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The following article was published in our article directory on December 28, 2012.
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What is the Fiscal Cliff 2013?

Article Category: Politics

Author Name: Justin Harris

We at Wonkblog put together a FAQ to sort it out. And we'll keep updating this FAQ as the debate raves on.
Exactly what is the fiscal cliff?
What is the fiscal cliff in one sentence?
If it's not a cliff, then exactly what is it?
What's in it?
Taxes
Investing
Financial obligation Ceiling
What matters most in it?
Exactly what takes place if we review?
Economic downturn
Shortage decrease
Tax rises
How has Washington tried to solve the fiscal cliff in the past?
2010 tax deal
Simpson/Bowles and the Gang of Six
Obama/Boehner
Supercommittee
What do the parties see eye to eye on?
Exactly what do they disagree on?
Exactly how can we solve it?
Simply go over
Simply go over then make a deal
Extend
Trigger
Small deal
Grand deal
Exactly what is the fiscal cliff?
The fiscal cliff is an inapt metaphor for the looming effects of some really bad congressional decisions.

On or around Jan. 1, about $ 500 billion in tax rises and $ 200 billion in spending cuts (see table 1) are scheduled to take effect. That's equal to about 4 percent of GDP, which is, according to the Congressional Budget Office, more than enough to throw us into an economic downturn (more on that later on).

Data: Economic Policy Institute

That's why the "cliff" metaphor is inapt. If financial markets freak out, it may happen extremely rapidly, proving the "cliff" images appropriate.
The reason that the fiscal cliff could possibly push us into an additional economic downturn in 2013 is since it enacts too much shortage decrease upfront, not too little. And yet, deficit decrease is something that most members of Congress support, at least in the abstract. Both sides wish to replace the fiscal cliff with ... something.
Exactly what is the fiscal cliff in one sentence?
Much excessive austerity, much too quickly.
If it's not a cliff, what is it?
The term "fiscal cliff" comes from testimony Fed Chairman Ben Bernanke delivered before Congress previously this year. As we pointed out, the "cliff" images has stimulated some dissent.
The threat the economic climate faces is too much austerity too quickly, so swapping the term "fiscal" for the word "austerity" actually much better mirrors the situation. Thus, the "austerity crisis.".
Exactly what's in it?
- Taxes.
5 tax measures have provisions ending at year's end:.

- 2001/2003 Bush tax cuts: These cut specific income tax rates, pared back the estate tax, decreased rates for financial investment income (such a capital gains and dividends) and broadened a many tax credits, consisting of the kid tax credit. According to the Economic Policy Institute, these would cost $ 203 billion next year if extended.

- 2009 stimulation: This included expansions of the Earned Income Tax Credit, which provides aid to low-income employees, along with the kid credit, and the American Opportunity tax credit, which assists households pay for university tuition. Extending these would cost $ 10 billion next year.

- Payroll tax holiday: This was included in the December 2010 tax offer and slashed the payroll tax rate on employees from 6.2 percent to 4.2 percent. Extending it would cost $ 115 billion next year.

- Alternative Minimum Tax: Intended as a baseline tax for high earners, the AMT is not indexed for inflation and would strike a great deal of middle-class taxpayers if not "patched" before following year. A patch would cost $ 114 billion.

- Extenders: This is the catch-all term tax wonks usage for business tax breaks that have to be extended routinely. Doing that again, as per typical, would cost $ 109 billion.

- Spending cuts.
Four kinds of investing cuts work following year:.

- The sequester (or, as we often like to call them, the big, dumb investing cuts that no one wishes): Mandated by the Budget Control Act of 2011 (much better known as the financial obligation ceiling compromise), this institutes a 2 percent cut in doctor and other providers' Medicare repayments, and a 7.6 to 9.6 percent across the board cut in all discretionary investing, other than programs for low-income Americans. The cuts are uniformly divided between protection and nondefense programs, with analysts forecasting a devastating effect on all afflicted divisions and companies.

The sequester can be prevented by reversing the section of the BCA mandating the cuts, which amount to about $ 110 billion next year.

- Budget caps: Also in the Budget Control Act, these set a firm restriction on discretionary spending within which policymakers must operate. They are set to reduce spending by $ 78 billion following year.

- Doc fix: This policy, passed every Congress for 15 years now however lapsing at the end of 2012, reverses temporarily cuts that Congress passed, and former President Bill Clinton signed, as a deficit reduction measure in 1997. The cuts, referred to as the "Sustainable Growth Rate" or SGR, require that development in carrier payments not surpass growth in Gross Domestic Product. If the doc fix is not extended, medical professional repayments would fall by almost 30 percent, dwarfing the cuts enacting as part of the debt ceiling deal. That would cut investing by $ 14 billion next year.

- Unemployment insurance: Unemployment insurance was expanded following the economic downturn, and due to the slow recuperation this growth has been routinely extended. Accomplishing this once again would cost $ 39 billion.

- Debt ceiling.
When precisely the financial obligation ceiling is next reached relies on the amount of the federal government in fact invests and taxes in the coming months. The majority of analysts think the following debt-ceiling increase will come due around February. The Bipartisan Policy Center approximates we'll have to raise the debt limitation by anywhere between $ 730 billion and $ 1.25 trillion to stay clear of the financial obligation ceiling for all of 2013 (depending on whether the Dec. 31 fiscal changes measures are enacted or not) and in between $ 1.3 trillion and $ 2.2 trillion in 2014.
A fiscal cliff bargain is most likely to consist of a rise to the financial obligation limitation. However in a globe without an offer, an ongoing austerity crisis could be intensified by a default. The economic consequences of that are hard to even envision, but we're talking about a crisis on the order of what we saw in 2008, a minimum of.

What matters most in the fiscal cliff?
The great updates is that if you look at the numerous parts of the fiscal cliff separately, you'll see that the parts that do the most for deficit reduction do the least for the recovery, and vice versa. This suggests the possibility of "a la carte" approach to the fiscal cliff, in which we extend the most stimulative policies and wave farewell to the most pricey policies.
The most stimulative policies are, naturally enough, the policies that were meant to be stimulation. Amongst the least stimulative policies are the Bush tax cuts. The spending sequester is also a truly nasty hit to the economy.
That menu, if anything, downplays the expense of policies like the Bush tax cuts. Those numbers are just for 2013. The Bush tax cuts, if they're extended, are most likely to be extended a minimum of for the following years, meanings their price will be 10 times higher than what's on the menu (in fact, it'll are more because of inflation and financial development, but let's not get too complicated here).
What takes place if we review?
- Recession.
Analysts expect that the austerity crisis will damage the financial recovery and quite possibly plunge the United States back into a recession. If all policies, consisting of the payroll tax cut, are extended, the economic climate will expand 2.4 percent.

- Deficit reduction.
If the austerity crisis favorites in complete, both medium-term and short shortage problems in the United States would disappear. By contrast, financial obligation would climb to 90 percent of GDP if existing policies continue, the greatest point because after World War II.

- Tax increases.
The Tax Policy Center approximates that if we review the fiscal cliff, the typical American will see their tax expense surge by $ 3,446 in 2013.
That average obscures a larger favorite to the rich than the poor: Taxpayers making more than a million dollars will, usually, see a $ 254,000 tax trip, equal to about 11 percent of their earnings, while taxpayers making between $ 40,000 and $ 50,000 will see a $ 1,700 tax hike, equal to about 4.4 percent of their earnings.
Still, it's a big hit to both teams, and that's before you get into the effects of the spending cuts, which will strike the bad much more difficult than the rich.

Tax Policy Center.

How has Washington tried to fix the fiscal cliff in the past?
- 2010 tax bargain.
The Bush tax cuts were really scheduled to end in 2010: Republicans wished to make them long-lasting during the initial arguments in 2001 and 2003, but for rather complex congressional reasons, their efforts to prevent a filibuster obliged them to accept a 10-year expiration date.
In late 2010, both President Obama and Congress passed regulation extending the Bush tax cuts for 2 years, concurring that the economic situation was too weak for a tax trip. The deal was also contingent on a two-year extension of federal welfare, which were included in the 2009 stimulation, a one-year pay-roll tax vacation to change an additional tax break in the stimulus (later extended to two years), and the extension of a couple of other tax breaks from the stimulation. All these provisions are because of expire at the end of this year, which is why they're part of the austerity crisis now.
- Simpson/Bowles and Gang of Six.
While they were still grappling with a foundering economy, leading Republicans and Democrats also became progressively concerned about the expanding deficit, which the monetary crisis and economic downturn substantially aggravated. To that end, Obama developed the Simpson-Bowles commission in 2010, whose members created an advised framework for $ 4 trillion in shortage reduction.

- Obama/Boehner.
In 2011, the new GOP-led House was requiring that the federal government decrease its shortage as a condition of raising the financial obligation ceiling. Obama and Boehner tried to hammer out a deal, but the talks eventually broke down as Boehner declined the president's demand for even more income.
Eventually, to avert a debt-ceiling crisis, Congress and the White House passed regulation in August 2011 called the Budget Control Act, which had almost $ 1 trillion in upfront cuts and established a Congressional committee to come up with $ 1.2 trillion even more in shortage decrease by late November 2011. If the supercommittee failed to decided upon a bargain, the across-the-board cuts to both protection and non-defense investing-- i.e. the sequester-- would be instantly arranged to take effect after Dec. 31.

- Supercommittee.
Republicans rejected the Democrats' proposed tax boosts and Democrats spurned the Republicans' revenue supplies as too paltry. Even after the supercommittee failed, Congress might have independently passed an offer that minimized the shortage by $ 1.2 trillion to avoid the sequester cuts.
That's why we're now dealing with the sequester, on top of the Bush tax cuts and other arrangements that were already set up to expire on Dec 31: They're all policy choices that Congress has actually made (or failed to make) over the past 2 years, loaded onto a single deadline.

What do the parties see eye to eye on?
Both parties concur that doing nothing and letting all the scheduled tax hikes and spending cuts to take effect for all 2013 would be a dreadful thing for the economic climate, and something they want to stay clear of. No one suches as the sequester's indiscriminate, across-the-board cuts, and couple of want to raise taxes considerably on the middle-class.
While they oppose the fiscal cliff's certain kind and pace of deficit decrease, the innovators of both parties still wish to enact major deficit reduction that brings down the longterm shortage. Both sides agree that such a deficit plan should consist of both tax incomes and entitlement cuts, usually talking. And so the negotiations are, rather peculiarly, concentrated on changing one deficit-reduction package with another deficit-reduction package deal.
Exactly what do they disagree on?
They do not see eye to eye on taxes: Democrats want to hike taxes on the affluent by about $ 1.6 trillion, and they want about $ 1 trillion of that to come from letting the leading tax marginal tax rate snap back to its Clinton-era level of 39.6 percent. Republicans oppose tax boosts in general and rises in marginal tax rates in particular.
The two parties also disagree about exactly how and where to cut spending: Republicans wish to make even more remarkable reforms to Medicare, Medicaid, and other entitlement programs, along with bigger cuts to domestic discretionary investing.
The earliest propositions have actually brought these differences into full relief: President Obama's opening bid requires $ 1.6 trillion in tax boosts and simply $ 400 billion in spending cuts, in addition to $ 200 billion in brand-new stimulus. By the White House's accounting, the entire plan would decrease the deficit by $ 2.4 trillion.
Speaker Boehner's counteroffer consists of $ 800 billion in brand-new tax income-- without any type of rate increases-- $ 900 billion in spending cuts from necessary programs, $ 300 billion in discretionary cuts, and $ 200 billion in slowing the growth of Social Security advantages. Utilizing the same accounting measures as the White House, it would decrease the deficit by $ 4.6 trillion.

How can we fix it?
- Just review.
The most basic option for Congress and the White House would be to do absolutely nothing. Taxes would rise. The military and domestic spending cuts in the sequester would bite down. This would be the solitary largest act of financial obligation decrease in American history, cutting some $ 1.2 trillion from the shortage over the following 2 years. Trouble is, that much austerity would likely also induce an economic downturn. That's why couple of policymakers advocate this situation.
There's an additional problem with this plan: Lawmakers cannot simply sit back and do absolutely nothing. Even if the tax trips and investing cuts kick in, Congress would still need to vote to raise the $ 16.4 trillion financial obligation ceiling by February or so.

- Just go over and then make a deal.
An additional possibility is that lawmakers do not reach a bargain by Dec. 31. The United States goes over the fiscal cliff. It's only short-term. After all, those tax trips and spending cuts don't pitch in with full force right away. They're spread out over 2 years. So there's still time to make a deal when the new Congress assembles in January.
Why would legislators do this? It may make a deal much easier. Today, the two parties are having a bumpy ride reaching an agreement since Democrats wish greater taxes on the rich and Republicans primarily decline to vote for any sort of tax boosts at all. If we go over the cliff, taxes automatically go much, much greater than either party wants. Now the two parties simply have to debate how to cut taxes from this new standard. That's a happier discussion, in theory.
The downside is that Congress and the White House may not have much time to negotiate a deal in January or February before monetary markets begin nosediving.

- Extend.
There's absolutely nothing stopping Congress and the White House from holding off the fiscal cliff till 2013 or 2014. Congress would simply vote to extend all (or some) of the Bush tax cuts and payroll tax cuts. Congress votes to override the sequester, so that none of the military and domestic investing cuts kick in. All of a sudden, the fiscal cliff is gone-- or a minimum of pushed back.
The flip side is that shortage would continue to expand-- the CBO estimates U.S. debt would be $ 1.2 trillion higher over the next 2 years if Congress extends everything, compared with if we went over the cliff. Plus, we 'd face an additional big showdown 2 years from now.
- Trigger.
One option to extending the fiscal cliff that would not require instant shortage reduction, or the immediate formulation of an offer, would be to create a brand-new trigger. There are numerous feasible forms such a trigger could take, consisting of cuts to tax expenses, a boost in the capital gains tax, or even more investing cuts.
- Small offer.
One possibility being chatted about is that Republicans would let the Bush tax cuts for income over $ 250,000 expire, as Obama wants. In return, Democrats would find $ 80 billion in spending cuts. Congress extends (most) of the rest of the tax cuts.
That's a small bit of austerity next year, but absolutely nothing like the complete cliff. And legislators might continue dealing with larger tax reform in 2013.

- Grand deal.
At the moment, there's a great deal of talk in Washington about a "grand deal" in between Republicans and Democrats. This would involve avoiding sharp austerity in 2013. It would also involve some mix of investing cuts and tax increases that are gradually phased in over the next years, so about slowly reduce the U.S. national debt. It would additionally include significant changes to entitlement programs like Social Security, Medicare and Medicaid. Instances of a "splendid bargain" framework consist of the Simpson-Bowles plan, or the Domenici-Rivlin plan.

In late 2010, both President Obama and Congress passed legislation extending the Bush tax cuts for two years, agreeing that the economic situation was too weak for a tax hike. The deal was additionally contingent on a two-year extension of federal joblessness advantages, which were included in the 2009 stimulation, a one-year pay-roll tax holiday to change another tax break in the stimulation (later extended to two years), and the extension of a few other tax breaks from the stimulus. Even if the tax hikes and spending cuts kick in, Congress would still require to vote to raise the $ 16.4 trillion financial obligation ceiling by February or so. Now, the 2 parties are having a tough time reaching a contract because Democrats wish higher taxes on the affluent and Republicans mostly refuse to vote for any type of tax rises at all. Congress would just vote to extend all (or some) of the Bush tax cuts and payroll tax cuts.

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