CBO lays out 'fiscal cliff' costs

The nonpartisan Congressional Budget Office (CBO) on Thursday laid out in substantial detail the costs of not dealing with the so-called "fiscal cliff."

CBO had already estimated that going over the cliff would spark a recession, while simply voiding the tax and spending increases would add trillions to the debt. But the new study breaks down the costs and benefits of allowing various parts of the fiscal cliff to remain in place.

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It finds that unemployment would rise from 7.9 to 9.1 percent by the end of 2013 if the nation went over the cliff.

The CBO warning comes as President Obama, Senate Democrats and House Republicans are girding for a huge negotiation over spending and tax policy in the coming lame-duck session of Congress.

Pressure on Washington from financial markets also mounted Thursday, as the Dow Jones Industrial Average and S&P 500 both dropped steeply for a second day. Each is off about 3 percent since Obama’s reelection, partly on fears about what going over the cliff could mean for the U.S. economy.

A day after Speaker John Boehner (R-Ohio) said he was willing to consider higher tax revenue as part of a deal to lower the deficit, the White House was largely quiet on the crisis.

Obama did not appear publicly on Thursday, though his chief campaign adviser David Axelrod offered a cordial tone, saying on MSNBC that talk of a mandate after Obama’s reelection victory was “foolish.”

Obama senior adviser David Plouffe reiterated Obama’s call for the wealthy to pay higher tax rates, however.

He told reporters that the deficit should be reduced “in a balanced way” and that voters “clearly chose the president's view of making sure the wealthiest Americans are asked to do a little bit more.”

Boehner reiterated his stance in an ABC News interview, while insisting he could forge a bipartisan deal.

“I'm the most reasonable, responsible person here in Washington,” he said. “The president knows it. He knows that he and I can work together. The election's over. Now it's time to get to work," he said.

The fiscal cliff consists of a set of tax hikes and spending cuts all set to be implemented in January.

Tax rates ushered in by former President George W. Bush are set to expire at the end of the year, which would raise rates on most households and businesses. A payroll tax cut in place for two years is also set to expire, and Congress has yet to pass legislation to prevent millions of people from being hit by the Alternative Minimum Tax.

Spending cuts triggered by last summer's debt deal are also set to begin in January.

The figures in the CBO report are sure to become fodder in the debate over how to move forward, and offer ammunition for both sides.

Republicans will likely seize on the report's estimate that preventing tax hikes set to kick in on Jan. 1. will add or save 1.8 million jobs next year.

Democrats will point out that allowing tax rates to rise for households with annual incomes above $250,000 but extending rates for other people would save 1.6 million jobs — nearly as many as if all the rates were extended.

Senate Majority Leader Harry Reid's (D-Nev.) office immediately highlighted through Twitter the fact CBO says growth is only reduced by .1 percent if the tax breaks for the wealthy are ended.

Republicans, meanwhile, focused on the job losses that would result from tax increases.

“Today’s report confirms that raising taxes on all taxpayers will result in fewer ‘help wanted’ signs hanging in the windows of businesses across the country," said House Ways and Means spokeswoman Michelle Dimarob.

She said “the House stands ready to work with the White House and Senate” to avoid all the tax rate increases and reform the tax code.

Republicans since the summer have pointed to an Ernst and Young report that estimated 700,000 jobs would be lost by allowing the tax rates on high-earners to rise.

The CBO report says that extending all the Bush-era rates and patching the Alternative Minimum Tax would help the economy expand by an additional 1.4 percent by the beginning of next year.

Doing that but allowing the top tax rates to rise would add only 1.3 percent to the GDP, an “effect nearly as large” as extending all the Bush cuts, CBO states.

Avoiding the spending cuts in the automatic sequestration would boost GDP by .75 percent, CBO said, while extending the expiring payroll tax cut and unemployment benefits would add another .75 percent.

Doing all of the above boosts GDP by 3 percentage points by the end of 2013.

CBO also provides job figures with each of these choices.

Avoiding the cliff altogether would add 3.4 million full-time-equivalent jobs, the report estimates. Just extending the payroll tax and unemployment benefits — as some Democrats are advocating — would add 800,000 jobs.

Preventing the cliff would also expand the deficit. The report says it would add $503 billion to the deficit in 2013 and $682 billion in 2014.

With the White House and congressional leaders publicly quiet, interest groups jockeyed for position Thursday.

Liberals, led by AFL-CIO President Richard Trumka, took out a print ad demanding tax increases on the wealthy and stimulus spending.

On the other side, Grover Norquist of Americans for Tax Reform said on CNBC that Obama has no mandate at all from his victory. He said it is House Republicans who have a mandate to prevent tax increases since they produced a House budget and kept power after doing so.

Deficit groups like Third Way decried liberals and Norquist for trying to prevent a compromise.

The Campaign to Fix the Debt, which is mustering the support of CEOs for a fiscal cliff deal that puts in place trillions in debt reduction, said it is encouraged by the Boehner bargaining stance.

“I see an incredible amount of willingness to work together.” said Maya MacGuineas of the Campaign to Fix the Debt, adding that he set the right “tone.”

“I am more optimistic than I have been for quite some time,” she said.

In a separate report Thursday, the CBO sketched out three sample approaches to a grand-bargain deficit-reduction plan.

The first two options would balance the budget by 2020, or keep the publicly held debt at 75 percent of the economy in 2020 — which is where it now stands. A third offers a compromise in-between those options.

These goals require between $3 trillion and $8 trillion in deficit reduction compared to a baseline that assumes current policies are continued.

In order to reach a deal, the CBO report lays out choices ranging from repealing coverage in Obama’s healthcare reform law to imposing a greenhouse gas tax.

— This story was posted at 3:47 p.m. and last updated at 5:25 p.m.

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