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What Exactly Is The Fiscal Cliff?

MIAMI (CBSMiami) – Much of the talk over the next week will not center around the New Year or football, but instead on the so-called "fiscal cliff." It's a catch-all term that's being applied to a massive round of austerity and tax increases set to go into effect on January 1, 2013. But what exactly makes up the fiscal cliff? It starts with the so-called "Bush Tax Cuts" passed in 2001 and 2004. At the time, then-President George W. Bush pushed through two major tax hikes immediately after the government began running surpluses at the end of the Clinton administration. Bush's tax cuts dropped the rates for all Americans, though Democrats argue they disproportionately helped the wealthiest Americans the most. The tax cuts were set to sunset, or end, in 2010, but another deal between President Barack Obama and Republicans in Congress extended them to December 2012. If both parties can't agree on what to do about the tax cuts, the overall tax rates will revert to what they were in 2000 under President Clinton. According to CBS News, this would impact 88 percent of taxpayers with their taxes rising by an average of $3,500 a year. For a family making between $50,000 and $75,000 a year, the average tax bill would jump by $2,400. The loss of the extra revenue for the families would impact their spending power, which then would hamper businesses, which would turn and cut jobs to continue making profits. But the tax hike in overall rate isn't the only tax that will be impacted. A payroll tax cut was enacted in 2010 to help give the economy some stimulus, but both sides appear willing to let that tax cut expire and let payroll taxes rise by 2 percent in 2013. Tax hikes make up only half of the fiscal cliff. The other half is made up of deep spending cuts/austerity that could cripple the government and contractors nationwide. During the 2011 national debt crisis started by Congressional Republicans, a deal was finally struck to increase the nation's debt limit, but a sequester was put on the military and domestic spending. The sequester was put in place to try and spur government action. As part of the deal, both Republicans and Democrats put together a joint committee to seek trillions in deficit reduction. Republicans refused to allow any tax/revenue increases and Democrats balked at major changes to Social Security and Medicare. When both sides declared failure, the sequester kicked in. It imposes deep spending cuts to domestic discretionary spending as well as deep defense department cuts for military spending. Democrats oppose the discretionary spending and Republicans oppose the defense cuts. According to CBS News, budget cuts of 8-9 percent would hit most of the federal government, from law enforcement to the military to weather forecasting. Only a few areas, like Social Security benefits and Veterans affairs, will be spared the deep cuts. Still, the cuts would be phased in slowly over the next decade, which could help minimize the damage if they are not repealed in early 2013. Even if the nation goes off the "fiscal cliff," Congress can pass tax cuts in early 2013 and make them retroactive to any date they so choose. Congress can also choose to delay or cancel any spending cuts they wish. Some pundits believe this is the likeliest scenario to happen. Because Republicans refuse to allow any tax increases, the belief is that both parties will allow the country to go off the "fiscal cliff." At that point, President Obama can put together a massive tax cut package and send it to Congress. Neither party is likely to oppose a tax cut package, but Obama would have the ability to call for the cuts to be applied to only those making less than $250,000 or another similar level. Republicans and Democrats could quickly pass that measure and both sides could declare victory over the other. The tax rate damage would be averted, but both sides would have to deal with the spending cuts in the sequester. The depth of the spending cuts will likely depend on how much revenue is gained from the tax cuts. Cutting taxes for those below $250,000 and letting the others rise will generate significantly more revenue, which can help minimize the cuts to some degree. However, in exchange for allowing the cuts, Republicans may demand other cuts to programs to offset the overall cost of the cuts. It would create a problem because if Democrats balked at other cuts, Republicans may have to choose between voting against a tax cut, or allowing the cuts to go through without any offsets. One key element of any deal will be the debt ceiling. The last time Republicans wielded the debt ceiling as a weapon, the nation's credit rating was dropped for the first time in history and hit the economy hard. Treasury secretary Timothy Geithner said Wednesday the nation will hit its borrowing limit on December 31. Geithner and the Treasury Department will take "extraordinary" measures to allow the government to keep functioning for a few months. However, at a certain point, Geithner will run out of options. If Congress doesn't authorize a hike in the debt ceiling, the U.S. will default on its bills. This could cripple not only the U.S. economy, but also the global economy. President Obama wants a grand deal on tax cuts and everything to include a two-year automatic extension on the debt ceiling. Republicans have balked at this proposal and another showdown could be in the works in 2013. Republicans will want massive offsets in exchange for any hike in the debt ceiling, which Obama and Democrats are likely to oppose. It all sets up for a very hectic end of 2012 and beginning of 2013. In the middle of it all, a brand new Congress will be sworn in and have to deal with all of the issues immediately if no deal is struck before then, which is looking increasingly less likely. But what exactly makes up the fiscal cliff?

  • Dec 27, 2012
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