Geithner keeps withholding freeze as cliff weapon

, Bloomberg

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The Obama administration has a way to blunt about half of the fiscal cliff's economic fallout for 2013, even if Congress stays deadlocked: Freeze paycheck withholding levels.

Treasury Secretary Timothy F. Geithner has the authority to set withholding, whether or not tax rates increase. He has said Congress should act to extend current rates for most taxpayers. A freeze could keep $10 billion per pay period in taxpayers' pockets and prevent a loss of 1.5 percent of monthly gross domestic product, said Mark Zandi, chief economist at Moody's Analytics Inc. in West Chester, Pennsylvania.

"You mitigate some of the downside, but not all of it," Zandi said. "With each passing day, the economic damage would mount. We're not going to get away scot-free if we freeze the withholding schedule. It will help."

The decision would rest with Geithner as he and the administration of President Barack Obama weigh the effect of withholding changes on the economy and on negotiations with Congress. Freezing withholding in advance of a congressional agreement on tax rates may support consumer spending while removing some pressure on lawmakers to act quickly.

The move would make sense, especially if by late December a congressional deal to avert the tax-rate increases set for January looks probable though isn't completed, Zandi said. Such a decision wouldn't prevent stock market declines and other negative effects of failing to avert the automatic spending cuts and tax increases, he said.

Urging Congress

On Nov. 16, Geithner urged Congress to act on the fiscal cliff without saying exactly what he would or wouldn't do.

"Don't over-interpret what that authority gives me," he said. "It does not give me the authority to give them, to let them avoid making some decisions on rates and policy."

Sabrina Siddiqui, a Treasury spokeswoman, declined to answer questions about the scope of Treasury's authority or its plans for releasing 2013 withholding tables.

The scheduled changes in tax rates are part of the $607 billion fiscal cliff of tax increases and spending cuts that would probably cause a recession in early 2013 if Congress doesn't avert them. The economic effects of the higher tax rates would occur over the course of the year through increased paycheck withholding.

Lawmakers agree they don't want rates to increase for most taxpayers. They are divided over Democrats' proposed higher tax rates for top earners and the shape of longer-term deficit reduction.

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