US Economy Could Withstand Brief Fall Off 'cliff'

Many more people would be affected if something called the alternative minimum tax isn't fixed.

The financially painful AMT was designed to prevent rich people from exploiting loopholes and deductions to avoid any income tax. But the AMT wasn't indexed for inflation, so it's increasingly threatened middle-income taxpayers. Congress has acted each year for a decade to prevent the AMT from hitting many more people.

If it isn't fixed again, roughly 33 million taxpayers, including married couples with income as low as $45,000 ⿿ down from $74,450 in 2011⿿ could face the AMT. Previously, only 5 million taxpayers had to pay it. Taxpayers subject to the AMT must calculate their tax under both the regular system and the AMT and pay the larger amount.

The IRS has said it assumes Congress and the White House will fix the AMT in a deal to avoid the cliff. If they don't, the IRS will need weeks to reprogram computers and make other adjustments. In the meantime, nearly 60 million taxpayers couldn't file tax returns early next year because they couldn't determine whether they owe the AMT. Refunds would be delayed.

One immediate spending cut would be the end of extended unemployment benefits. Most states provide benefits for 26 weeks. But since 2008, the federal government has provided an emergency benefits program. This adds an average of 32 weeks, depending on the state, for a total of 58 weeks of benefits for long-term unemployed.

If the extended benefits end Jan. 1 as scheduled, about $30 billion would be saved next year. But without that money, about 2 million people who have been out of work for more than six months would lose benefits averaging about $320 a week.

Economists note that recipients of unemployment aid tend to spend that money quickly, giving a lift to the economy. The expiration of the extended benefits would cut economic growth by about 0.2 percentage point next year, the Congressional Budget Office estimates.

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