Infographic: Understanding the Fiscal Cliff
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Three days to the edge of the metaphorical ‘fiscal cliff’ and still no clear deal in sight. What will happen if we go off the cliff, and just how will the increase in taxes affect consumers and the macro economy? Will the world’s largest economy really slip into recession in the absence of a budget compromise?
Sometime in the next 10 days, a fiscal cliff agreement is likely, but it almost certainly won’t be a broad deficit reduction plan.
Three days to the edge of the metaphorical ‘fiscal cliff’ and still no clear deal in sight. What will happen if we go off the cliff, and just how will the increase in taxes affect consumers and the macro economy? Will the world’s largest economy really slip into recession in the absence of a budget compromise?
Sometime in the next 10 days, a fiscal cliff agreement is likely, but it almost certainly won’t be a broad deficit reduction plan.
In 2011, a congressional super committee was formed to settle disputes about the debt ceiling, fiscal reform, and other tax measures on which Congress had taken no action. Months later, the super committee would disband amidst a downgrade in the country’s credit rating and a lifting of the debt ceiling. As a result, Congress was forced to enact deep budgetary cuts in many federal programs starting in 2013.
With all those measures coming to term in January 2013, there is little time to put into motion the groups of people that would need to come together in finding a solution to the impending fiscal cliff, the biggest portion of which, experts believe to be the extension of Bush tax cuts.
Tax cuts are one of the most closely watched political measures because they have the ability to affect so many people. The public largely welcomes them, and have come to rely on tax cuts or credits for income tax, real estate mortgage interest, childcare, and unemployment benefits. Businesses benefit too, with periods of lower payroll taxes.
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The nonpartisan Tax Policy Center calculates the fiscal cliff will result in higher taxes for 90 percent of Americans, with an overall tax bill increasing $755 for the average middle-class family. Put simply, higher taxes equal less money in your pocket.
So how can we avoid the fiscal cliff?
There’s little time to act, but there are still options. One possibility is an emergency temporary extension of the status-quo; a short term stop gap that keeps tax cuts in place for another six months to a year while lawmakers come together to overhaul the tax code. But many members of Congress, and financial experts, are weary of such an option, afraid it would serve only to delay the inevitable – akin to kicking the can down the winding road.
Alternatively, both sides could come together on a bipartisan compromise that everyone can live with. Let’s not forget the strong economy of the middle to late 1990s after the standoff between President Bill Clinton and Congress. Perhaps another standoff, with a sharing of ideas, and a willingness to compromise will be the best thing for the world’s largest economy.
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