Unless President Obama and Congress prevent it, the new year is going to usher in a mix of tax increases and federal spending cuts that will hit every working American and send an already ailing economy into a devastating tailspin.
Republicans and Democrats alike claim they don't want their inaction to shove the country over the so-called fiscal cliff, but their lack of compromise so far has made preventing that calamity much more difficult, according to experts.
Congress returns to town next week to deal with $1 trillion in automatic budget cuts, expiring Bush-era income tax cuts and an increase in the payroll tax. Virtually all Americans -- not just the wealthy -- will take home smaller paychecks if a deal is not reached. Economists predict that would further undermine consumer confidence and trigger a second recession.
Washington's failure to act would increase the average household's taxes by $3,500 a year, the Tax Policy Center estimates.
"I think people have no idea what will happen to them individually," said Roberton Williams, a senior fellow at the center. "Unemployment would go up. A series of bad things would happen. And the tax system wouldn't be better. It just raises more revenue across the whole spectrum."
The payroll tax reduction from 6 percent to 4 percent lowered the average family's tax bill by $1,000 for each of the past two years. And expiring Bush cuts have lowered the tax burden for all families, not just the wealthy. For example, individuals earning between $40,000 and $65,000 have paid an average of $888 less annually. Middle-income people also saved hundreds of dollars more each year through various tax credits, such as mortgage deductions and for children.
The Congressional Budget Office released a report Thursday showing that Washington's failure to deal with the pending spending cuts and tax increases would drive unemployment up to 9.1 percent by next fall.
And while the combination of tax increases and reductions in federal spending would trim the budget deficit by $500 billion next year, it would also reduce the nation's gross domestic product by 0.5 percent, the CBO said.
"It would pretty much wipe out the recovery," said Stephen Fuller, an economist at George Mason University. "You can't absorb that reduction in spending and increase in taxes so quickly. The universal consensus is it would take about 5 points out of GDP."
Obama pledged during the campaign to allow taxes to rise for those earning more than $250,000 a year. But Republicans insist that those increases would undermine small businesses and the economy overall.
Also, nearly 30 million families face the prospect of being forced to pay the Alternative Minimum Tax. Right now ,just 5 million households are subject to the tax. For a couple making as little as $40,000, that could mean an extra $104 in taxes a year.
Beyond taxes, Congress and the White House have to work out a compromise that would reduce the federal budget deficit in time to avoid $1 trillion in automatic budget cuts set to take effect Jan. 1. Half of the cuts that would kick in under the so-called sequestration would come from the Pentagon, in a move that would devastate Virginia's economy.
"The whole notion of 'let's tear it down to build it back up' is frightening," said Daraius Irani, an economist at Towson University. "It could end up costing even more and slowing things down for no reason other than political gamesmanship."