National Government

A peek over the ‘cliff’s’ edge

With the Nov. 6 election yesterday’s news, the political story now dominating the headlines is the Dec. 31 deadline to avoid driving over the fiscal cliff.

So just what is the fiscal cliff, and what will happen to us if we go over it?

The short answer to the first question is that the fiscal cliff is a combination of federal budget cuts and tax increases that are set to automatically take effect Jan. 1 unless President Barack Obama and House Republicans can reach a compromise.

As for the second question – if we drive off the cliff – imagine the economic recovery is the car, and the American people are Thelma and Louise.

The following is a list of questions about the fiscal cliff and its potential impact.

What is the fiscal cliff?

The fiscal cliff, a term coined by Federal Reserve Chairman Ben Bernanke, is a combination of $500 billion in tax increases and spending cuts over the next 10 years starting in 2013.

The tax increases come because of the scheduled expiration of the Bush-era tax cuts and the payroll tax cut enacted in 2010 under President Obama, totaling about $400 billion, as well as a number of smaller tax cuts for people and businesses.

The cliff includes $100 billion in automatic federal budget cuts, such as a 9 percent cut in the defense budget, and a reduction of Medicare payments to doctors.

Where did these automatic cuts come from?

The cuts, called sequestration, came from the fierce battle between President Obama and the GOP House majority over raising the debt ceiling, which sets the maximum amount the federal government can borrow.

An agreement was made to allow the debt ceiling to be increased, preventing a default on the U.S. government’s payments, while a bipartisan congressional “supercommittee” hammered out a budget deal to help address the deficit. The automatic cuts were put in place as an incentive for the supercommittee to reach an agreement. But the supercommittee failed.

So what does this mean to me?

It means taxes will go up for everyone without a deal. The nonpartisan Tax Policy Center estimates that the average middle-class taxpayer will pay $2,000 more a year. Taxpayers in the bottom 20 percent would pay about $400 more, while people in the top 1 percent would pay $121,000 more, according to estimates.

Wealthy Americans would see the preferential rate on capital gains rise from 15 percent to 20 percent, and the number of Americans subject to the alternative minimum tax would skyrocket from 4 million now to more than 30 million.

What does it mean for the economy?

A lot.

The Congressional Budget Office projects that going over the fiscal cliff could plunge the economy back into recession, with a contraction in the first half of 2013 and a stabilization in the second half. The CBO estimates that annual economic growth in following years would be limited to half of 1 percent.

Earlier this year, the CBO also projected that the unemployment rate would again rise above 9 percent.

Federal budget cuts would also affect the states, which receive federal money. The effects would likely be more pronounced in states with dire budget problems such as Illinois, but the National Conference of State Legislatures has aired concerns that the fiscal cliff comes at a time when many states are projected in 2013 to return to their pre-Great Recession revenue levels.

Would all of this happen right away if the deadline comes and goes?

No, but the CBO estimates the damage will start after a few weeks if the spending cuts and tax increases stay in place. For example, private companies whose government contracts run afoul of budget cuts would start laying off workers. As for households, their discretionary spending would likely start falling off in earnest come April, when people do their taxes and see how much more they’re paying.

Both sides can’t compromise? What a surprise. What is it this time?

The biggest sticking point is the Bush tax cuts. President Obama, who already has extended them once, wants to allow them to expire for the wealthiest taxpayers in the top two tax brackets. Republicans, led by House Speaker John Boehner, say that they will not allow that to happen.

These folks can’t agree on the color of the sky. Will they really strike a deal by year’s end?

Actually, Congress is set to adjourn Dec. 21 for the holidays.

Both sides could reach a deal, or more likely impose a temporary fix so that the new Congress sworn in next month can address the issue. However, kicking this can down the road could have the consequence of hurting the economic recovery by making businesses wary of investing and hiring, and consumers leery of spending.

So if a deal is struck, all is well, right?

No. There’s the tiny problem of the fact that the federal government is racking up $1 trillion in debt annually, with the national debt now standing at more than $16.3 trillion. When political leveraging and grandstanding is stripped away, the root of the problem is getting a grip on unsustainable spending.

Who gets the blame if we drive over the cliff?

Polls suggest the Republicans would take the brunt of it. A post-election poll by the Washington Post and the Pew Research Center concluded that 53 percent of respondents would blame the GOP, compared with 29 percent blaming Obama. A CNN/Opinion Research Corp. poll later in November had 45 percent blaming Republicans compared to 34 percent for President Obama.

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