What is the 'Fiscal Cliff' and How Will it Affect Us?

What is the 'Fiscal Cliff' and How Will it Affect Us?

Dear Deborah,

Recently I heard about the “fiscal cliff” that could bring another serious recession. What is it and how will it affect us?

The fiscal cliff refers to spending cuts and tax increases that take effect in the U.S. on January 1, 2013. The term “fiscal cliff” was coined by Federal Reserve chairman Ben Bernanke.

First, let’s start with some fiscal background information.

President Obama and his administration haven’t passed any annual budgets in the last four years. Government spending has been on a steep increase, with the president growing the deficit “faster than any president since LBJ” (Wall Street Journal). The Congressional Budget Office states that there has been a 5 trillion dollar shortfall under this president (Investors Business Daily).

Throughout this time, however, there have been numerous efforts in Washington D.C. to offer workable solutions to this country’s debt crisis.

In Bob Woodward’s book The Price of Politics, Woodward writes about a White House meeting shortly after President Obama came to office. The president invited the House Republicans to discuss the stimulus. When then-Minority Whip Eric Cantor shared a detailed plan that contradicted Mr. Obama’s tax plan, Mr. Obama told Cantor, “I can go it alone. … Look at the polls. The polls are pretty good for me right now. Elections have consequences. And Eric, I won. So on that, I think I trump you” (Washington Examiner).

Later, Mr. Obama asked the bipartisan Simpson-Bowles commission to come up with solutions to balance the budget. After the Simpson-Bowles group spent months of discussions and came up with a tentative plan, the president did not proceed with the proposals.

When the appointed Congressional super-committee got to work to offer solutions, Mr. Obama “worked to undermine” it, according to Wall Street Journal. During the debt ceiling negotiations, the “grand bargain” fell through (WSJ).

So, when Congress and the president did not come up with an alternative debt-reduction plan last summer, the Budget Control Act of 2011 was triggered as a compromise.

Spending Cuts

This law “raised the debt limit by $2.1 trillion – enough to keep the government from collapsing until the end of 2012. But in return it imposed spending caps that will slash spending by $109 billion per year for nine years,” according to Money and Markets.

Beginning in 2013 there will be automatic spending cuts mainly in these federal programs: defense, Health and Human Services, and Medicare. Defense cuts make up about half of the total proposed budget cuts. Author Bob Woodward wrote that the president’s administration proposed a sequester, or across-the-board cuts to every part of the military budget (The Price of Politics).

Tax Hikes

Charles Goyette of Weiss Research states that expiring tax policies and tax changes include: a rise in basic income tax rate, child tax credits cut, taxes on dividends that could more than double, and business deductions for investing in the business will be cut. These tax increases will affect almost all businesses and families.

Charles Goyette says that to make our country prosperous again, we must stop the huge drag of the federal government on the economy and decrease the harmful impact of government spending. We must promote production in this country and reduce the taxes and regulations that encumber and burden businesses. “Without production, there can be no prosperity,” Goyette said.

Investors Business Daily writer Lawrence Kudlow states that House Speaker John Boehner and other House leaders have a “coherent growth-and-jobs message” that can fight deflation.

The coming automatic tax hikes alone could cause harm. Yet, even if Congress is able to delay some of these tax increases, Americans will still have the taxes brought on by Obamacare, with its mandates and new taxes. The new health care entitlement mandates “the equivalent of five new taxes” on January 1, 2013 (WSJ).

c. 2012 Deborah Nayrocker. All rights reserved. Permission to reprint required.

Deborah Nayrocker is the author of The Art of Debt-Free Living and Living a Balanced Financial Life. She is an award-winning writer and columnist.

Publication date: October 25, 2012