One of the most limiting resources in the American economy is money (wealth) because the growth of the economy heavily depends on the people’s ability to spend their earnings. Tax breaks given to millions of households in the lower middleclass increase their disposable income which is spent on consumables. Raising the taxes for the American households in this group greatly reduces their spending power which could cause recession. Another scarce resource is the small and medium-sized businesses that provide employment to millions of American people (fifteen percent of the workforce). As a result, imposing high taxes on these businesses can have a negative impact on their growth and perfomance. Apart from providing employment, small and medium-sized businesses contributed 53 percent of the earnings reported by taxpayers.
If the tax increases and spending cuts would have gone on as scheduled, the American economy would have lost millions of jobs. This can be explained using Okun’s law which states that for every 2 percent that the economy attains below the potential GDP, unemployment raises by one percent. Therefore, a 6 point drop in the GDP triggered by the fiscal cliff would increase unemployment by 2 % points which translates into additional 2.8 people in unemployment. Also, most businesses would not be able to hire, and raise the salaries for their employees.
The 112th congress managed to pass policies to avert big tax increases on most American households and prevent large cuts in spending for the Pentagon and other government programs. This would translate into a tax rise for the highest-earning Americans. The policies passed by congress would see a tax rise households with an income of $ 400,000 for individuals and $ 450,000 for couples. The policies would also make permanent tax cuts for households with an income below that level. However, the nation’s debt-ceiling vote stands post phoned until March.
Economists would agree that the policies adopted by congress are equitable because they increase taxes for the wealthiest and give tax breaks to the lower middleclass households. The policies are also efficient and stable because they focus avoid an imminent recession and thus would help the recovering economy. However, the failure to control government spending may impact negatively on the country’s economy in the long run because the nation’s debt keeps on rising.
Altogether, the opportunity costs for inaction would have been greater. For instance, tax increases for small and medium-sized businesses would significantly reduce the probability of small businesses to expand. Also, tax increase on millions of lower middleclass households would heavily impact on their spending ability which could trigger recession. Moreover, workers and small businesses would have seen their marginal tax rates rise to above and beyond 50 % of their income in taxes.
Holtz-Eakin, D., & Brannon, I. (2012, November). The Economic Effects of the Fiscal Cliff. Retrieved January 6, 2013, from American Action Forum : http://www.AmericanActionForum.org
Steinhauer, J. (2013, January 1). Divided House Passes Tax Deal in End to Latest Fiscal Standoff. Retrieved January 6, 2013, from New York Times: http://www.nytimes.com/2013/01/02/us/politics/house-takes-on-fiscal-cliff.html?pagewanted=2&_r=0