In case you are unaware of the danger of the "Fiscal Cliff" that is looming on the horizon for the American people, it refers to the upcoming date of January 1, 2013, when a series of dramatic
The U.S. Congressional Budget Office has just reported that, if the nation is permitted to fall off the fiscal cliff, dire consequences are in store. They called it the "single biggest near-term threat to a global economic recovery," and calculate that it will plunge the U.S. back into a recession in 2013, along with increasing the unemployment rate again.
With all the current focus on the upcoming election, the fiscal cliff will likely not be addressed until after November 6, leaving little time and a lame duck Congress to wrestle with the issue. Chances of an agreement are slim. But the consequences of no agreement are potentially devastating.
The CBO has estimated that, with a fall off the fiscal cliff, the current government deficit would actually decrease from 7.3% of GDP to only 4% in just one year, which would be the largest one-year deficit reduction since 1969. This will, however, lead to recession and massive job losses.
If the country is not permitted to fall, the economy will continue to grow, albeit slowly, and 2 million more jobs will be created.
So the question boils down essentially to jobs and economic growth versus deficit reduction. Perhaps a middle ground can be found, but with the gridlock that has been the norm in Congress this year, a compromise seems unlikely.
The fiscal cliff encompasses both spending cuts and tax increases, which will fall on different groups of people disproportionately.
The spending cuts that will be effective on January 1st are the result of the Budget Control Act of 2011, and were mandated when the debt ceiling crisis was averted in August 2011. The Act calls for automatic, across-the-board spending cuts if Congress is unable to come to a bipartisan debt reduction deal, which they failed to do. These cuts will amount to $1.2 billion in deficit reduction over 10 years.
50% of the reduction will come from spending on defense, which will amount to $55 billion in 2013, or approximately 10% of the discretionary defense budget.
The remaining 50% will come from non-defense spending, and will amount to approximately 8% of budget cuts in programs such as
The major tax increases will occur when the Bush Tax Cuts are allowed to expire at the end of 2012. This includes increases in income tax rates for all taxpayers, and an increase in the capital gains and dividend tax rates for investors. High income households will find limitations on some of their deductions, and the estate tax will revert to a $1 million exemption (from the current $5 million exemption) and an increase of the top rate from 35% to 55%.
Lower income and households with children will be hit with a reduction in the Child Tax Credit, from $1000 to $500 per child, and the Marriage Penalty Relief will expire, making it more expensive to file as a married couple rather than as two single earners. Low income households will receive a reduction in the Earned Income Tax Credit, as the expanded eligibility for this credit will end. The American Opportunity Tax Credit for education expenses will also expire.
The AMT Patch will expire, snaring approximately 30 million people as opposed to its current 4 million. Households with incomes as low as $35,750 for an individual and $45,000 for a couple will find themselves subject to this tax, which was originally designed only for wealthy households.
The current Payroll Tax Holiday will likewise expire. This reduction in the Social Security tax for employees, from 6.2% to 4.2% for 2011 and 2012, will mean an increase for the first $110,000 of income.
The federal Unemployment Extension will also expire, so that the newly unemployed will be able to receive a maximum of only 26 state-funded weeks of benefits, as opposed to the current maximum of 99 weeks of jointly funded state and federal benefits.
Wherever you may stand on the individual issues, it is important to understand that as a whole, this “fiscal cliff” cannot be permitted to happen. We need to demand that our legislators face up to their responsibilities and ensure that the country can continue to recover from the worst economic situation since the Great Depression. Now is not the time to play partisan politics and stonewall for the sake of causing gridlock. Now is the time to buckle down and do the hard work of cooperating to find the best result for the people of America.
Written by Karin Hernandez, guest writer of WallaceAPC, a Los Angeles