Many economists are nervous for the United States to fall off the ‘fiscal cliff’ and to plunge into another recession. Exactly what this fiscal dive would do to this country’s economy is up for debate. Some politicians and economists are not bothered by this dive; one reason for this maybe because the U.S. Treasury Department and the Internal Revenue Service can choose to adjust or not to adjust withholding rates. Some tax experts say there could be a cushion on the economic blow for the beginning year if tax breaks expire on December 31, but the tax administrators leave the withholding at the current levels. This will also give Congress more time for negotiation.
According Eric Toder, an expert with the nonpartisan Tax Policy Center, “what happens with the Bush tax cuts depends on what the treasury does with withholding tables and they have significant amount of discretion.” On Monday, the Tax Policy Center offered little reassurance on the impact of the fiscal cliff. Next year, the average middle-class household would face a $2,000 tax increase and the people making more than $500,000 will face a tax increase of an average of $120,000.
Democrats are being called to join Republicans to stop the tax increases. For the most part, Republicans are in favor of extending all the Bush-era tax rates and breaks. Extending the tax rates and breaks would give Congress time to negotiate a tax-code rewrite. President Obama would like to extend the Bush tax level for the middle class, defined as couples making less than $250,000 a year. President Obama also wants to renew a few other tax breaks. It is unclear what will happen; however, the continued weakness of the economy could add pressure to extend the tax breaks for a little longer.