First, the cliff you’ve read about, from Brian Wesbury:

Last week, fresh off the election, it looked like Democrats and Republicans could quickly forge a bipartisan agreement to avoid the fiscal cliff. President Obama was talking about raising taxes but wasn’t wedded to higher tax rates. Meanwhile, Speaker Boehner put higher revenue on the table, as long as tax rates did not go up.

So they could have extended all the tax cuts just one more year – the “Bush” tax cuts dating back to 2001/03 as well as the payroll tax cut – and then gone to work on proposals like the Simpson-Bowles long-term budget plan. Or, in the alternative, they could have kept all income tax rates where they are, including a top rate of 35%, and raised tax revenue from the upscale by limiting itemized deductions.

Instead, President Obama is now asking for $1.6 trillion in higher taxes over ten years, which, in combination with pushback against tighter limits on itemized deductions, requires higher tax rates. In fact, Keith Hennessey, former head of the National Economic Council, thinks Obama and Boehner never meant the same thing when they were talking about tax rates.

Boehner meant not lifting tax rates above today’s top rate of 35%; he thinks Obama meant not lifting the top rate above the 39.6% where it was already scheduled to go next year. …

As a result, it now looks like a toss-up whether we hit January 1 without an agreement. So get ready for the doomsaying punditry to go crazy over the next few weeks.

By contrast, we do not think there is anything special about January 1. Most firms issue their first paychecks of the year on or after January 15th, and would have until that time to change withholding. Taxes on capital gains and dividends earned in 2013 are not due until April 2014. The Alternative Minimum Tax has to be “patched” for 2012, but those who owe AMT generally wait until March or April to pay their taxes.

In the end, we still think an agreement is highly likely because an uninterrupted dive off the fiscal cliff would cause a recession. In the end that agreement will likely contain some higher tax rates for investors. …

Higher taxes on investors would certainly not be good news, but it would also not be a reason to panic or flee from the stock market. From the end of 1986 through the end of 1996 the S&P 500 went up 12% per year, excluding dividends, and the total return was 15% per year. Yes, that includes a huge rally in 1995-96, but it also includes the crash in 1987.

And during that entire period, the capital gains tax rate was 28% and the top tax rate on dividends (treated as regular income) went from 28% to 31% to 39.6%. In other words, higher tax rates on investment than we are likely to get next year did not prevent a bull market.

What really mattered during this timeframe was that the size of government was shrinking. Federal spending fell from 22.5% of GDP to 20.2%. At the time, it was the largest drop in any ten-year period since the wind-down after World War II.

Ultimately, it’s the government spending that matters because spending redirects resources from the more productive private sector to the less productive government sector.

However, a majority of Americans voted in favor of the “less productive government sector” party, didn’t they?

Now, the cliff you haven’t read about, from Big Government:

Some of the largest U.S. businesses will drastically scale back their investments over the next year because of uncertainty caused by the increase in America’s debt, a lack of spending cuts, and President Barack Obama’s insistence on raising tax rates.

According to a Wall Street Journal analysis of securities filings and investor calls, “half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next.” Businesses are “worried about the future, as profit growth and the global economy slow and the outlook for U.S. government policies remains murky.”

In addition, a Business Roundtable survey that “tracks expectations for sales and investment among its big-company CEOs” found the economic outlook among business leaders was the worst it’s been in three years. …

According to the study, business investments as a whole decreased by 1.3% in the third quarter of 2012, while “business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009.” Corporate investments in new buildings also declined by 4.4%.

Even during the 2007-09 recession, businesses still made investments that helped “propel the recovery” and “boost productivity and profits,” even when they could not bring on new workers.

The outlook now is even more negative, and “unless the business investment slowdown reverses quickly, it could weigh further on growth prospects and the stock market” and make it more difficult for America’s economy to turn the corner.

Want visual evidence? How about a chart of private investment (the only kind of “investment”) as a percentage of gross domestic product since 1947? Note that it’s not going up.