If Congress does nothing and the United States plunges off the "fiscal cliff" in three months, taxes would rise for 90% of Americans due to automatic increases in income and payroll taxes and a range of other fiscal shocks, said a report issued on Monday.
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In the latest forecast of trouble ahead if Capitol Hill cannot overcome its fiscal paralysis, the Tax Policy Center, a Washington thinktank, predicted taxes would rise by $500 billion in 2013, or an average of almost $3,500 per household.
At the same time, government spending would shrink, reducing the budget deficit, but the economy would likely be thrown back into recession next year, the center said, echoing similar predictions of the devastating impact of going off the 'cliff.'
"Lawmakers could soften that near-term hit by delaying or repealing provisions in the 'cliff' or by enacting other spending and tax policies that would provide offsetting support for the economy," the center said.
President Barack Obama and Congress earlier this year approved an extension of a cut in the payroll tax rate to 4.2% from 6.2%. The tax funds Social Security and Medicare. It is paid by about 160 million working Americans.
The payroll tax break was "clearly intended as temporary stimulus" and is the most likely tax cut to expire, said Donald Marron, director of the Tax Policy Center at a news conference.
Cuts in the individual income tax, capital gains tax, dividend tax and other taxes affecting most Americans were pushed through in 2001 and 2003 by President George W. Bush. They were extended under Obama in 2010, but will expire at the end of this year.
The fiscal cliff looms not far in the future regardless of the outcome of the Nov. 6 elections for president and Congress.
"No matter who wins in November, the country has to face the issue of looming tax increases," said Roberton Williams, a senior fellow at the Urban Institute, a partner with the Brookings Institution in the Tax Policy Center.