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A Gigantic Sigh of Relief as Tax Uncertainty Ends

New York Times (01/03/13) Catherine Rampell

Despite the fact that the fiscal cliff agreement passed by Congress means higher taxes for almost all Americans, businesses are relieved that some of the uncertainty about what they will owe the government this year is gone. However, many economists estimate the end of the payroll tax holiday, the income tax increase on the wealthiest Americans, and other provisions will probably shave 0.7 to 1.5 percentage points off economic growth in 2013. They are forecasting growth in output this year of just over 2%, almost identical to that of 2012. “We’ve definitely averted the worst-case recession scenario,” says Jay Feldman, an economist at Credit Suisse. “We’re still looking at some fiscal drag, but it’s an amount the economy can absorb.”

The tax deal is also expected to result in hiring growth at last year’s pace, meaning the creation of 150,000 to 160,000 payroll jobs a month, according to Michael Gapen, senior U.S. economist and asset allocation strategist at Barclays. Without the tax increases, employers would probably be adding more than 200,000 jobs a month. Altogether, that means the economy will “create 600,000 fewer jobs in 2013—leaving the unemployment rate 0.4 percentage point higher—than it would have if the 2012 tax policies had been kept in place,” says Mark Zandi, chief economist at Moody’s Analytics. Most analysts’ estimates for the fiscal bargain’s effects on the economy do not take into account remaining negotiations over major spending cuts and an increase in the debt ceiling. Congress appears unlikely to resolve either of these issues until March.