Are fiscal cliff doomsayers overreacting?
While many bemoan the possibility of the America's topple over the fiscal cliff, some major investors say even if Congress doesn't reach a deal by the end of the year, the economic outlook may not be as bad as it seems.
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The government's budget managers appear to be in no hurry to take out their scissors.Skip to next paragraph
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The Office of Budget Management, the executive branch tasked with overseeing the cuts, has issued a report detailing how they will affect 1,200 government agency accounts. But breaking this down to a program-by-program plan is proving "challenging," given the scale of the task, the OMB said.
By the end of October the OMB had not advised agencies how to prepare for the so-called sequesters, or automatic spending cuts, according to a government budget expert who had talked to staff at OMB as well as agency budget offices.
The expert, speaking on condition of anonymity, said the OMB was still waiting for lists of programs from the Defense Department.
The agencies "would see the reduction in the funds that they have in Treasury immediately but obviously it takes a while for all that spending to occur so that's why people are talking about the fiscal slope in terms of the sequestration cuts," the budget expert said.
A more immediate concern in terms of the economic impact is the expiration on Jan. 1 of the Bush-era tax cuts and the lower payrolls tax cuts which were introduced in early 2011. If they lapse, American consumers could see an immediate bite out of their take-home pay as tax rates revert to higher levels.
However, government tax lawyers, speaking off the record because they were not authorized to talk publicly, said the U.S. tax code gives the Treasury and the IRS some flexibility when deciding withholding levels appropriate to tax law.
If legislation was in progress to restore all or some of the tax cuts early in 2013 they might be able to hold off on increasing withholdings from paychecks, they said.
There is also the option of cutting taxes retroactively after the new higher rates have been introduced. This could end up in rates lower than current level to make up for any temporary payment of higher tax rates, giving a boost the economy once applied, experts say.
There may be further room for maneuver by U.S. tax officials.
Americans typically give more to the tax man than they need with each paycheck and end up getting a rebate after the end of each tax year. That may allow tax officials to refrain from applying at least part of any higher rates in early 2013, if a deal to restore lower tax rates appears close.
"My understanding is the law gives a lot of flexibility," said Bob Williams, an economist at the liberal-leaning Urban Institute and previously a tax specialist at the CBO.
Two years ago, Congress was in a similar situation when a fight over whether to extend the Bush-era tax rates for the wealthy went down to the wire. A deal was not reached until mid-December.
"They (the Treasury) didn't know that for sure and they didn't issue (instructions to raise taxes) right away ... and that turned out OK," Williams said.
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