The Fiscal Cliff
It is the last day of 2012, and the news has stories about President Barack Obama and the "fiscal cliff." If you're like me and are wondering what that's all about, let me give you my understanding.
The "fiscal cliff" is the term used to describe the economic effects that will result from tax increases, spending cuts, and a corresponding reduction in the US budget deficit beginning in 2013 if existing laws remain unchanged. The deficit (the difference between what the government takes in and what it spends) is projected to be reduced by roughly half in 2013. The Congressional Budget Office estimates that this sharp of a decrease in the deficit (the fiscal cliff) will likely lead to a mild recession in early 2013.
There are a number of laws which will lead to the fiscal cliff, unless lawmakers come to some compromise. These laws include the following:
1. The Bush tax cuts extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, will end today unless extended.
2. Across-the-board spending cuts ("sequestration") to most discretionary programs as directed by the Budget Control Act of 2011 will occur.
3. Minimum tax thresholds will revert to their 2000 tax year levels.
4. Measures delaying the Medicare Sustainable Growth Rate from going into effect (the "doc fix"), as extended by the Middle Class Tax Relief and Job Creation Act of 2012 will end.
5. The 2% Social Security payroll tax cut is also scheduled to end
6. Federal unemployment benefits will end
7. New taxes imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will go into effect
Without new legislation, these provisions would automatically go into effect on January 1 or 2, 2013 (except for the Alternative Minimum Tax growth, which can be changed retroactively until December 31, 2012). Some provisions would increase taxes (the expiration of the Bush and payroll tax cuts and the new Affordable Care tax and minimal tax thresholds) while others would reduce spending (sequestration, expiration of unemployment benefits and implementation of the Medicare SGR).
The laws leading to the fiscal cliff include the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the Bush tax cuts or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes or increasing spending. Because of the short-term adverse impact on the economy, the fiscal cliff has led to calls to extend some or all of the tax cuts, and to replace the spending reductions with more targeted cutbacks. Negotiations over this have also generated heightened policy uncertainty over the eventual tax and spending paradigm.
The United States public debt would continue to grow even if the fiscal cliff occurs. However, over the next ten years, the smaller deficit will lower projected increases in the debt by as much as $7.1 trillion or about 70%, resulting in a considerably lower ratio of debt to the size of the economy. For the first year (from fiscal year 2012 to 2013), federal tax revenues are projected to increase by 19.63%, while spending outlays are expected to decline by 0.25%. These changes would raise 2013 tax revenue to 18.4% GDP, above its historical average of 18.0% GDP, while reducing spending to approximately 22.4% GDP, still above the 21.0% GDP historical spending average.
Following is a statement that President Obama made today about this issue:
Sources say that both sides are still far apart from a deal.
Happy New Year.
The "fiscal cliff" is the term used to describe the economic effects that will result from tax increases, spending cuts, and a corresponding reduction in the US budget deficit beginning in 2013 if existing laws remain unchanged. The deficit (the difference between what the government takes in and what it spends) is projected to be reduced by roughly half in 2013. The Congressional Budget Office estimates that this sharp of a decrease in the deficit (the fiscal cliff) will likely lead to a mild recession in early 2013.
There are a number of laws which will lead to the fiscal cliff, unless lawmakers come to some compromise. These laws include the following:
1. The Bush tax cuts extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, will end today unless extended.
2. Across-the-board spending cuts ("sequestration") to most discretionary programs as directed by the Budget Control Act of 2011 will occur.
3. Minimum tax thresholds will revert to their 2000 tax year levels.
4. Measures delaying the Medicare Sustainable Growth Rate from going into effect (the "doc fix"), as extended by the Middle Class Tax Relief and Job Creation Act of 2012 will end.
5. The 2% Social Security payroll tax cut is also scheduled to end
6. Federal unemployment benefits will end
7. New taxes imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will go into effect
Without new legislation, these provisions would automatically go into effect on January 1 or 2, 2013 (except for the Alternative Minimum Tax growth, which can be changed retroactively until December 31, 2012). Some provisions would increase taxes (the expiration of the Bush and payroll tax cuts and the new Affordable Care tax and minimal tax thresholds) while others would reduce spending (sequestration, expiration of unemployment benefits and implementation of the Medicare SGR).
The laws leading to the fiscal cliff include the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the Bush tax cuts or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes or increasing spending. Because of the short-term adverse impact on the economy, the fiscal cliff has led to calls to extend some or all of the tax cuts, and to replace the spending reductions with more targeted cutbacks. Negotiations over this have also generated heightened policy uncertainty over the eventual tax and spending paradigm.
The United States public debt would continue to grow even if the fiscal cliff occurs. However, over the next ten years, the smaller deficit will lower projected increases in the debt by as much as $7.1 trillion or about 70%, resulting in a considerably lower ratio of debt to the size of the economy. For the first year (from fiscal year 2012 to 2013), federal tax revenues are projected to increase by 19.63%, while spending outlays are expected to decline by 0.25%. These changes would raise 2013 tax revenue to 18.4% GDP, above its historical average of 18.0% GDP, while reducing spending to approximately 22.4% GDP, still above the 21.0% GDP historical spending average.
Following is a statement that President Obama made today about this issue:
Sources say that both sides are still far apart from a deal.
Happy New Year.