What Happens If We Fall Off The 'Fiscal Cliff'? President Obama and congressional Republicans have been trying to negotiate a deal to avert the automatic tax hikes and spending cuts known as the "fiscal cliff." But what happens Jan. 1 if no agreement is reached? Some experts say not much will happen — at least not immediately.

What Happens If We Fall Off The 'Fiscal Cliff'?

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This is MORNING EDITION, from NPR News. Good morning, I'm Renee Montagne.


And I'm David Greene.

Lines of communication remain open. That's the official word from the White House and House Speaker John Boehner as they try to avoid automatic tax hikes and spending cuts due to kick in next month. Whatever negotiating is or isn't taking place, details have not emerged from either end of Pennsylvania Avenue. Some in the media have already fired up their countdown clocks.

But as NPR's Tamara Keith reports, if no deal is reached by the end of the year, the consequences might not be all that drastic.

TAMARA KEITH, BYLINE: Let's imagine its January. This thing that everyone's been talking about for months has happened: The nation has gone off the fiscal cliff. But wait. You don't really feel any different. You look around. Things don't look different, either. And that's because, according to Stan Collender, the cliff isn't really a cliff.

STAN COLLENDER: It was a great communications tool, but it was a misnomer from the beginning. The idea of jumping off the cliff and having the economy just go into the tanks immediately is just absolutely, positively, incontrovertibly incorrect.

KEITH: Collender is former congressional budget staffer who now works at Quorvis Communications.

COLLENDER: Yes, taxes technically would go up on January 1, and, yes, a lot of federal spending will be cut on January 2nd. But you really won't start to see any real effects of that for a couple of weeks, at minimum, and maybe not even until the end of the month.

KEITH: He says the Obama administration would most likely instruct departments to delay the cuts for a little while, to see if something can be worked out with Congress. As for taxes...

BOB MEIGHAN: For most people, its life goes on.

KEITH: Bob Meighan is vice president of TurboTax, the program some 25 million people use to prepare their taxes each year.

MEIGHAN: We may see take-home pay reduced to accommodate the increased tax withholding on your pay check, as well as the additional payroll taxes. But there's already talk of deferring or delaying that until Congress decides what to do.

KEITH: Even if higher payroll taxes and income tax rates show up in that very first paycheck, for most, it won't arrive until mid-month, says Edward Kleinbard, a tax law professor at USC.

EDWARD KLEINBARD: The first few days of 2013 are not going to radically change his or her life. But as the weeks go by, at some point, take-home pay will go down noticeably.

KEITH: The Congressional Budget Office has said that if the automatic tax hikes and spending cuts of the fiscal cliff are allowed to happen, the country would fall into recession in 2013. But budget maven Collender says it wouldn't be immediate.

COLLENDER: It's not as if the entire increase in taxes that would be included in the fiscal cliff will be taken out of your first paycheck. I mean, the real problem economically with the fiscal cliff is cumulative - that is, if we hit the cliff, we go over it and it stays in effect for the whole year.

KEITH: He says the thing to look for immediately would be market reaction, a dive in stock prices. But Jack Ablin, chief investment officer at B-Mo Private Bank in Chicago, isn't so sure that will happen.

JACK ALBIN: I think there's a changing perception that this is no longer is a time bomb that will detonate.

KEITH: He thinks that perception is already baked into stock prices. The image Ablin prefers to the cliff or the bomb is a pot of water. On January 1st, the burner is turned on, but the water won't start boiling for a while.

ALBIN: Put it this way: You know, I lose sleep at night so my clients don't have to. I'm not losing a ton of sleep over this one - at least not yet.

KEITH: When do you start losing sleep?

ALBIN: I start losing sleep if we are making no progress by, let's say, the end of January.

KEITH: So, if these guys are right, enjoy your New Year's Eve. It will take a while for the real consequences to play out.

Tamara Keith, NPR News, the Capitol.

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