Monday, November 19, 2012

Reuters News - Petrified by the fiscal cliff? Relax, it's just a slope


U.S. President Barack Obama delivers a statement on the U.S. ''Fiscal Cliff'' in the East Room of the White House as Vice President Joe Biden (L) looks on in Washington, November 9, 2012. REUTERS/Kevin Lamarque
NEW YORK | Sun Nov 18, 2012 8:08am EST
(Reuters) - The "fiscal cliff" sounds like a scary place. Headlines about "taxmaggeddon" are flashing on TV screens, next to clocks ticking down to January 1.
The Dow Jones Industrial Average has skidded more than 7 percent over the last month, largely due to concerns about the standoff in Congress over how to stop a barrage of tax hikes and spending cuts.
But some major investors say the doomsayers are getting too much attention and cliff watchers should relax a bit.
These investors argue that the U.S. economy does not face immediate disaster if lawmakers can't reach a deal by the end of the year, and there will still be time for Washington to come up with a deal in early 2013 before major damage starts to be done.
"It is not impossible at all that they miss by a little and then come back and get it," said billionaire investor Ken Fisher, whose firm Fisher Investments oversees about $38 billion in equities. "There's a minor risk ... but getting it done 10 days later is not really a big deal."
Others say Washington has more time than that.
Billionaire investor Warren Buffett, long supportive of higher taxes for America's super-rich, told CNN this week that lawmakers could have as much as a couple of months next year to reach a deal.
"The fact that can't get along for the month of January is not going to torpedo the economy," he said.
Chief executives warn of the damaging effects of uncertainty on their investment and hiring decisions. Many investors have focused on the risk of a new recession if the cliff is not addressed. And tumbling stock prices can add to the sense of panic and hurt both business and consumer confidence.
The Congressional Budget Office estimates that the tax hikes and spending cuts would amount to $600 billion in 2013 and could cause the U.S. economy to contract by nearly 3 percent in the first half of the year.
But that does not mean the pain begins automatically at the start of January.
For example, there could be a long lag, possibly lasting several months, between January 2, when the budgets of government agencies would be cut, and the actual implementation of those cuts to programs ranging from research grants to court room security.
On the tax side, the Treasury Department and the Internal Revenue Service have flexibility as to when to implement new, higher taxes. And even if higher withholding rates do take effect in January, they could be retroactively reversed later in the year.
In short, what has been dubbed a cliff is more like a fiscal slope that gets steeper as time goes on. How far the U.S. economy slides down it will depend on how quickly lawmakers in Washington take to do a deal.
A lot will depend on whether talks between administration officials and Congressional leaders can remain cordial and appear to be making progress, even if that progress is slow. They got off to what seemed to be a good start on Friday when both Democratic and Republican Congressional leaders came out of a meeting with President Barack Obama talking about the need for a deal, giving a boost to U.S. stock prices.
But some are skeptical. J. Dan Denbow, a fund manager at USAA in San Antonio, Texas, has been watching the value of his precious metals funds tank as fears of a U.S. recession dent the asset class. He thinks Congress will end up going over the cliff and that markets are in for a lot more volatility.
"Everybody's playing nice in the same sandbox," said Denbow of the recent round of cross-party meetings at the White House. "But they don't tell you what kind of cat fights they had behind closed doors."
KNIVES POISED, NO ORDERS TO CUT YET
Stephen Fuller, an economist at George Mason University, said it could take until the end of March before spending cuts begin to be implemented.
The government's budget managers appear to be in no hurry to take out their scissors.
The Office of Budget Management, the executive branch tasked with overseeing the cuts, has issued a report detailing how they will affect 1,200 government agency accounts. But breaking this down to a program-by-program plan is proving "challenging," given the scale of the task, the OMB said.
By the end of October the OMB had not advised agencies how to prepare for the so-called sequesters, or automatic spending cuts, according to a government budget expert who had talked to staff at OMB as well as agency budget offices.
The expert, speaking on condition of anonymity, said the OMB was still waiting for lists of programs from the Defense Department.
The agencies "would see the reduction in the funds that they have in Treasury immediately but obviously it takes a while for all that spending to occur so that's why people are talking about the fiscal slope in terms of the sequestration cuts," the budget expert said.
TAXING ISSUES
A more immediate concern in terms of the economic impact is the expiration on January 1 of the Bush-era tax cuts and the lower payrolls tax cuts which were introduced in early 2011. If they lapse, American consumers could see an immediate bite out of their take-home pay as tax rates revert to higher levels.
However, government tax lawyers, speaking off the record because they were not authorized to talk publicly, said the U.S. tax code gives the Treasury and the IRS some flexibility when deciding withholding levels appropriate to tax law.
If legislation was in progress to restore all or some of the tax cuts early in 2013 they might be able to hold off on increasing withholdings from paychecks, they said.
There is also the option of cutting taxes retroactively after the new higher rates have been introduced. This could end up in rates lower than current level to make up for any temporary payment of higher tax rates, giving a boost the economy once applied, experts say.
There may be further room for maneuver by U.S. tax officials.
Americans typically give more to the tax man than they need with each paycheck and end up getting a rebate after the end of each tax year. That may allow tax officials to refrain from applying at least part of any higher rates in early 2013, if a deal to restore lower tax rates appears close.
"My understanding is the law gives a lot of flexibility," said Bob Williams, an economist at the liberal-leaning Urban Institute and previously a tax specialist at the CBO.
Two years ago, Congress was in a similar situation when a fight over whether to extend the Bush-era tax rates for the wealthy went down to the wire. A deal was not reached until mid-December.
"They (the Treasury) didn't know that for sure and they didn't issue (instructions to raise taxes) right away ... and that turned out OK," Williams said.
(Additional reporting by Steve Johnson and Kim Dixon; Editing by William Schomberg and Eric Walsh)

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