The US Fiscal Cliff

The Fiscal Cliff is the popular short-hand term used to describe the issues the US government will face when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

At midnight on 31st December 2012 a number of changes took place:

1) The end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers)

2) The end of certain tax breaks for businesses

3) Shifts in the alternative minimum tax that would take a larger bite

4) A rollback of the “Bush tax cuts” from 2001-2003

5) The beginning of taxes related to President Obama’s health care law

At the same time as all this, the debt ceiling deal of 2011 will come into effect…

Over the past month, there have been attempts to a reach a deal. President Barack Obama had originally proposed plans to raise taxes on those earning more than $250,000, but then offered to raise that threshold to $400,00. John Boehner (Speaker of the House of Representative) had offered for the tax cut  to expire just for those earning more than $1m,  but this was scrapped because of lack of support from his own party.

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The fiscal cliff presented issues for business and investors since the highly partisan nature of the political environment made a compromise difficult to reach. Lawmakers had over a year to address the issue, but Congress waited until the last possible moment before seeking to solve the problem. Which side of the table are you on? The Republicans who wanted to cut spending and avoid raising taxes? Or the Democrats who sought a combination of spending cuts and tax increases?

Unfortunately, the fiscal cliff isn’t the only problem facing the United States right now. At some point in the first quarter, the country will again hit the “debt ceiling” – the same issue that roiled the markets in the summer of 2011 and prompted the automatic spending cuts that make up a portion of the fiscal cliff.

What happens next you may ask? Well, there is the issue of the world’s largest economy running out of money.

Check out the following video for a fuller explanation of the fiscal cliff if you understand this:

 

Feel free to debate on the impacts of the fiscal cliff and other approaches the US could have taken!

If you wish to learn more check out the following links:

http://www.guardian.co.uk/commentisfree/fiscal-cliff-blog/2013/jan/02/fiscal-cliff-explained-smarttakes-congress

http://en.wikipedia.org/wiki/United_States_fiscal_cliff

Thanks for reading!

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One comment on “The US Fiscal Cliff

  1. azleader says:

    The Budget Control Act is only a portion of the U.S. fiscal cliff. It is the spending cuts part. That is about $110Bn/yr in cuts for 2013 and each year after for 10 years.

    The other, much bigger part of the fiscal cliff are a set of tax increases of about $500bn/yr that come mostly from these separate and distinct sources:
    1- Bush-era tax cuts expire
    2- Payroll tax holiday expires
    3- Alternative Minimum Tax is not fixed
    4- The Medicare “doc fix” doesn’t happen
    5- Obamacare taxes begin

    The U.S. Congress cut a New Year’s Day fiscal cliff deal.

    As you might expect of something crafted in only 24 hours in the middle of the night on a national holiday… it wasn’t that good of a deal.

    For example, the Budget Control Act part was not resolved… among many other defects.

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