By Erik Wasson - 09/18/12 04:11 PM EDT
The fiscal cliff refers to a series of automatic policy changes set to go into effect in early 2013 in which the Bush-era tax rates expire, as do lower estate and gift taxes. Automatic cuts of $109 billion are set to hit, doctors payments will be slashed by Medicare and the Alternative Minimum Tax will affect more middle-income taxpayers. On top of this, a temporary payroll tax cut is scheduled to end.
He warns that the rate could go much higher given the fragility of the economy.
Zandi notes that in the second scenario, of extending current policy, there will be no improvement on the long-term finances of the United States, and credit agencies, including Moody's, would likely downgrade the U.S. debt rating.
Moody's Analytics is a separate division from Moody's credit rating agency.
The U.S. economy is already suffering the effects of the fiscal cliff as businesses face uncertainty, the Federal Reserve said this month.
This spring, Sen. Patty Murray (D-Wash.), a member of leadership, threatened to go over the cliff temporarily to force Republicans to accept a deficit deal that includes tax increases.
She argued that once the Bush era rates end, Republicans will not be violating the Americans for Tax Reform no-tax-increase pledge as keeping the higher taxes on the wealthy in place would not be technically an increase at that point.
Some have seen Murray's remarks as a hardball negotiating tactic.