	Introduction

A major policy concern for Congress has been when and whether to address the "fiscal cliff," tax increases and spending cuts that would have substantially reduced the deficit in 2013 relative to 2012. According to projections in March 2012 by the Congressional Budget Office (CBO), this fiscal restraint constituted 5.1% of output in 2013 and was projected to reduce growth to 0.5% from 4.4%. Unemployment would have increased by 2 million. The American Taxpayer Relief Act, H.R. Policy choices with respect to the fiscal cliff are difficult because of the conflict between short-run and long-run economic and budgetary objectives. In the short run, the reduction in demand from the reduced budget deficit could damage an already fragile recovery. In the longer run, however, deficit reduction is needed to address a projected unsustainable debt level. 111-5 ). It allowed some of the 2001 and 2003 tax cuts to expire for higher-income individuals but at a higher level than S. 3412 . Other expiring tax provisions were extended through either 2017 (the 2009 stimulus provisions) or through 2013 (depreciation provisions and the other "extenders" that have been enacted on a temporary basis). The 2001 tax cuts include the 10% rate bracket (lowered from 15%) and the lower rates for higher-income individuals (25%, 28%, 33%, and 35%, compared with 28%, 31%, 36%, and 39.6%); the elimination of the phase-out of itemized deductions and personal exemptions (PEP and Pease); the increase in the child credit; the provisions reducing the marriage penalty (increasing the standard deduction and width of lower rate brackets for joint returns); the reduction in the estate tax; and some other smaller provisions. The temporary two-percentage-point reduction in the employee's share of the Social Security payroll tax that was to expire at the end of 2012. While CBO's baseline reflects current laws (and hence assumed the Bush tax cuts would expire at the end of 2012), the alternative baseline assumed that all tax cuts except the payroll tax reduction would be extended, the AMT patch would occur, the doc fix is made each year, and the Budget Control Act automatic spending cuts do not occur, although the discretionary spending caps remain. Expirations of individual income tax cuts are largely combined into one major category that accounts for 44% of the policy-related fiscal cliff of $502 billion. 813

As compared with the original policy-related fiscal cliff, H.R. These calculations compare effects from H.R. The decrease in the deficit is 54% of the total fiscal restraint including non-policy-related effects. CBO projected that not eliminating the fiscal cliff would have increased unemployment by 2 million. Thus, the effects might have been considerably smaller, but they also could have been much larger. The contractionary effect of spending cuts and tax increases occurs because these changes reduce spending and contract demand. These results are similar to the CBO calculations for the extenders. 8 . Implications for Policy Choices

The policies that have received significant legislative attention during 2012 that would change the size of the fiscal cliff—extending the expiring tax cuts—are a majority of the fiscal cliff but a minority of the economic effects, although the economic effects are still notable. As shown in Table 8 , presenting Zandi's estimates of provisions in the original fiscal cliff and a percentage of spending and a percentage of the contraction, many of the items omitted from the legislation had a more powerful than average effect on the economy per dollar of deficit, especially the payroll tax cut and the budget cuts. Proposals in both the House and Senate addressed the expiring tax cuts from 2001, 2003, and 2009, which had been extended in 2010, along with the AMT patch, which together contributed $221 billion (44%) of the policy-related fiscal cliff.
A major policy concern for Congress has been when and whether to address the "fiscal cliff," a set of tax increases and spending cuts that would have substantially reduced the deficit in 2013. In projections made in March 2012 by the Congressional Budget Office (CBO), this fiscal restraint, constituting 5.1% of output in 2013, would have reduced growth to 0.5% from 4.4%. Unemployment would increase by 2 million. In August, updated estimates projected growth at a negative 0.5%. The American Taxpayer Relief Act (H.R. 8) eliminated part of the fiscal cliff.
Policy choices with respect to the fiscal cliff are difficult because of the conflict between short-run and long-run economic and budgetary objectives. In the short run, the reduction in demand from the reduced budget deficits could damage an already fragile recovery. In the longer run, however, deficit reduction is needed to address a projected unsustainable debt level.
For FY2013, compared with FY2012, the original policy-related fiscal cliff was projected at $502 billion, 80% reflecting tax increases, with an additional $105 billion from other changes. The expiration of the 2001, 2003, and 2009 tax cuts (extended in 2010) and the expiration of the alternative minimum tax (AMT) "patch," which indexes the AMT exemption for inflation, accounted for 44% of the policy-related fiscal cliff. Other tax provisions included expiration of the temporary two percentage-point reduction in the employee's Social Security payroll tax (19%); the expiration of other tax cuts, including depreciation and the "extenders" (13%); and taxes scheduled to come into effect as a part of health reform (4%). Spending reductions included the automatic spending cuts under the Budget Control Act (13%); the expiration of extended unemployment insurance benefits (5%); and the "doc fix" that would have lowered Medicare payments (2%). Most changes would have taken effect after 2012, although the AMT and many of the extenders expired after 2011.
CBO estimates were similar to those of other forecasters. Estimates are uncertain; CBO suggested a range of potential reductions in growth from 0.9% to 6.8% if the fiscal cliff occurred. Thus, the effects could have been much smaller, but they could also have been significantly larger, than CBO's mid-point estimate. Different parts of the cliff were projected to have different effects per dollar of budgetary effects, with larger effects from the automatic budget cuts and ending extended unemployment benefits than from ending tax cuts for higher-income individuals.
H.R. 8 passed by the House on January 1, 2013 (after previous Senate approval) eliminated two-thirds of the policy-related fiscal cliff, and slightly over half of the total (including non-policy-related provisions). Thus about half of the contractionary effect remains, which would appear to reduce output by about 2%. H.R. 8 permanently extended the 2001 and 2003 income tax cuts, except for high-income taxpayers and the $5 million exemption for the estate taxes (but with a higher rate). It extended the 2009 cuts through 2017. It extended unemployment insurance benefits, the doc fix, and bonus depreciation and the "extenders" through 2013. It delayed the automatic spending cuts for two months. Elements of the fiscal cliff that will continue to reduce the deficit in 2013 compared with 2012, and potentially exert a contractionary effect, are the payroll tax reduction, which expired; some individual income tax cuts for high-income individuals; tax increases enacted in health reform; the remaining budget cuts; and non-policy-related effects.