Analysis: At cliff's edge, old ideas to cap tax breaks are new again

By Kim Dixon and Kevin Drawbaugh

Mon Dec 31, 2012 3:57pm EST

n">(Reuters) - Imposing overall caps on how much high-income people in the United States can claim on their tax returns in deductions, exemptions and other tax breaks is an idea whose time may have come - again.

In the whirl of "fiscal cliff" talks, bipartisan backing has grown for imposing, or in some cases reinstating, caps on tax breaks for top earners.

On Monday, Republicans threw their support behind several approaches to do just that in a framework to step away from the fiscal cliff of $600 billion in new taxes and spending cuts set to take effect on January 1.

Under an emerging deal brokered by Republican Senate Minority Leader Mitch McConnell and Democratic Vice President Joe Biden, curbs on deductions and exemptions for households earning more than $300,000 would be re-imposed, according to a source close to the talks.

For several years, Democratic President Barack Obama has proposed re-imposing the limits. Republicans have opposed such caps for more than a decade, but the idea may be coming full circle.

These limits "were originally done in 1990 at the behest of the Republicans who didn't want tax rates to go up," said Michael Graetz, a Columbia University tax law professor and a former top Treasury Department official.

The main reason for the switch now? The urgent search for politically achievable paths to avoid falling off the fiscal cliff of sharp tax increases and spending cuts.

Talks on avoiding the cliff were moving along on Monday with the fresh offer from McConnell and Biden.

The beauty of the approaches, backers say, is that they let politicians raise government revenue without raising tax rates as much, said economists, Republicans and congressional aides.

Moreover, a strategy that caps several tax breaks broadly could be more expedient than trying to curb tax breaks one at a time that would incur the wrath of lobbyists who would fight them all the way.

Lawmakers are sizing up several ideas.

PEP AND PEASE

Two ideas backed by McConnell are reinstating the personal exemption phase-out (PEP) and so-called Pease limits on itemized deductions. Both were created in 1990 in a budget deal between Republican President George H.W. Bush and Democrats in Congress.

PEP and Pease - often viewed as a package deal - both reduce how much high-income taxpayers can claim in personal exemptions, in the case of PEP, and itemized deductions, in the case of Pease. Both measures work to raise taxes on top earners, without explicitly raising the tax rates that they pay.

When first imposed more than two decades ago, "they were ways to keep the rate at a certain level," Graetz said.

So how do they work?

PEP deals with the personal exemptions that taxpayers claim near the top of the Internal Revenue Service's Form 1040. Taxpayers claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.

The Pease limit - named after its author, former Ohio Democratic Representative Don Pease - applies to itemized deductions, such as the ones taken for mortgage interest, charitable giving and state and local taxes paid.

By reducing the values of exemptions and deductions, both PEP and Pease would work to raise the taxable income of wealthier people and, as a result, the taxes they pay.

Under a previous proposal offered by Obama, reinstating them would raise about $165 billion in new tax revenue over 10 years, the Tax Policy Center estimated.

Both limits were gradually eliminated under President George W. Bush. By 2010 they were history, a status which was extended for two years by Obama in an agreement with Republicans.

28 PERCENT CAP

Another idea is Obama's proposal to cap the value of tax deductions and certain tax exemptions for high-income taxpayers.

The president's proposal would limit the value of these tax breaks as one moves to a higher tax bracket. For example, a taxpayer in the current 35 percent tax bracket with $100,000 worth of qualified deductions and exemptions gets a $35,000 tax break. Under the 28 percent limit, that taxpayer would only get a $28,000 tax break.

Such a change would raise about $580 billion over a decade, according to a White House estimate, a significant chunk of revenue.

"Republicans have resisted it since the president proposed it," said Alan Viard, an economist at the conservative-leaning American Enterprise Institute think tank.

But a top Republican aide has said that House of Representatives Speaker John Boehner was willing to consider the president's proposed cap in budget talks with Obama.

Viard said that the idea fits with Republican support for broadening the tax base in exchange for lower tax rates.

There are limits already in place for some tax breaks, such as the $1 million limit for home mortgages.

(Editing by Howard Goller and Mohammad Zargham)

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Analysis: Economy would dodge bullet for now under fiscal deal

U.S. Senate Minority Leader Mitch McConnell (C) departs the senate floor with an aide after a senate vote in the early morning hours at the U.S. Capitol in Washington January 1, 2013.

Credit: Reuters/Jonathan Ernst

By Jason Lange

WASHINGTON | Tue Jan 1, 2013 2:52am EST

WASHINGTON (Reuters) - A deal worked out by U.S. Senate leaders to avoid the "fiscal cliff," was far from any "grand bargain" of deficit reduction measures.

But if approved by the U.S. House of Representatives, it could help the country steer clear of recession, although enough austerity would remain in place to likely keep the economy growing at a lackluster pace.

The Senate approved a last-minute deal early Tuesday morning to scale back $600 billion in scheduled tax hikes and government spending cuts that economists widely agree would tip the economy into recession.

The deal would hike taxes permanently for household incomes over $450,000 a year, but keep existing lower rates in force for everyone else.

It would make permanent the alternative minimum tax "patch" that was set to expire, protecting middle-income Americans from being taxed as if they were rich.

Scheduled cuts in defense and non-defense spending were simply postponed for two months.

Economists said that if the emerging package were to become law, it would represent at least a temporary reprieve for the economy. "This keeps us out of recession for now," said Menzie Chinn, an economist at the University of Wisconsin-Madison.

The contours of the deal suggest that roughly one-third of the scheduled fiscal tightening could still take place, said Brett Ryan, an economist at Deutsche Bank in New York.

That is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold.

At midnight Monday, low tax rates enacted under then-President George W. Bush in 2001 and 2003 expired. If the House agrees with the Senate - and there remained considerable doubt on that score - the new rates would be extended retroactively.

Otherwise, together with other planned tax hikes, the average household would pay an estimated $3,500 more in taxes, according to the Tax Policy Center, a Washington think tank. Budget experts expect the economy would take a hit as families cut back on spending.

Provisions in the Senate bill would avoid scheduled cuts to jobless benefits and to payments to doctors under a federal health insurance program.

AUSTERITY'S BITE

Like the consensus of economists from Wall Street and beyond, Deutsche Bank has been forecasting enough fiscal drag to hold back growth to roughly 1.9 percent in 2013. Ryan said the details of the deal appeared to support that forecast.

That would be much better than the 0.5 percent contraction predicted by the Congressional Budget Office if the entirety of the fiscal cliff took hold, but it would fall short of what is needed to quickly heal the labor market, which is still smarting from the 2007-09 recession.

"We continue to anticipate a significant economic slowdown at the start of the year in response to fiscal drag and a contentious fiscal debate," economists at Nomura said in a research note.

In particular, analysts say financial markets are likely to remain on tenterhooks until Congress raises the nation's $16.4 trillion debt ceiling, which the U.S. Treasury confirmed had been reached on Monday.

While the Bush tax cuts would be made permanent for many Americans under the budget deal, a two-year-long payroll tax holiday enacted to give the economy an extra boost would expire. The Tax Policy Center estimates this could push the average household tax bill up by about $700 next year.

The suspension of spending cuts sets up a smaller fiscal cliff later in the year which still could be enough to send the economy into recession, said Chinn.

He warned that ongoing worries about the possibility of recession could keep businesses from investing, which would hinder economic growth.

"You retain the uncertainty," Chinn said.

(Reporting by Jason Lange; Editing by Eric Walsh)

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Analysis: After "fiscal cliff" dive, more battles, new cliffs

Macy Curtis, 11, and her grandparents Sam and Andrea Perrone, all of Snellville, Georgia, visit the U.S. Capitol in Washington, December 29, 2012. President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the ''fiscal cliff,'' setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

Credit: Reuters/Mary Calvert

By David Lawder and Fred Barbash

WASHINGTON | Sat Dec 29, 2012 4:26pm EST

WASHINGTON (Reuters) - Whether or not the "fiscal cliff" impasse is broken before the New Year's Eve deadline, there will be no post-cliff peace in Washington.

With the political climate toxic in Congress as the cliff's steep tax hikes and spending cuts approach, other partisan fights loom, all over the issue that has paralyzed the capital for the past two years: federal spending.

The first will come in late February when the Treasury Department runs out of borrowing authority and has to come to Congress to get the debt ceiling raised.

The next is likely in late March, when a temporary bill to fund the government runs out, confronting Congress with a deadline to act or face a government shutdown. The third will possibly be whenever the temporary bill replacing the temporary bill expires.

While Congress is supposed to pass annual spending bills before the start of each fiscal year, it has failed to complete that process since 1996, resorting to stopgap funding ever since.

Influential anti-tax activist Grover Norquist predicted in an interview with Reuters that conservatives would wage repeated battles with President Barack Obama to demand budget savings every time the government needs a temporary funding bill or more borrowing capacity.

The so-called "continuing resolutions" to which a divided Congress has increasingly resorted to keep the government operating, provide a "very powerful tool" to pry out spending cuts, said Norquist, president of Americans for Tax Reform.

Republican Senator Bob Corker of Tennessee said he will not be satisfied until there are substantial cuts to federal retirement and healthcare benefits known as entitlements, producing savings in the $4.5 trillion to $5 trillion range.

"Unfortunately for America," said Corker, "the next line in the sand will be the debt ceiling."

Most observers see the $16.4 trillion debt limit as the true fiscal cliff in the new year because if not increased, it would eventually lead to a default on U.S. Treasury debt, an event that could prove cataclysmic for financial markets.

The Treasury Department said on Wednesday it would start taking extraordinary measures by December 31 to extend its borrowing capacity for about two more months.

'POISONOUS CLIMATE'

It was a deadlock over raising the debt ceiling in August 2011 that prompted a deficit reduction deal that led to a key fiscal cliff component, the $109 billion in automatic spending cuts on military and domestic programs.

If the fiscal cliff's spending cuts or tax increases are left even partly unresolved on December 31, the political combat over them will carry over into the new Congress, possibly simultaneously with the debt ceiling debate.

"We would be pessimistic of a quick fix" if the deadline is missed, Sean West, head U.S. analyst at Eurasia Group, a political risk consultancy, said in a note to clients. "The political climate will be poisoned. The new Congress will need time to settle in."

"We are concluding one of the most unsuccessful Congresses in history," Democratic Representative John Dingell of Michigan declared in a statement on Saturday, "noteworthy not only for its failure to accomplish anything of importance, but also for the poisonous climate of the institution."

Dingell, 86, is the longest serving member of the House, elected first in 1955.

Historically, bitter struggles in Congress like that over the fiscal cliff lead to further resentment and strife in a cycle of cumulative grudges that now spans nearly 30 years.

Many analysts and lobbyists in Washington believe the strife could get even worse because the new Congress convening on January 3 will include fewer members from moderate or swing districts and more from districts tilted heavily to the left or the right.

Republicans in particular are likely to face their most serious re-election challenges in 2014 not from Democrats but from conservative Republicans challenging them in primary elections.

"Ironically," said a post-election analysis published by the law firm Patton Boggs, "the voters have elected a 113th Congress that may be even more partisan than the 112th."

(Reporting by David Lawder and Fred Barbash; Editing by Eric Beech)

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Analysis: Boehner has few options in fiscal cliff mess

U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

Credit: Reuters/Yuri Gripas

By Richard Cowan

WASHINGTON | Fri Dec 21, 2012 3:34am EST

WASHINGTON (Reuters) - Now that House Speaker John Boehner's "Plan B" for addressing the "fiscal cliff" has crashed and burned, the top U.S. Republican appears to have two remaining options - wash his hands of the entire matter or negotiate a compromise with Democrats that could abandon scores of his fellow Republicans.

The Republican rank and file and Democrats may face an equally stark choice: work together for a change, or plunge together off the cliff.

Boehner tried to ram a "fallback" plan through the House on Thursday - a relatively tiny tax increase on millionaires and billionaires - and failed. His rambunctious Republicans, who see opposition to all tax hikes as a matter of bedrock principle and of political survival, refused to go along.

President Barack Obama and his Democrats who control the Senate take the opposite view - tax hikes on the wealthy are a condition for their support of a fiscal cliff bill. If there is to be a resolution it will largely depend on an improbable scenario - Democrats in the House teaming up with less militant Republicans to back away from the fiscal cliff.

Compromise has been out of style in recent years, and many think it could require some prodding from the markets.

"At this point, I only see one route to avoiding the cliff, a replay of the TARP debacle in 2008," said George Washington University's Sarah Binder, an expert on Congress. In September 2008, the House defeated the bank bailout bill and the market collapsed, prompting a terrified lawmakers to reconsider and pass it.

"In this case, a harsh market and public reaction would be needed to force the hand of the speaker to negotiate a deal that can pass with Democratic votes," she said.

"If the GOP takes a beating in the headlines and the market tanks, I suspect a good number of rank-and-file GOP will demand that the speaker go back to the table. But absent whiplash from the markets and voters, I suspect it's over the cliff we go."

For the time being - or at least the 11 days until the automatic tax hikes and spending cuts are triggered - the House is in disarray and no deal to avert the fiscal cliff is in sight.

While the House in recess for a Christmas break that is likely to last at least until December 27, Boehner must decide whether to move any further in Obama's direction and agree to tax increases much higher than his own proposal that so angered his fellow Republicans on Thursday.

The Ohio Republican also might have to settle for fewer long-term spending cuts than he had hoped for.

WALK ON BY

Boehner's only other apparent option - one that he hinted at late on Thursday following the collapse of his bill - would be to walk away and leave the problem on Democrats' doorstep.

"Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff," Boehner said in a statement referring to Senate Majority Leader Harry Reid.

But in a closed-door session before that statement, Republican lawmakers said Boehner told them that he would at least try to work out something with Obama.

Either way, Boehner faces the possibility of having to battle not only Democrats for the next two years, but also his own membership on major bills.

"We have people (Republican lawmakers) who felt like they had to stand on the principle ... they couldn't vote for anything (that raised any taxes). I don't quite understand it," lamented Representative Buck McKeon, the powerful chairman of the House Armed Services Committee, who oversaw passage of a $633 billion defense spending bill for 2013.

"If you don't have the votes, you can't move forward," McKeon said of the Plan B fiscal cliff bill.

Representative Steven LaTourette, a moderate Republican who is retiring at year's end, told reporters that Thursday's legislative defeat - and public relations failure - will not stop Boehner from being re-elected House Speaker on January 3. "Name one member who opposes him," LaTourette challenged reporters.

Firing Boehner, LaTourette said, would be "like saying the superintendent of the insane asylum should be discharged because he couldn't control the crazy people."

Nonetheless, two years into his stint as Speaker, Boehner still has not found the right formula for corralling his Republican majority, especially the Tea Party conservatives whose victories in 2010 helped Republicans wrest control of the House. However, he has taken steps in recent weeks to punish a handful of uncooperative Republicans.

Since unveiling his plan on Tuesday, several conservative groups, including the Heritage Foundation, waged a spirited effort to kill the measure.

Those groups, LaTourette said, had been "making their phone calls, and they're bombing people" with pressure to vote against the bill. That, he added, "makes people nervous" about primary election challengers being recruited in 2014 by outside groups to defeat Republican lawmakers who vote for any tax increase.

"I doubt his speakership is in trouble," said American Enterprise Institute scholar Norm Ornstein, "The big question is whether, and when, he is willing to bring up a bill that will require more Democrats than Republicans to pass."

(Reporting By Richard Cowan. Editing by Fred Barbash)

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Analysis: Traders hedge bets as budget talks turn to bluster

House Speaker John Boehner makes a brief statement to the media at the Capitol in Washington December 19, 2012.

Credit: Reuters/Gary Cameron

By Steven C. Johnson, Doris Frankel and Ryan Vlastelica

NEW YORK/CHICAGO | Thu Dec 20, 2012 10:52am EST

NEW YORK/CHICAGO (Reuters) - U.S. markets in the last few weeks have conveyed a strong sense of optimism over Washington's budget battle - perhaps a bit too much.

The benchmark S&P 500 index .SPX recently capped off its best two-day run in a month and the euro reached an 8-1/2-month peak against the dollar, largely on expectations that an agreement to avoid the "fiscal cliff" - $600 billion in automatic spending cuts and tax hikes set for early next year - is nearly at hand.

But at the risk of sounding like Ebenezer Scrooge, some investors fear a sudden run of bad news could snuff out the pre-holiday cheer and send stocks down. As a result, they are wading into the options market to hedge their bets and protect their profits.

"With all the uncertainty, we want exposure to sectors but we don't want to risk as much," said Michael Matousek, senior trader at U.S. Global Investors Inc, which manages about $3 billion. "We want to limit our positions because we don't know what will be impacted and by how much."

Republican Speaker of the House John Boehner, in a brief press conference on Wednesday, dared President Barack Obama to oppose Republican plans to cut taxes for all but those making $1 million or more in annual income.

After his remarks, both the S&P 500 .SPX and the Dow Jones industrials .DJI hit the day's lows.

Boehner's gambit, which followed another press conference where Obama suggested Republicans need to get over reflexive opposition of him, shows the two sides still have work to do to bridge their divide.

"It is very difficult to say if the optimism out there is warranted," said Alec Young, global equity strategist at S&P Equity Research in New York. "We don't know what's going on behind the scenes, and that makes it very difficult to account for all the uncertainty out there."

PLAYING IT SAFE

Some investors have started to limit exposure to stocks that have had a strong runup. A popular strategy is stock replacement, which involves selling shares outright and, instead, buying a call option - a bet the stock will keep rising - on those securities.

This allows investors to take profits and also reduce risk, particularly if budget talks break down and the market sells off. But they retain the option to get in on the gains if things go well by exercising their call, or "buy" options.

"We have seen this strategy in eBay (EBAY.O), Dell (DELL.O), Juniper Networks (JNPR.N), Coca-Cola (KO.N) and Starbucks (SBUX.O), among others," said Phillip Saunders, an equity derivatives strategist at Topeka Capital Markets.

Another approach: covered calls, in which investors hang onto a position while simultaneously selling a call option on it to increase their income. In this case, if the asset falls in value, some of the losses are offset by the premiums collected on the unexercised call option.

It's a strategy that Michael Fredericks, who manages the BlackRock Multi-Asset Income Fund, has employed with high dividend-yielding U.S. stocks, which could suffer if no deal is reached and dividend taxes spike from 15 percent to as high as 40 percent for some earners.

"When you add the value of selling an options contract to the dividend payment some companies distribute, you end up with a really attractive value proposition," Fredericks said.

The benchmark S&P 500 is up nearly 15 percent this year, with three sectors - industrials, financials and consumer discretionary shares hitting 2012 highs. That has increased the desire to hedge. On Wednesday, put options - bets on a market decline - on the S&P were trading more than three times the average volume of the past five trading days.

"What this suggests is that people are buying options in the S&P 500 index in order to protect themselves in case of a selloff into year-end," said J.J. Kinahan, chief derivatives strategist at TD Ameritrade.

TAIL RISK NARROWS

Overall, volatility remains low as stock trading winds down for the year. The CBOE Volatility Index .VIX, Wall Street's "fear gauge," rose to 17.4 on Wednesday, spiking after Boehner's comments but still well below its long-term mean of 20.5.

The market slipped following Boehner's words, with the S&P ending down 0.76 percent, but the overall low volatility suggested investors believe the outlook remains positive.

"I definitely think there is some risk, though," said Douglas DePietro, head of trading at Evercore Partners in New York, adding that some investors were protecting themselves by buying funds that bet on declines in the S&P 500.

Currency investors who fear a plunge over the "fiscal cliff", should consider selling currencies with strong U.S. links such as the Canadian dollar and Mexican peso against the Japanese yen, which usually rises when risk aversion spikes, said Steven Englander, who heads Citigroup's global G10 FX strategy.

He said some investors might be reluctant to hedge their bets now, after having been over-cautious in the past and missing out on the rally.

Unlike in early 2012, investors are no longer singularly focused on protecting against massive risks such as the 2008 market meltdown or the possible demise of the euro.

"Through much of this year, these....outcomes were central scenarios that investors pursued, and that in some cases weakened the returns that they got," Englander said.

But Michael Khouw, head of equity derivatives at CRT Capital Group in Stamford, Connecticut, said thin pre-holiday trade may be suppressing volatility somewhat.

"I don't think that the options markets are overly complacent," he said. "I would have expected option volume to drop off this year and it has not, and this is a reflection of the fact that market participants could expect a sharp move, up or down, in equities."

(Editing by David Gaffen, Tiffany Wu and Leslie Gevirtz)

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Analysis: U.S. policy gridlock holding back economy? Maybe not

By Jason Lange and Jonathan Spicer

Tue Dec 18, 2012 11:05am EST

n">(Reuters) - Washington thinks a resolution of the tense debate over the national debt will unlock a burst of economic growth by lifting uncertainty that has stymied investment.

It is a widely held view on Wall Street as well, derived from the glaring signs of weak business confidence over the last year as America struggles to get its fiscal house in order.

However, evidence for this belief is far from clear and is an issue of considerable debate, and even some businesses wonder how big a factor uncertainty is.

In Lexington, Kentucky, new sales are slipping at Gray Construction, a family-owned builder of factories and distribution centers. Clients say they are holding back because America could fall into recession if Congress and the White House don't strike a deal soon to avoid a "fiscal cliff" of some $600 billion in tax increases and government spending cuts due to begin in January.

"They're saying: 'Let's wait. Let's see what happens,'" Chief Executive Stephen Gray said.

And yet, the company, which also does design and engineering work, still has a record backlog of work and has hired about 30 people in the last six months.

The company's CEO has seen little dips in the sales pipeline before and said it's hard to know how different business would be if Washington's politicians inspired more confidence. As it is, Gray sees no reason to stop hiring: "I'm not super-worried."

Like Gray, economists are also unsure how much they can attribute business decisions to something so indeterminate as uncertainty, and they are divided over the degree to which erratic policymaking has dragged on the economy in recent years, if it has at all.

Answering this question could give important clues on how the economy will perform next year, whether or not Congress strikes a deal to avoid the fiscal cliff.

HOLDING BACK

Toward that end, researchers at Stanford University and the University of Chicago have created an index to gauge just how murky the future looks.

They count soon-to-expire tax provisions and mentions of uncertainty in major newspapers, as well as how much economic forecasters disagree on things like future government spending.

In a sample period between 1985 and 2011, they found heightened uncertainty went hand in hand with weak economic growth and hiring. Their index hit an all-time high last year when congressional gridlock nearly led the United States to default on its debt. It remains high, with a host of temporary tax cuts due to expire at year's end and the debate over the fiscal cliff regularly splashed across front pages.

Nicholas Bloom, a Stanford economist who helped make the uncertainty index, says weak levels of investment, along with surveys in which businesses say they are holding back because of concerns over the direction of policy, suggest uncertainty has weighed on growth since late 2011.

This year, business investment on capital goods - things like equipment and machinery - has fallen short of what economists would expect considering the $1.7 trillion in cash that companies were holding in the third quarter.

New orders for non-defense capital goods other than aircraft fell 7 percent in the year through October, while total business investment in the third quarter dropped the most since 2009.

Bloom says businesses would spend their cash more readily if politicians united around a grand bargain to put U.S. fiscal policy on a stable path. Using past correlations between uncertainty and economic growth as a guide, he estimates that lifting uncertainty could add about 3 percent to gross domestic product over the next 18 months - enough growth to create roughly 2 million jobs.

"There should be a surge of investment and hiring," he said.

That would be a big boost to the lackluster 1.9 percent growth rate many economists expect next year.

A deal in Congress that avoids the fiscal cliff while taming the nation's $16 trillion debt over the long term may come by year-end or in early 2013. It is also plausible Washington will avoid the fiscal cliff but kick the can into 2013 when it comes to the details of longer-term deficit planning.

Republican House Speaker John Boehner, who has looked exasperated in public over the fiscal debate, has edged closer to President Barack Obama's key demands in the last few days, and the president made a counteroffer on Monday that could put a deal within reach. The two sides still differ on where to set tax rates and how to overhaul social spending programs.

The tense negotiations have corporate America on edge.

So far this month, companies have submitted 148 statements to the Securities and Exchange Commission expressing concern about the fiscal cliff. In November, there were 215 such warnings, up from 80 in October and none prior to May. About half of 200 big companies surveyed by American Express last month said Congress won't resolve the fiscal cliff this year.

Chemical maker DuPont is trimming its capital investment plans due to uncertainty. "We're not going to spend as much as we thought next year," DuPont CEO Ellen Kullman said last week in an interview.

Treasury Secretary Timothy Geithner told CNBC earlier this month that reaching a sensible fiscal deal would get rid of the biggest roadblock to stronger growth. Many business leaders and lawmakers agree.

NO SURE THING

However, some economists doubt uncertainty has played such a central role holding back the U.S. economy. If they are right, growth next year could disappoint even if politicians wow investors with a grand bargain.

Researchers at Goldman Sachs say the weak economy might be boosting measures of uncertainty as much as the other way around.

The bank doesn't rule out an "uncertainty shock" over the next few months - most economists think uncertainty must matter for something - but its researchers crunched numbers and found there might be a simpler explanation for the disappointing levels of business spending.

The bank's economists calculated how much the business sector would normally be investing given its assets and the stage of the business cycle, and found the recent shortfall could be mostly explained by a lack of available credit.

Rather than being too scared to invest, companies might simply be having trouble getting loans. That makes sense considering many banks are still licking their wounds from the recent financial crisis.

"The evidence that a policy uncertainty shock is already depressing activity is far from unequivocal," Goldman Sachs economists Jan Hatzius and Sven Jari Stehn wrote in a recent note.

Their research suggests some of the hype over uncertainty is overblown. Indeed, much of the country is not paying attention to the fiscal cliff debate.

A poll by Gallup conducted December 1-2 showed only 60 percent of Americans were following the talks at least somewhat closely. In the history of national events tracked by Gallup, that ranks somewhere between the Iraqi election of 2005 and the confirmation hearings for Supreme Court Justice Samuel Alito in 2006.

Households, whose spending drives more than two-thirds of the economy, are not as worried as the country's CEOs, although a recent consumer sentiment survey showed concerns appeared to grow in early December.

Some economists say the most important issue for Congress is not to resolve policy uncertainty but rather to strike a fiscal deal that doesn't hurt the economy by ushering in harsh budget austerity measures.

Surveys of small businesses show companies are worried about higher taxes, but over the last few months and years they have worried even more about poor sales. Adjusting for inflation, household incomes are still lower than they were before the recession. This has depressed spending, a situation that could be exacerbated by tighter fiscal policy.

"The biggest uncertainty is whether the U.S. consumer is really back," said Stephanie Kelton, an economist at the University of Missouri-Kansas City.

(Reporting by Jason Lange in Washington and Jonathan Spicer in New York; Editing by Tim Ahmann in Washington and Steve Orlofsky in New York)

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