By: Kayvan Dastgheib-Beheshti
The term “fiscal cliff” gets thrown around fairly frequently in the media today. It represents one of the most significant topics dividing the current political stage. The most important question in every American’s mind should be: What exactly is the fiscal cliff? Before you take a stance as your own, it behooves you as an American to understand this term and importantly how the political parties plan to attack it.
The fiscal cliff is the term that applies to the major decision making that will need to occur at the end of 2012 in order to prevent the country from falling into a second recession. The Budget Control Act of 2011 was signed into law August 2nd, 2011. This law resolved, temporarily, the debt ceiling crisis. The debt ceiling restricts the US Treasury’s authority to borrow funds to finance Congressional spending. If the ceiling was not raised the US would default on “paying its bills.”
The BCA of 2011 expires December 31st, 2012. This bill raised the debt ceiling, extended pay roll tax cuts and initiated significant tax breaks for businesses. However, with the expiration of this bill there will be an approximate 2% increase in taxes on payroll and an expiration of the small business tax cuts. Alongside these increases comes the tax increases associated with funding the new Health Care Law.
This crisis is not a new one. Congress has been aware of the impending situation for three years. However, the current political gridlock has prevented solution searching in favor of stop-gap plans to permanent policy changes. Several major effects will occur if the current laws planned for 2013 go into effect alongside the expiring BCA of 2011. The Congressional Budget Office estimates a 560 billion decrease in the deficit should the spending cuts and tax increases come into play. However, the policies would cut the GDP by 4%. This negative growth would cause a second recession.
Republicans look to cut spending and avoid the tax increases. Democrats are looking to combine spending cuts with tax increases. The staunch political opposition to any strategy will no doubt end in an eleventh hour decision much like last year’s Budget Control Act. There is even a chance of the crisis resolution not occurring until after the start of 2013 when the new Congress is sworn in. The effect on the economy will have effects even without Congressional intervention. Businesses and people will make new financial decisions to prepare themselves for any changes implemented by Congress.
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