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Everything You Always Wanted to Know About the ‘Fiscal Cliff’ (But Were Afraid to Ask)

Nov. 13, 2012 4:15pm Becket Adams

The impending “fiscal cliff,” a combination of tax increases and spending cuts that will go into effect in January unless Congress passes a budget deal, will affect everyone who pays income tax (and even some who don’t). But are you unsure about exactly what it is? What does it entail? What are the potential consequences? Well, we’ve compiled everything you need to know.

–

Here’s what we know that you need to know.

First, the name.

While speaking before the House Financial Services Committee in February, Chairman of the U.S. Federal Reserve Ben Bernanke warned that Congress must agree on a budget deal by January 1, 2013, or the U.S. will face a “massive fiscal cliff of large spending cuts and tax increases.” Hence the term “fiscal cliff.”

Next, the issues.

At the center of the “fiscal cliff” is the expiration of the Bush-era tax cuts.

You may recall that these tax cuts were originally set to expire at the end of 2010 but were extended through 2012 as part of a deal reached between President Obama and the Republican-controlled House. The deal involved an extension of both the Bush tax cuts and long-term unemployment benefits for out-of-work Americans as well as a one-year reduction in the Social Security employee payroll tax (which Congress ended up extending through 2012).

Then in 2011 there was the infamous debt-ceiling crisis. Democrats wanted to raise the ceiling and Republicans refused. As a result of this fight, Congress passed the Budget Control Act of 2011 which called for the formation of the Joint Select Committee on Deficit Reduction (i.e. the “super committee”) to come up with a plan to deal with the deficit.

Here’s where it gets tricky.

The 2011 Budget Control Act calls for across-the-board spending cuts (also known as “sequestrations”) to defense and domestic programs — which the CBO puts at about $85 billion — if the “super committee” fails to come up with a deficit-reduction plan.

Someone thought that spending cuts of this magnitude would help force an agreement. Obviously, that didn’t happen.

In short, we’re facing these spending cuts and tax increases because Congress couldn’t agree on a deficit-reduction plan and someone had the bright idea of imposing automatic spending cuts if they failed to do so.

A Rundown of What to Expect With the Impending Fiscal Cliff

President Obama speaks during a Veterans Day ceremony in Arlington, Va., on Sunday (AP)

So let’s say Congress fails to heed Bernanke’s warning? What then?

Should the U.S. go over the so-called cliff, the economy would be hit so hard that it would likely sink into recession in the first half of 2013, economists say. And no matter who you are, it will be all but impossible to avoid the pain.

Middle income families would have to pay an average of about $2,000 more next year, the nonpartisan Tax Policy Center has calculated.

Up to 3.4 million jobs would be lost, the Congressional Budget Office estimates. The unemployment rate would reach 9.1 percent from the current 7.9 percent. Stocks could plunge. The nonpartisan CBO estimates the total cost of the cliff in 2013 at $671 billion.

Collectively, the tax increases would be the steepest to hit Americans in 60 years when measured as a percentage of the economy. Most of the damage — roughly two-thirds — would come from the tax increases. But, as mentioned briefly in the above, spending cuts could cause pain, too.

Hopefully, these numbers force the White House and Congress to agree to a deal before year’s end. On Tuesday, Congress returns for a post-election session that could last through Dec. 31. At a minimum, analysts say some temporary compromise might be reached, allowing a final deal to be cut early next year.

Still, uncertainty about a final deal could cause many companies to further delay hiring and spend less. Already, many U.S. companies say anxiety about the fiscal cliff has led them to put off plans to expand or hire.

A breakdown in negotiations could also ignite turmoil in financial markets. It could resemble the 700-point fall in the Dow Jones industrial average in 2008 after the House initially rejected the $700 billion bailout of major banks.

Since President Barack Obama’s re-election, nervous investors have sold stocks. The Standard & Poor’s 500 index sank 2.3 percent last week, its worst weekly drop since June. The sell-off resulted in part from anxiety over higher tax rates on investment gains once the fiscal cliff kicks in.

Last week, President Obama said he was open to compromise with Republican leaders — but only they agree to a deal that involves making “millionaire sand billionaires” pay their “fair share.”

Republican House Speaker John Boehner countered that higher tax rates on upper-income Americans would slow job growth. Boehner argued that any deal must reduce tax rates, eliminate special-interest loopholes, and rein in government benefits.

In this November 2012 file photo House Speaker John Boehner, R-Ohio, talks about the elections and the unfinished business of Congress at the Capitol in Washington (AP)

More than 50 percent of the tax increases would come from the expiration of tax cuts approved in 2001 and 2003 and from additional tax cuts in a 2009 economic stimulus law.

The first set of tax cuts reduced rates on income, investment gains, dividends and estates. They also boosted tax credits for families with children. Deductions for married couples also rose. The 2009 measure increased tax credits for low-income earners and college students.

About 20 percent of the tax increase would come from the expiration of a Social Security tax cut enacted in 2010. This change would cost someone making $50,000 about $1,000 a year, or nearly $20 a week, and a household with two high-paid workers up to $4,500, or nearly $87 a week.

Now it’s important to note that the expiration of the one-year reduction in Social Security employee payroll tax cut isn’t technically among the changes triggered by the fiscal cliff. But because it expires at the same time, it’s included in most calculations of the fiscal cliff’s effects.

An additional 20 percent of the tax increase would come from the end of about 80 tax breaks, mostly for businesses. One is a tax credit for research and development. Another lets companies deduct from their income half the cost of large equipment or machinery.

The rest of the tax increase would come mainly from the alternative minimum tax, or AMT. It would hit 30 million Americans, up from 4 million now.

The costly AMT was designed to prevent the wealthy from exploiting loopholes and deductions to avoid paying income tax. But the AMT wasn’t indexed for inflation, so it’s increasingly threatened middle-income taxpayers. Congress has acted each year to prevent the AMT from hitting many more people.

Under the fiscal cliff, households in the lowest 20 percent of earners would pay an average of $412 more, according to the Tax Policy Center. The top 20 percent would pay an average $14,000 more, the top 1 percent $121,000 more.

All this would lead many consumers to spend less. Anticipating reduced sales and profits, businesses would likely cut jobs. Others would delay hiring.

And then there are the cuts in spending which, according to the CBO, could total about $85 billion.

Defense spending would shrink 10 percent. Defense Secretary Leon Panetta has said those cuts would cause temporary job losses among civilian Pentagon employees and major defense contractors. Spending on weapons programs would be cut.

For domestic programs, like highway funding, aid to state and local governments and health research, spending would drop about 8 percent. Education grants to states and localities; the FBI and other law enforcement; environmental protection; and air traffic controllers, among others, would also be affected, the White House says.

Hospitals and doctors’ offices could also cut jobs if an $11 billion cut in Medicare payments isn’t reversed.

Extended unemployment benefits for about 2 million people would end. The extra benefits provide up to 73 weeks of aid.

“It would be nice if we could … address these issues before the very last moment,” said Donald Marron, the Tax Policy Center’s director.

Follow Becket Adams (@BecketAdams) on Twitter

The Associated Press contributed to this story. Front page photos courtesy the AP.

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Comments (57)

MaxineH20Sux
Posted on November 13, 2012 at 8:32pm
I have an online business and you can tell when the dollar is tanking because half of my orders daily come from international orders. When the dollar is doing ok I only get a couple if any. Yesterday i had many many international orders….. Just letting you all know!

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- Secret Squirrel
  Posted on November 13, 2012 at 10:31pm
  Here’s what you need to know about the fiscal cliff.
  There will be tax increases.
  There will be no spending cuts.
  Not a single penny will be used to reduced the debt.
  
  In a year or two, we’ll be hearing how we need tax increases and the
  rich need to pay “their fair share”.
  
  Hint: Always ask the progressives how much is their “fair share”?
  The never have an answer.
  
  Report this comment
- NeilChapin
  Posted on November 14, 2012 at 6:09am
  All you need to know about the fiscal cliff is that no matter what deal they come up with it is eventually going to happen anyway. Read fresh political commentary at: http://smallcraftadvisorychronicles.blogspot.com/
  
  Report this comment
Verceofreason
Posted on November 13, 2012 at 7:14pm
every you need to know – there is no fiscal cliff.
Only McConnell and Boehner posturing.
And Obama has finally learned THEY don’t want bipartisanship.
Enjoy the fireworks.

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- The-Monk
  Posted on November 13, 2012 at 9:29pm
  Trying to change your avatar wont help you Dora…..
  
  Report this comment
Insert Clever Username Here
Posted on November 13, 2012 at 6:55pm
“economic meltdown”, “fiscal cliff”, “kick the can down the road”, “double dip”, “back form the brink”, “xyz bubble”, “global financial crisis”, etc., i despise all these similes, metaphors, analogies and political footballs that exist solely to obfuscate truth.

jan 1 2013 is simply another day in which we will choose either to continue lying to ourselves or to accept the reality of the situation.

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DadRocked
Posted on November 13, 2012 at 6:50pm
BIGGEST ISSUE – What are they saying “the fiscal cliff” is coming in January 2013.
We have been on a ‘fiscal cliff’ for years now. Gross Dept to GDP Ratio 105.13%
As of this writing:
Public Debt $16,057,580,487,904 * Tax Revenue $ 2,431,400,318,190 Difference $13.3 Trillion
Debt per citizen $51,648 Per Taxpayer $141,734
2012 Total Interest (So Far) $3.9 Trillion
Social Security Liability $16 Trillion
Prescription Drug Liability $21 Trillion
Medicare Liability $84 Trillion
Unfunded Liabilities $121.5 Trillion

And we’re GOING TO GO OVER A FISCAL CLIFF? WE ALREADY ARE and HAVE.
What we have here are like the 33% that supported the crown back in the 1770′s!

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TheBurningTruth
Posted on November 13, 2012 at 6:46pm
Part 1:

It’s actually fairly clear to anyone that can look at this dispationately.

After the bubble burst in 2008, pretty much everyone agreed with the idea that the economy WAS a series of bubbles: property values, stock market, govt spending, etc. For the last 4 years, the govt (I’m including the Fed here for this discussion) has been trying every trick in the book to get that “recovery” going.

Recovery? Really? Recovery to WHAT? Another bubble? Is that what people really want, another roll in the financial hay before the next bubble bursts?

What we have is an economy that is like a very sick patient into which the doctors (politicians and economists) keep pumping new and more powerful drugs. We have decades of ill effects from past fiscal and monetary policy coursing through the economies veins and nobody really knows what a healthy economy looks like anymore.

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Eric_The_Red_State
Posted on November 13, 2012 at 6:46pm
The sad part is – and you know this is true — VOTERS (at least 51% of them) as long as they can get an X-Box and a hot dog do not care if the bill for the rest of the country is 100 Million – 100 Billion or 100 Trillion. They do not care.

As long as they have a sugardaddy to feed them – house them and put a bandaid on their boo-boo’s – they are JUST fine thank you.

Forget the schools
Forget the roads
Forget the jobs
Forget everyone else….

More foodstamps??

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- Oilfield_Trash
  Posted on November 13, 2012 at 10:24pm
  AMEN Brother….
  
  Report this comment
- cemerius
  Posted on November 14, 2012 at 9:13am
  Exactly Eric!! Personal accountability does NOT exist anymore!
  
  Report this comment
TheBurningTruth
Posted on November 13, 2012 at 6:46pm
Part 2:

With tax cuts overlaid on top of nearly zero interest and huge deficit spending, we are in a place where there’s nowhere to go but DOWN. It’s like being on a drug high when the drugs wear off. At this point, I believe the best place to go is over the fiscal cliff. Yes, I can hear the screams now, but consider that to do anything else means continuing to grow that bubble. The reason the fiscal cliff is a cliff, is because the ONLY WAY to get the economy back into any kind of balance is to cut spending and raise revenue. Anybody that thinks there is another way is fooling themselves and others.

Take the pain of a semi-controlled descent now or suffer the total collapse in a few years when the debt is over $20T, interest rates have risen to who knows how high (because like Greece and Spain nobody wants to buy your bonds) and we get a real business crash, like the 30′s, not like the “Great Recession” which though bad was nothing like the depression.

Of course, hiding from reality is the politician’s way.

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- mgh999
  Posted on November 18, 2012 at 9:49am
  The politicians way: I will lay in a plan that shows balance after my term(s) are up based on assumptions that a barely plausible so as to avoid either having to do real work or being held accountable for my actions.
  
  Report this comment
cliKKer
Posted on November 13, 2012 at 6:35pm
Please PUSH! stop stopping it…. the conservatives always “bailout” the progressives. Let it go. But before do it …. House should pass a bill giving obama a 100% rich tax. When he doesn’t accept it make him say how much he wants…. how much 90, 80, 70…. doesn’t matter with QE 3 infinity the fed our money is worthless…….. so our choice stop it and slow the decline just a little bit. or push it over and show the morons they get nothing when nobody has anything to give them.

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PALEHORSE
Posted on November 13, 2012 at 6:05pm
I hope the Republicans make the Dems cave and not the other way around.

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- CommonSenseTalk
  Posted on November 13, 2012 at 6:16pm
  I hope the government protects all Americans. Do you really think the Dem or Rep are that different? They both are stealing our money and love the power that they have or can get.
  
  Report this comment
- Verceofreason
  Posted on November 13, 2012 at 7:17pm
  Cave + Continue tax cuts for the rich?
  
  Report this comment
DadRocked
Posted on November 13, 2012 at 5:56pm
Think about it – The govt needs $85B and it is now the Repubs fault but when he had both houses he dished out $79.6B in taxpayer aid that Congress dished out to “save” GM and Chrysler, GM received about $50 billion.
You spilled it and I’m to blame? Who Are You Crappin’?

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- rickc34
  Posted on November 13, 2012 at 6:04pm
  It all comes down to Obama is a crappy leader.
  
  Report this comment
- mgh999
  Posted on November 18, 2012 at 9:59am
  Ignore the debt is up almost 50% since BO took office. Ignore that the size of the Fed has grown (Gen Govt spending is up 60% or $14B), Ignore that entitlement is up $465 B (35%), Ignore almost every facet of the Govt spending is up 40%.
  
  It’s all because of the $100 B we are “spending” on the rich that we spend $1,300 B more than revenues (yet revenues are only about $100 B less now).
  
  If you don’t believe that then it’s all about the video
  
  Report this comment
thibx
Posted on November 13, 2012 at 5:55pm
they will start taking ira accounts and taking over companies completely for their profits. nothing suprises me. bunch of moroons running the country. communist all over the government.

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IMCHRISTIAN
Posted on November 13, 2012 at 5:42pm
Again and Again and Again but it is ok to waste money with bad green investments and other crazy spending loss on GM, food stamps, no drilling etc Then they blame Republicans if they can’t continue to print, print print.

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- Favored93
  Posted on November 13, 2012 at 6:02pm
  It will sting but we need to go over the cliff so that the American moocher class will see what stealing from the taxpayers do to a nation.
  
  Report this comment
DadRocked
Posted on November 13, 2012 at 5:35pm
I was wondering of its origin. Thanks Blaze…
Now for the ulterior motive… Consider the source of the term; my first thought was it was a politically motivated term anyway… Now that I am assured of its creation, to me it means NOTHING! Nothing but another scare tactic!

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soybomb315_II
Posted on November 13, 2012 at 5:22pm
if you’re looking for a laugh – watch this

http://www.good.is/posts/intermission-chris-rock-sends-a-message-to-white-voters?utm_source=outbrain&utm_medium=cpc&utm_campaign=1112

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Lloyd Drako
Posted on November 13, 2012 at 5:21pm
“Oh Lord, make me chaste–but not yet.”
–St. Augustine, 400 AD

“Oh Lord, make us fiscally responsible–but not yet.”
–America, 2012 AD

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Spyderco
Posted on November 13, 2012 at 5:19pm
That first pic where Obama has his hands apart shows how far we are from the cliff.

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Joyzee
Posted on November 13, 2012 at 5:15pm
If we can Sell Ohio and California’..we can pay the debt and Elimniate food stamps to a good degree

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- rolla020980
  Posted on November 14, 2012 at 3:17pm
  We would never make any money from California. It would be like trying to sell a rusted out 1984 Chevy that doesn’t run when you still have a $10,000 loan on it. Why not just junk it and default on the loan?
  
  Report this comment
Josh
Posted on November 13, 2012 at 5:02pm
it won’t make a difference, either way – with a deal or witout a deal – we’re doomed.

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- AmericanFightingMan1
  Posted on November 13, 2012 at 5:22pm
  Not doomed. But I will watch the flimsy libs struggle. They deserve every bit of it to wipe that smug grin off their faces.
  
  Report this comment
- ddajs
  Posted on November 13, 2012 at 6:26pm
  Josh: You are correct, America is now to far gone to save. The poor man is screwed no matter what happens.
  
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FoxholeAtheist
Posted on November 13, 2012 at 4:50pm
What’s to know other than it’s a made up scare tactic?

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- Rothbardian_in_the_Cleve
  Posted on November 13, 2012 at 4:59pm
  Hmmm, made up how exactly?
  
  Report this comment
- netmail
  Posted on November 13, 2012 at 5:02pm
  Our financial existence is “made up”. You’ll realize that when you hear the splats of those who are in front of you.
  
  Report this comment
- RLTW
  Posted on November 13, 2012 at 5:02pm
  2+2= 3 then right?
  
  What a maroon!
  
  Report this comment
- FoxholeAtheist
  Posted on November 14, 2012 at 2:18pm
  Just a month or two ago we hadn’t heard of this ” fiscal cliff”. All of a sudden people are talking about it as if it had been a part of our dialect for years. They just threw it out there to scare you. Sheeple.
  
  Report this comment
Cavallo
Posted on November 13, 2012 at 4:46pm
Go go go.. Send us over, get it over with. This doesn’t happen completely in a vacuum either. This will also effect international trade and prevent any ability of the US to bail out Europe. As the American companies tighten their belts, Europe would go deeper into the crap pile and Greece, Italy, Spain, and then Ireland and France would collapse in on their own. China might cease to buy our debt, and the Fed that has been QEing us over a barrel won’t be able to ease us out of it. Likely though, they’ll make some temporary fix that will continue to slowly bleed us, like they have been doing for many years now. Slowly rot us from within.. They’ll play trumpets, and our first Queer President will make a speech about how great he is that we didn’t all die on Jan 1. In 6 months time, another fiscal crisis will have erupted from this slow disease they have subjected us to.

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- netmail
  Posted on November 13, 2012 at 4:49pm
  Perfect description..
  
  Report this comment
rabblechat
Posted on November 13, 2012 at 4:40pm
85$ billion is less than 2% of what we spent last year. A 2% reduction is hardly a “massive reduction”…

I cannot believe that the federal government doesn’t have 2% which they can cut…

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- Cavallo
  Posted on November 13, 2012 at 4:52pm
  The revenue is somewhere around 2 Trillion dollars. If you can’t run the federal government on 2 trillion … well what’s the point.. we’re headed to H E double hockeysticks anyway.
  
  Report this comment
- Cavallo
  Posted on November 13, 2012 at 4:55pm
  Also, remember two years about ago when they cut 60 billion.. then they made it down to 30.. then we find out it was somewhere around 3 billion or less. And the house leadership patted themselves on the back, and told us we should all be proud of them. Barf.
  
  Report this comment
- soybomb315_II
  Posted on November 13, 2012 at 4:59pm
  i still remember the republican running for senate in my state. He was going around our area saying any cut to the defense budget would tank our local economy. Keynesian. He lost anyways
  
  Report this comment
RamonPreston
Posted on November 13, 2012 at 4:35pm
I wouldn’t feel so bad about it if we could throw Obama off that cliff first.

In the movie “Robodoc” a crooked lawyer had his brain removed and he became president of the United States. Life imitates the movies.

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Cymry
Posted on November 13, 2012 at 4:34pm
what would happen if, in addition to going over the fiscal cliff, there was a taxpayer rebellion where no one paid their income taxes? (exemptions = 9, marital = single)

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- soybomb315_II
  Posted on November 13, 2012 at 4:39pm
  Doesnt the IRS fine people if they manipulate their deductions beyond a certain amount?
  
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- Cymry
  Posted on November 13, 2012 at 4:43pm
  soy,
  
  taxpayer rebellion was the operative term.
  
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soybomb315_II
Posted on November 13, 2012 at 4:32pm
prediction – they will kick the can down the road by extend bush tax cuts, delay spending cuts, and pass more continuing resolutions. Why would politicians take a hit when the federal reserve can supply them with all the money they need…..

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- Cavallo
  Posted on November 13, 2012 at 4:57pm
  They’ll likely continue to kick that can until they break their foot on it.
  
  Report this comment
- bpodlesnik
  Posted on November 13, 2012 at 5:00pm
  You forgot to add more debt. Even though that doesn’t much matter to any of them anyhow.
  
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netmail
Posted on November 13, 2012 at 4:26pm
We fell off a long time ago. The cliff is just very, very, very high is all.

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- FEMALL
  Posted on November 13, 2012 at 4:34pm
  Indeed. To all the Ohio Obama Voters who are having their food stamps reduced:
  
  That was me in freefall with empty pockets turned inside out.
  
  Report this comment

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