Economists appear to be in broad agreement that the possibility of ending the George W. Bush-era tax levels next year would have about twice the impact on economic growth as the automatic cuts to government spending under the sequester.
An informal survey of economists shows that they see increased marginal income tax rates as causing up to 40 percent of the slowdown in economic growth if the United States were to "jump off" the so-called fiscal cliff. By contrast, they attribute about 20 percent of the slowdown to reductions in government spending.
This assessment mostly reflects the amount of money the higher taxes would take out of the economy compared to the lower spending. Returning marginal income tax rates to where they were in the Clinton administration would take a bit more than $200 billion out of the private sector, while the sequester would require a cut of about $100 billion in 2013 government spending.
But the numbers might also justify Democratic arguments to keep tax rates higher on upper-income earners.
Specifically, the analyses seem to agree that raising taxes on Americans earning less than $250,000 would have a much larger impact on revenue and GDP than raising taxes on people above that income level.
For example, Moody's Analytics chief economist Mark Zandi's analysis says raising taxes on lower incomes would stunt GDP by about 1.1 percent, while raising them on upper incomes would only slow GDP by about 0.25 percent.
Recent analyses by Zandi, Douglas Holtz-Eakin of the American Action Forum, Jari Stehn and others at Goldman Sachs and Bill Cline of the Peterson Institute for International Economics use slightly different figures, but all estimate a roughly 2-to-1 ratio of taxes to spending cuts in the fiscal cliff.
These assessments estimate new government revenues of roughly $560 billion for fiscal 2013, and more than $700 billion in calendar year 2013, if all elements of the fiscal cliff were implemented. Aside from ending the Bush-era tax levels and the sequester, the fiscal cliff also includes the end of the Alternative Minimum Tax (AMT) patch, the payroll tax holiday, emergency unemployment insurance, the Medicare "doc fix" and other tax extenders, in addition to the implementation of new taxes under the 2010 Affordable Care Act (ACA).
These economists estimate a drop in U.S. GDP of anywhere from 3.6 to 5.2 percent if all of these changes were to take effect.
Some of the changes are likely unavoidable, which has led Goldman Sachs to project a nearly 1.5 percent drop in GDP in 2013. Holtz-Eakin said he is expecting about the same thing.
"The ACA taxes and the payroll tax are pretty much baked in the cake," he said. "The remaining tax components certainly pose a greater economic danger, but the spending cuts in the sequester are a policy nightmare."
If those elements of the fiscal cliff really are "baked in the cake," Congress will be left to decide what to do about the marginal income tax rates, the AMT patch and the sequester.
The economists have slightly different estimates, but all agree failing to address those issues would have a dramatic impact on growth next year. According to Zandi, failing to maintain current tax levels on people earning less than $250,000 would shave another 1.1 percent of GDP next year, and that the combination of enforcing the spending cuts and ending the AMT patch would have nearly the same effect.
Goldman Sachs estimates a roughly 3 percent reduction in GDP if the marginal tax rates jump, spending cuts are enforced and the AMT patch goes away. And Holtz-Eakin, who says the fiscal cliff would cut 5.2 percent of GDP, says these major changes account for 3.7 percentage points.
The Congressional Budget Office has estimated that dodging the fiscal cliff would allow GDP growth next year of 1.7 percent or even higher, but estimates a 0.5 percent drop in GDP if the fiscal cliff takes effect. However, CBO has not broken down the numbers beyond that.