Both parties are committed to avoiding a hard fiscal landing, and they'll likely do so. But that doesn't ensure it will be a smooth ride, and there could be a price to pay in terms of economic growth.
Major stock market gauges tumbled Wednesday as Obama's re-election focused attention on this near-term flashpoint and the likelihood of higher taxes — especially on investment income.
In the wake of the election, Goldman Sachs cut its 2013 economic growth forecast by 0.2 percentage points, citing prior signals Obama would veto an extension of the Bush tax cuts for households earning $250,000.

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