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| Fiscal cliff: what happens if Congress can't strike a deal? | Fiscal cliff: what happens if Congress can't strike a deal? |
| (30 days later) | |
| The United States looks set to leap, eyes wide open, off the fiscal cliff, as an enormous $560bn package of tax increases and government spending cuts will land together on January 1. The fear is that taxes and spending cuts will hurt consumers and cause unemployment to rise, which in turn will slow down the US economy. The economy has made only meager progress toward growth in the past two years. | The United States looks set to leap, eyes wide open, off the fiscal cliff, as an enormous $560bn package of tax increases and government spending cuts will land together on January 1. The fear is that taxes and spending cuts will hurt consumers and cause unemployment to rise, which in turn will slow down the US economy. The economy has made only meager progress toward growth in the past two years. |
| The fiscal cliff is a creation of the US Congress, which could not agree on a yearly budget that would also help the country reduce its deficit, or long-term debt, of $1.3tn. To resolve the impasse in August 2011, the Congress decided to push the big decisions off by 17 months. Now the 1 January deadline looms, and with little sign of a deal in Washington, so too do tax hikes and automatic spending cuts. | The fiscal cliff is a creation of the US Congress, which could not agree on a yearly budget that would also help the country reduce its deficit, or long-term debt, of $1.3tn. To resolve the impasse in August 2011, the Congress decided to push the big decisions off by 17 months. Now the 1 January deadline looms, and with little sign of a deal in Washington, so too do tax hikes and automatic spending cuts. |
| So what happens if the US begins the New Year by going over the fiscal cliff? | So what happens if the US begins the New Year by going over the fiscal cliff? |
| Tax hikes | Tax hikes |
| The tax hikes, which will hit 90% of Americans, come from the expiration of two stimulus measures: the Bush-era tax cuts and the payroll tax holiday. The Tax Policy Center estimates that the combined effect of the tax hikes will raise taxes by an incredible $500bn over the next decade, which means a $3,500 increase in the yearly tax bill for the average American. | The tax hikes, which will hit 90% of Americans, come from the expiration of two stimulus measures: the Bush-era tax cuts and the payroll tax holiday. The Tax Policy Center estimates that the combined effect of the tax hikes will raise taxes by an incredible $500bn over the next decade, which means a $3,500 increase in the yearly tax bill for the average American. |
| The first and biggest tax hike is end of the so-called Bush tax cuts – a package of tax cuts for Americans of all income levels introduced by President George W Bush in 2001 to stimulate a sluggish economy after the technology boom ended, and which have been kept in place since then. The U.S. Treasury estimated that the elimination of the Bush tax cuts will raise taxes by $849bn over the next decade. That would work out to about $2,200 a year in increased taxes for the average middle-class family, according to the National Economic Council and the president's Council of Economic Advisors. It would also include halving the tax credit usually given to families with children to $500 per child. | The first and biggest tax hike is end of the so-called Bush tax cuts – a package of tax cuts for Americans of all income levels introduced by President George W Bush in 2001 to stimulate a sluggish economy after the technology boom ended, and which have been kept in place since then. The U.S. Treasury estimated that the elimination of the Bush tax cuts will raise taxes by $849bn over the next decade. That would work out to about $2,200 a year in increased taxes for the average middle-class family, according to the National Economic Council and the president's Council of Economic Advisors. It would also include halving the tax credit usually given to families with children to $500 per child. |
| The terms of the fiscal cliff mean that the Bush tax cuts will lapse for all Americans, even though both Republicans and Democrats agree that the tax cuts should stay in place for middle-class Americans making less than $250,000 in income a year. | The terms of the fiscal cliff mean that the Bush tax cuts will lapse for all Americans, even though both Republicans and Democrats agree that the tax cuts should stay in place for middle-class Americans making less than $250,000 in income a year. |
| The two parties differ on whether the tax cuts should stay in place for Americans making more than that. Republicans support keeping the tax hikes in place for all Americans, including high-earning ones, while President Obama and Democrats favor raising the nation's income by taxing the wealthy. | The two parties differ on whether the tax cuts should stay in place for Americans making more than that. Republicans support keeping the tax hikes in place for all Americans, including high-earning ones, while President Obama and Democrats favor raising the nation's income by taxing the wealthy. |
| The payroll tax holiday was a short-term stimulus measure imposed by President Obama in 2010 to encourage workers to spend more. Payroll taxes include several smaller taxes, meant to fund social programs. For instance, the US government charges a payroll tax of 6.2% on the paychecks of all Americans to fund Social Security pension payments to the elderly and disabled, and 1.45% to pay for Medicare health benefits. There are other, smaller taxes that go to pay for unemployment benefits. | The payroll tax holiday was a short-term stimulus measure imposed by President Obama in 2010 to encourage workers to spend more. Payroll taxes include several smaller taxes, meant to fund social programs. For instance, the US government charges a payroll tax of 6.2% on the paychecks of all Americans to fund Social Security pension payments to the elderly and disabled, and 1.45% to pay for Medicare health benefits. There are other, smaller taxes that go to pay for unemployment benefits. |
| These payroll taxes usually make up a whopping one-third of all the US government's revenues every year, or $870bn, according to to the Tax Policy Center. For the past two years, the payroll tax has only been 4.2%, but that will lapse with the fiscal cliff. | These payroll taxes usually make up a whopping one-third of all the US government's revenues every year, or $870bn, according to to the Tax Policy Center. For the past two years, the payroll tax has only been 4.2%, but that will lapse with the fiscal cliff. |
| The Tax Policy Center estimates that letting the payroll tax lapse would cost American workers $115bn in taxes next year. | The Tax Policy Center estimates that letting the payroll tax lapse would cost American workers $115bn in taxes next year. |
| Unemployment benefits | Unemployment benefits |
| A major casualty would be the elimination of unemployment benefits to 2.1 million Americans who are long-term unemployed. Those benefits are due to expire, and Barack Obama has urged Congress to extend them as part of any deal. The benefits are worth about $30bn, according to the Congressional Budget Office, or just under one-third of all the unemployment benefits the government paid out last year. More Americans will lose their benefits over the course of the next few months. | A major casualty would be the elimination of unemployment benefits to 2.1 million Americans who are long-term unemployed. Those benefits are due to expire, and Barack Obama has urged Congress to extend them as part of any deal. The benefits are worth about $30bn, according to the Congressional Budget Office, or just under one-third of all the unemployment benefits the government paid out last year. More Americans will lose their benefits over the course of the next few months. |
| Spending cuts | Spending cuts |
| At the same time as all these tax hikes and benefit cuts, there will also be a big slash in government spending, to the tune of $984bn cut from the federal budget between now and 2021. | At the same time as all these tax hikes and benefit cuts, there will also be a big slash in government spending, to the tune of $984bn cut from the federal budget between now and 2021. |
| Congress agreed last year that every year for the next 10 years, it would cut government spending by $110bn a year – half from defense spending, and half from batches of other government programs such as Medicare, which would take a 2% cut to pay doctors who provide healthcare. The cuts would also hit programs like farm subsidies, student loan support, national parks, and assistance to those living in low-income housing as well as big agencies including the Federal Bureau of Investigation and the Environmental Protection Agency. | Congress agreed last year that every year for the next 10 years, it would cut government spending by $110bn a year – half from defense spending, and half from batches of other government programs such as Medicare, which would take a 2% cut to pay doctors who provide healthcare. The cuts would also hit programs like farm subsidies, student loan support, national parks, and assistance to those living in low-income housing as well as big agencies including the Federal Bureau of Investigation and the Environmental Protection Agency. |
| The Department of Defense, which employs 3.2 million people and is the biggest employer in both the US and the world, would take the biggest hit in dollars terms. The president has already requested that Congress reduce the defense budget by at least $487bn, so the fiscal cliff cut of $550bn is not dramatically worse. Still, the chief worry is that the defense department will have to lay off employees, which will add to the nation's unemployment problem, as well as avoid signing new contracts for equipment and supplies. Many of those contracts are important to both big companies like Boeing and Northrup Grumman as well as a host of smaller, minority-owned businesses. | The Department of Defense, which employs 3.2 million people and is the biggest employer in both the US and the world, would take the biggest hit in dollars terms. The president has already requested that Congress reduce the defense budget by at least $487bn, so the fiscal cliff cut of $550bn is not dramatically worse. Still, the chief worry is that the defense department will have to lay off employees, which will add to the nation's unemployment problem, as well as avoid signing new contracts for equipment and supplies. Many of those contracts are important to both big companies like Boeing and Northrup Grumman as well as a host of smaller, minority-owned businesses. |
| The economic impact | The economic impact |
| While the fiscal cliff seems dire, most lawmakers agree it is necessary to cut the federal budget. The Congressional Budget Office, or CBO, estimated that if the US continues on its current path, the country's debt will grow sharply to become equal to its economic output by 2021, and will be nearly double GDP by 2035. Right now, the country's debt is only 70% of its economic output. | While the fiscal cliff seems dire, most lawmakers agree it is necessary to cut the federal budget. The Congressional Budget Office, or CBO, estimated that if the US continues on its current path, the country's debt will grow sharply to become equal to its economic output by 2021, and will be nearly double GDP by 2035. Right now, the country's debt is only 70% of its economic output. |
| The fiscal cliff would immediately cut the budget deficit almost in half. Whereas the US government was in $1.1tn of debt in 2012, the CBO estimated that would be only $612bn in 2013 after the fiscal cliff. | The fiscal cliff would immediately cut the budget deficit almost in half. Whereas the US government was in $1.1tn of debt in 2012, the CBO estimated that would be only $612bn in 2013 after the fiscal cliff. |
| But many experts predict that the tax rises will cause US consumers to shut their wallets, to the tune of a 1.7% drop in spending, according to a prediction from the National Economic Council and the president's Council of Economic Advisors report. That spending slowdown, in turn, will mean less money flowing to businesses and a corresponding economic slowdown. Similarly, experts fear the government spending cuts will drag the US deeper into an unemployment crisis. The government is one of the country's biggest employers, and budget cuts will likely mean layoffs that will add to the tally of 12 million Americans currently without work. | But many experts predict that the tax rises will cause US consumers to shut their wallets, to the tune of a 1.7% drop in spending, according to a prediction from the National Economic Council and the president's Council of Economic Advisors report. That spending slowdown, in turn, will mean less money flowing to businesses and a corresponding economic slowdown. Similarly, experts fear the government spending cuts will drag the US deeper into an unemployment crisis. The government is one of the country's biggest employers, and budget cuts will likely mean layoffs that will add to the tally of 12 million Americans currently without work. |
| Still, many economists argue that the fiscal cliff is more of a slope: the consequences will get worse as the year goes on. The immediate effect of the fiscal cliff is likely to be slight at first, for a number of reasons. | Still, many economists argue that the fiscal cliff is more of a slope: the consequences will get worse as the year goes on. The immediate effect of the fiscal cliff is likely to be slight at first, for a number of reasons. |
| The first is that Americans won't feel the full hit of the tax hikes until early 2014, when they have to write their 2013 tax check to the government. That's when they will see their full tax bill. The payroll tax cut is smaller and thus less visible. | The first is that Americans won't feel the full hit of the tax hikes until early 2014, when they have to write their 2013 tax check to the government. That's when they will see their full tax bill. The payroll tax cut is smaller and thus less visible. |
| The second reason is that there is always the possibility of more delay, or even repeal: Congress can create a new budget, and new laws, at any time. | The second reason is that there is always the possibility of more delay, or even repeal: Congress can create a new budget, and new laws, at any time. |
| The third reason is that America is facing several other economic crises at the same time, the most dramatic of which is the battle to raise the debt limit. The US is predicted to default on its bills by March 2013, and the time before that is likely to be marked by panic in the stock market and downgrades to the value of US debt. | The third reason is that America is facing several other economic crises at the same time, the most dramatic of which is the battle to raise the debt limit. The US is predicted to default on its bills by March 2013, and the time before that is likely to be marked by panic in the stock market and downgrades to the value of US debt. |
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