Source: wikipedia
In the United States, the
fiscal cliff refers to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the US
budget deficit
beginning in 2013 if existing laws remain unchanged. The deficit—the
difference between what the government takes in and what it spends—is
projected to be reduced by roughly half in 2013. The
Congressional Budget Office estimates that this sharp decrease in the deficit (the fiscal cliff) will likely lead to a mild
recession in early 2013.
The laws leading to the fiscal cliff include the expiration of the
2010 Tax Relief Act and planned spending cuts under the
Budget Control Act of 2011. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the
Bush tax cuts
or changing the 2011 Budget Control Act or both, thus making the
deficit larger by reducing taxes or increasing spending. Because of the
short-term adverse impact on the economy, the fiscal cliff has stirred
intense commentary both inside and outside of Congress and has led to
calls to extend some or all of the tax cuts, and to replace the spending
reductions with more targeted cutbacks. The protracted negotiations
over this have also generated heightened
policy uncertainty over the eventual tax and spending landscape in the US.
The Budget Control Act was a compromise intended to resolve a
dispute concerning the public debt ceiling. Some major programs, like
Social Security,
Medicaid, federal pay (including military pay and pensions), and
veterans' benefits, are exempted from the spending cuts.
[note 1] Spending for
defense,
federal agencies and
cabinet departments would be reduced through broad, shallow cuts referred to as
budget sequestration.
The
United States public debt
would continue to grow even if the fiscal cliff occurs. However, over
the next ten years, the smaller deficit will lower projected increases
in the debt by as much as $7.1 trillion or about 70%, resulting in a
considerably lower ratio of debt to
the size of the economy. For the first year (from
fiscal year
2012 to 2013), federal tax revenues are projected to increase by
19.63%, while spending outlays are expected to decline by 0.25%.
[1](table-1.6)[note 2]
These changes would raise 2013 tax revenue to 18.4% GDP, above its
historical average of 18.0% GDP, while reducing spending to
approximately 22.4% GDP, still above the 21.0% GDP historical spending
average.
Etymology
The term
fiscal cliff has been used in the past to refer to various fiscal issues.
[3] The term started being used in the current context near the original expiration of the
Bush tax cuts in 2010.
[4][3] In 2011, the term started to be used to refer to the deficit reductions that would occur in 2013 under current law.
[3][5]
In late February 2012,
Ben Bernanke, chairman of the
U.S. Federal Reserve, popularized the term "fiscal cliff" for this crisis.
[6] Before the
House Financial Services Committee he described that "a massive fiscal cliff of large spending cuts and tax increases" would take place on January 1, 2013.
[3][7][8]
Some analysts have argued that
fiscal slope or
fiscal hill
would be more appropriate terminology because while the cumulative
economic effect over all of 2013 would be substantial, it would not be
felt immediately but rather gradually as the weeks and months went by.
[9][3][10][6]
Legislative history
During a
lame duck session in December 2010, Congress passed the
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The act extended the
Bush tax cuts for an additional two years and "
patched" the
exemptions to the
Alternative Minimum Tax (AMT) for tax year 2011. This act also authorized a one-year reduction in the Social Security (
FICA) employee payroll tax. This was extended for an additional year by the
Middle Class Tax Relief and Job Creation Act of 2012, which also extended federal unemployment benefits and the freeze on
Medicare physician payments.
[11]
On August 2, 2011, Congress passed the
Budget Control Act of 2011 as part of an agreement to resolve the
debt-ceiling crisis. The Act provided for a
Joint Select Committee on Deficit Reduction
(the "super committee") to produce legislation by late November that
would decrease the deficit by $1.2 trillion over ten years. When the
super committee failed to act,
[12] another part of the BCA went into effect. This directed automatic across-the-board cuts (known as "
sequestrations") split evenly between defense and domestic spending, beginning on January 2, 2013. Also, the
Affordable Care Act imposed new taxes on families making more than $250,000 a year ($200,000 for individuals) starting at the same time.
[13]
At the end of 2011, the patch to the AMT exemptions expired.
Technically, the AMT thresholds immediately reverted to their 2000 tax
year levels, a drop of 26% for single people and 40% for married
couples. Anyone over these reduced thresholds at the end of 2012 would
be subject to the AMT. Therefore, more taxpayers would pay more unless
some legislation was passed (as was done in 2007) that affects the exemptions retroactively.
Key laws leading to the fiscal cliff
A number of laws led to the fiscal cliff, including these provisions:
[1][14]
- Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels;
- Expiration of the 2% Social Security payroll tax cut, most recently extended by MCTRJCA;
- Expiration of federal unemployment benefits, as extended by MCTRJCA, and
Without new legislation, these provisions would automatically go into
effect on January 1 or 2, 2013, except for the Alternative Minimum Tax
growth, which can be changed retroactively until December 31, 2012.
[15]
Some provisions would increase taxes (the expiration of the Bush and
FICA payroll tax cuts and the new Affordable Care tax and AMT
thresholds) while others would reduce spending (sequestration,
expiration of unemployment benefits and implementation of the
Medicare SGR).
[1]
On the other hand, some lawmakers intend to attach a bipartisan extension to the expiring
wind-power tax credit.
[16] Unlike the provisions above, this will
reduce, not increase, taxes by $1.3 billion.
[17]
Proposals to avoid the fiscal cliff involve repealing legislation
containing certain of these provisions or passing new legislation to
extend provisions that are due to expire. Different proposals may
include changes to some or all of the above provisions. For example, the
Congressional Budget Office's
"Alternative Fiscal Scenario" includes only the first four items above.
Changes to other provisions are also sometimes included in such
proposals; for example, changing the original caps on discretionary
appropriations contained in 2011's Budget Control Act, indexing the AMT
exemptions for inflation (rather than capping them for one year at a
time) or the wholesale or partial reform of the tax laws and/or the
entitlement programs (sometimes called "the grand bargain").
[18]