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What is the 'Fiscal Cliff'?

We've all heard of it and it sounds just terrible - not in a Wylie E. Coyote fall-off-the-cliff sort of way, but in a dire consequence sort of way. But what is it?

What is the 'Fiscal Cliff'?

There are several rather pithy monikers that are supposed to simplify the importance of the “Fiscal Cliff,” all using words like “looming consequences,” “too much austerity,” and “conundrum.” All convey a dire situation which will certainly be unpleasant no matter the outcome.

And, I suppose, that would be the correct determination.

No matter which side of the aisle you vote for your politics, here’s, hopefully, a description of the situation referred to as the US Fiscal Cliff in layman’s terms - as much as possible.

Where did the term “Fiscal Cliff” originate?

Though some feel we are headed more towards a fiscal “slope” rather than a “cliff” the term stems from a statement by Ben Bernanke, chairman of the U.S. Federal Reserve  in February 2012 to the House Financial Services Committee. He described “a massive fiscal cliff of large spending cuts and tax increases” that would take place on January 1, 2013 based on current policy.

And what is “IT”?

Most refer to "it" as the culmination of some very bad congressional decisions.

The Fiscal Cliff refers to a single day January 1, 2013 - when about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect if a compromise isn’t reached between President Obama and Congress. The cliff refers to the most imminent recession if something isn't done.

Among those laws set to change as we ring in the New Year  are the end of last year’s temporary payroll tax holiday, the end of the 2009 stimulus with the American Opportunity tax credit, the alternative minimum tax, certain corporate tax breaks, and the rollback of “Bush tax cuts” from 2001-2003.

Also going into effect is the beginning of taxes related to Obama’s health care law while at the same time, firm budget caps are set, and the beginning of some of the spending cuts agreed upon as part of the debt ceiling relief deal of 2011. These include cuts in part of the defense budget and Medicare.

Where is the disagreement?

Policy making and possible solutions are divided exactly down party lines. There is no agreement on taxes. In basic terms, Democrats look for a combination of tax increases and spending cuts while Republicans seek to cut spending and avoid raising taxes at all.

While both parties agree that spending cuts are necessary, there is no agreement on how and where to make those cuts. Republicans look to make reforms to Medicare, Medicaid, discretionary spending and what they refer to as entitlement programs. Speaker Boehner’s proposal includes $800 billion in new tax revenue without any rate increases, but $900 billion of spending cuts from mandatory programs. It looks to slow the growth of Social Security benefits.

President Obama looks to increase taxes on the wealthy to the pre-Clinton rate of 39.6 percent and has compromised with raising the threshold for what defines “wealthy.” He also looks to find an agreement with Republicans to agree to another extension of unemployment benefits which will primarily impact middle-classs Americans.

We are LITERALLY hours away - what can be done?

  • All agree that if the current policy scheduled for January 1, 2013 goes into effect, we will likely be driven back into – or further into – a recession. It won't be a "wham!" we're there sort of moment, but more of a slide. 
  • Agreement or compromise can be made to cancel some or all of the scheduled tax increases or spending cuts.
  • Congress and the White House can also extend the fiscal cliff until 2013 or 2014 giving both parties an opportunity to find better solutions or to allow the economy to right itself based on existing policy.
  • Find a middle ground that would address budget issues to a limited extent with modest growth in our economy.

 As of Saturday, the Huffington Post is reporting that negotiations continue and compromises are being made on both sides, though perhaps not by the December 31 deadline. Democrats have been told that Republicans might reject any deal until after January 1 relying that taxpayers weren’t likely to “feel any adverse impact if legislation is signed and passed into law in the first two or three days of 2013 instead of the final hours of 2012.”

Currently, there is no longer talk of a “Grand Bargain” in which the parties could agree. Negotiations are currently leading towards a goal of trying to prevent additional damage to our economy.

So progress is being made on our behalf; but it would seem that none of the options are attractive to all parties involved. 

If you would like more information on the specific laws, policies and actions referred to in this article, I found these links particularly helpful:

What is the Fiscal Cliff? on About.com

THE FISCAL-CLIFF BOWL: A VIEWER’S GUIDE by  John Cassidy on the New Yorker

The Fiscal Cliff: Absolutely everything you could possibly need to know, in one FAQ by Suzy Khimm, Ezra Klein, Dylan Matthews and Brad Plumer on WONKBLOG by the Washington Post.




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