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What happens if we go over the fiscal cliff?

In less than a week, we are set to either fall off the fiscal cliff or sail cautiously away, bruised but safe. Some economists argue that spending cuts and tax hikes will

In less than a week, we are set to either fall off the fiscal cliff or sail cautiously away, bruised but safe. Some economists argue that spending cuts and tax hikes will drive the economy into another recession, while others say they are paramount to long-term financial stability. Tax breaks enacted under President George W. Bush will expire on January 1 and new laws from the Obama administration will take effect. If we are successful in avoiding the fiscal cliff, stocks may rise and businesses could start to spend more, driving consumers to do the same. If we are unsuccessful, we will enter another financial crisis.

Last chance to make a deal
According to the Tax Policy Center, the country will face serious long-term consequences if lawmakers fail to work out a fiscal cliff resolution. Going off the cliff would result in tax raises of $3,500 a year for 88 percent of Americans. Families with incomes of $50,000 to $70,000 could expect a tax jump of around $2,400. Since these increases would drive down spending, jobs and perhaps entire businesses would be lost.

Implementing all of the government's mandated spending cuts and tax hikes, according to the Congressional Budget Office, would lead to a GDP reduction of 0.5 percent next year. The Office determined that the cuts would also cause the unemployment rate to rise to about 9.1 percent.

What happens if the deal falls through?
If lawmakers fail to reach concession by December 31, some economists argue that the financial market might collapse. Many claim that in the case of a fiscal cliff collapse, consumer and business spending would come to a roaring halt, driving the country into an even deeper recession.

President Obama is calling for higher taxes for the wealthiest Americans, while House Republicans continue to oppose tax increases for any and all citizens. The President is still arguing for a temporary economic stimulus package to inspire spending and help relieve concerns surrounding a recovery. However, republicans and some democrats claim that the country can't afford to spend more money just to roll into another economic ditch.

If we do go over the fiscal cliff, CBS claims that budget cuts of 8 or 9 percent would necessarily be made across federal agencies, affecting everyone from lawmakers to agriculturalists and healthcare workers. Select programs are exempt from the cuts. These include Social Security benefits, the Department of Veterans Affairs and several programs providing aid to the poor and homeless.

Indecisive economic policies damage markets
New research from the University of Washington Foster School of Business has found that debates and ambiguities surrounding national tax, spending, regulation and debt can lead to effects on financial markets that outlive the stalemates themselves. While several weeks ago the American stock market started to look up as a result of optimism surrounding potential fiscal cliff resolutions, Friday saw stock prices drop around the world after House Republicans' plan fell through.

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