More potential fiscal-cliff mayhem

Gene Epstein devotes his latest Barron’s “Economic Beat” column to some less-publicized negative consequences tied to a fiscal cliff stalemate.

[T]he Internal Revenue Service has made it known that more than $200 billion in tax refunds normally made in the first quarter may be delayed until the second quarter, due mainly to confusion over the Alternative Minimum Tax, or AMT.

On [Dec. 19], the IRS upped the ante on the risk faced by the economy. In a Dec. 19 letter to the House Committee on Ways and Means, IRS Acting Commissioner Steven T. Miller warned that “most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later,” with “lengthy delays of tax refunds” resulting.

The letter contained new information: Miller hiked his estimate of the number of returns not filed on time from a previous 60 million to “80 to 100 million of the 150 million total returns expected to be filed.”

Consumer spending has been increasing by an average of $90 billion per quarter. So if $100 billion in refund checks get postponed, that alone could cause a decline in consumer spending in the first quarter. In addition, based on a statement last week from the Obama administration, it now appears certain that payroll taxes will rise back to normal rates in January, thus ending the payroll tax holiday of two years, causing a hit to paychecks of $25 billion in the first quarter.

The two other key parts of the tax shock—the broader imposition of the AMT, and the rollback of the Bush tax cuts—are still in play. Offers made by either side of the negotiating table could be withdrawn if a deal continues to be delayed.

The turmoil at the IRS turns mainly on lack of instructions about the AMT. The Bush tax cuts drove more people into the AMT, a consequence that has been mitigated via an annual “patch” that has yet to be announced for this year. The greater the delay on what will be done about it, the greater the likelihood of economic turmoil in the first quarter, whatever deal is ultimately struck on blunting the tax shock.

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