What is the Fiscal Cliff?

So, What iş the Fiscal Cliff anyways? There are two major factors that when combined, produce the fiscal cliff. Budget Cuts & Tax Hikes Back in August of 2011, Obama and Congress, under pressure from the Tea Party, signed into law the Budget Control Act of 2011. The Bush tax cuts which were signed in 2001 and extended by Obama for two years in 2010. This was designed to cut the budget deficit in half by broadly cutting $1.2 trillion from the federal budget over ten years. They include payroll tax cuts, changes to the alternative minimum tax, estate and gift tax cuts, child tax credit and others. The loss of these would raise taxes on millions of Americans. It kicks in at midnight December 3Ist. These expire at midnight, December 31st. Cutting the deficit in half is a good thing, but taking $500 billion out of the economy to do it is expected to create recession conditions and push the unemployment rate above 9% according to the Congressional Budget Office. 2010 2011 $1,293 billion $1,299 billion 2012 S1,171 billion 2013 $612 billion 2014 $385 billion 2015 2016 $257 billion $259 billion 2017 $201 billion So what can be done about it all? Well, there are three main options. Obama and Congress can do nothing, or get nothing done. Obama and Congress can cancel some or all of the tax hikes and spending cuts. This would be "kicking the can down the road" to deal with at a later time. Obama and Congress could compromise and address the budget issues on a more limited extent that would not This will surely reduce GDP growth and put us into a recession. detrimentally affect the economy too much, This may prevent a recession but the US could face a debt crisis similar to some Compromise is hard to come by given the highly partisan political climate. On the plus side, our deficit will be cut in half. European nations. It's quite possible thae the current gridlock will continue and Congress decides to pass some Iith hour stop-gap mea- sures to delay the issue until later in the year. Can an agreement be reached? Both sides have offered and rejected plans so far. Let's see what's on the table. Likely On the table Unlikely Expiration of employee's payroll tax reduction Other expiring provisions Automatic Taxes in the Affordable Care Act cuts, Budget Control Act Reduction in Medicare payment rates for physicians Misc revenue and spending changes Sunset of Expiration of upper income tax provisions emergency unemployment benefits Expiration of tax rates below 33% and AMT Patch The Congressional Budget Office has projected two scenarios on the deficit. The "alternative fiscal scenario" involves maintaining the current laws to keep the economy from slowing in the short-run. Deficit as percentage of GDP IO The Fiscal Slope 2. The Fiscal Cliff 2004 2006 2008 2010 2012 2014 2016 2019 2020 2022 It's December already, time to panic?! "Despite the immediacy of the "cliff" metaphor, the impact of the changes will be gradual at first. Tax increases and budget cuts are spread out over the year. Congress can even act to change the laws retroactively after the deadline. So the "cliff" may not slow the economy until Congress can get its act together some time in 2013. But they shouldn't wait too long, the debt ceiling crisis is right around the corner again. That was the crisis that created half of this cliff to begin with. And around and around we go.. Sources: About.com Credit Suisse WhiteHouse.org Congressional Budget Office Images: Shutterstock.com visual.ly