The fiscal cliff started to affect business decisions this fall. That’s why you saw small declines in manufacturing in Friday’s jobs report, for example.
It appears to be a worry for consumers now. The University of Michigan’s latest consumer sentiment survey shows confidence dropping to a four-month low. That suggests households are concerned about a potentially sharp fall in their after-tax incomes. The CBO data suggests they might want to be concerned.The CBO estimates suggest the 20% of households with the lowest incomes might see their taxes rise by $412. If you’re in the middle 20% of income levels — between $39,791 and $64,484 — the average increase would be $1,984. If you’re in the top 20% — $108,267 or above — the CBO is estimating an average increase of $14,173. If you’re in the top 1% — with income above $506,210 — the average increase might be about $120,500.
The threat of the cliff is the result of Congress’ inability in 2011 to come up with a package that would satisfy everyone. It came after threats of a government shutdown, a downgrade of U.S. debt by Standard & Poor’s and a short, intense panic in financial markets that sent the major stock market averages down. The provisions of the cliff were part of a deal made by Congress in an August 2011 budget bill. It set up a so-called Super Committee of members of Congress and the Senate who were supposed to hammer out $1.2 trillion in spending cuts over 10 years. If they couldn’t come up with a plan, then a mandatory combination of spending cuts and tax increases would kick
The Super Committee couldn’t agree on a plan, with Democrats and Republicans essentially deciding to wait until after the 2012 election to make decisions. The CBO sees the cliff cutting the federal deficit but also causing a recession, just as the economy is gaining some strength, that might not end until the end of 2013.