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Fiscal Cliff = “Enormous Hit” to the Economy, Holtz-Eakin Says

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America is headed for a fiscal cliff if members of Congress fail to act before the end of the year.

Many economists agree that if no action is taken, 2013 will begin with a $600 billion drag on the economy, or a 4 to 5 percent hit to GDP, due to a combination of tax hikes and budget cuts set to take effect. To put that in perspective, the knock to economic growth could be twice as much as current GDP growth forecasts for all of 2012 and more than any annual GDP growth in the last decade.

Former Treasury Secretary Robert Rubin said this week at the CNBC Institutional Investor Delivering Alpha conference that the impact of the fiscal cliff could be worse than the fallout from the 2008 financial crisis, which resulted in the worst recession since the Great Depression.

A new report by the American Action Forum forecasts between 2.8 million and 10 million jobs could be lost as a result of falling off the cliff based on a set of GDP economic multipliers developed by former White House economic adviser Christina Romer. Additionally, failing to take action would decrease the likelihood small businesses will hire by nearly 20 percent, according to American Action Forum.

"This is an enormous hit" to the economy," Douglas Holtz-Eakin, president of the conservative American Action Forum and former director of the Congressional Budget Office says in the accompanying video.

Taxes hikes would make up about $440 billion of the $600 billion economic drag. A major point of political contention is whether or not to extend the Bush-era tax cuts for everyone or just for middle class Americans, making the wealthiest American's pay a greater share of their income in taxes.

Senator Patty Murray (D-WA) signaled this week that liberals could be willing to push this debate until next year if a comprise cannot be reached with Republican lawmakers.

"[I]f we can't get a good deal — a balanced deal that calls on the wealthy to pay their fair share — then I will absolutely continue this debate into 2013, rather than lock in a long-term deal this year that throws middle-class families under the bus," said Murray on Monday.

While the Center on Budget and Policy Priorities came out in support of Murray -- "the economy won't immediately fall off a cliff if the scheduled tax and spending changes take effect," the center claims -- Holtz says the dangers of hitting the fiscal cliff are just too great. "I think the lesson here is that this is not something we should not even contemplate," he says.

According to the American Action Forum report, "failing to extend the 2001-2003 tax cuts would not only increase taxes on every single taxpayer in the country but would also put millions of lower middle class households who are not currently paying taxes back on the tax rolls at a rate of fifteen percent, and restore the marriage penalty."

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