The Fiscal Cliff: Impact on U.S. Economy and Employment if Bush Tax Cuts Expire

As the debate about how to revive strong U.S. economic and job growth continues, policymakers must confront a host of budget and tax policy decisions. One of the key issues policymakers must decide is the fate of the reductions in tax rates on income, capital gains and dividends which were enacted during the 2001-2005 period and then extended for the 2011-2012 period. The ACCF presents this summary of a new macroeconomic analysis by Dr. Allen Sinai, Chief Global Economist and President of Decision Economics, Inc to help policymakers, the public and the media understand the consequences of raising tax rates in the current economic environment.

At the beginning of 2013, a large number of Federal tax provisions will expire, raising taxes across the board. Tax rates on income, capital gains and dividends, estates and payrolls will all rise and other tax provisions such as the child care credit are set to be cut back or eliminated.

These tax increases are part of what has been called the “Fiscal Cliff,” legislation now the “law-of-the-land” that, ex-ante, reduces federal budget deficits by over $7 trillion in the next 10 years beginning in 2013. The deficit reductions include cutbacks in federal government outlays, tax increases, and interest savings estimated from these reductions. The tax increases will result from the failure of deliberations in Congress and by the Obama Administration in 2010-2011 on how to deal with the U.S. deficit and debt situation. The mix of deficit reduction that will result is approximately 60% from tax increases, in higher tax rates and amounts, and 40% reductions in outlays, many of them through sequestration, across- the-board, unplanned and unintended.

This brief report summarizes a large-scale structural macroeconometric model assessment of the quantitative impacts of the tax increases that currently are set to occur, together or singularly in some instances, on the U.S. macroeconomy. The effects on real economic growth, real GDP, consumption, business fixed investment, housing, motor vehicle sales, jobs and the unemployment rate, inflation, and the federal budget deficit and debt in relation to GDP are assessed.