The "'''Fiscal cliff'''" is the combination of United States financial policy changes that were scheduled to take effect at the start of 2013. The [[Congressional Budget Office]] has predicted that if those policies are allowed to take effect, they will place the United States economy into a [[recession]].<ref name="nytrecession">{{cite news |title=Recession Possible if Impasse Persists, Budget Office Says |last=Calmes |first=Jackie |url=http://www.nytimes.com/2012/05/23/business/congressional-budget-office-warns-of-a-fiscal-cliff.html?_r=1&src=recg |date=May 22, 2012 |newspaper=The New York Times |accessdate=October 19, 2012}}</ref><ref> See [[Cloward-Piven Strategy]], to "overwhelm the system and bring about the fall of [[capitalism]] by overloading the government bureaucracy with impossible demands". American Thinker; [http://www.americanthinker.com/2008/09/barack_obama_and_the_strategy.html Barack Obama and the Strategy of Manufactured Crisis]</ref> On February 29, 2012, [[Ben Bernanke]] coined the term "fiscal cliff" in his testimony before the House Financial Services Committee.<ref name="Reuters-Bernanke-1202">{{cite web |title=Highlights: Bernanke's Q&A testimony to House panel |author=Washington newsroom |url=http://www.reuters.com/article/2012/02/29/us-usa-fed-bernanke-idUSTRE81S1DO20120229 |date=February 29, 2012 |publisher=Reuters |accessdate=October 19, 2012 }}</ref><ref name="CNBC120621">{{cite web|url=http://finance.yahoo.com/news/fiscal-cliff-may-europe-look-154128079.html |title= 'Fiscal Cliff' May Make Europe Look Like a Dip |first=Jeff |last=Cox | work=CNBC |date=June 21, 2012 |publisher=Yahoo! Finance}}</ref>
The policy elements of the fiscal cliff include:
* the expiration of the tax cuts enacted during the [[George W. Bush]] Administration.
* the Presidential [[Executive Order]]s to force automatic spending cuts (called [[sequestration]]) required by the 2011 budget compromise.
* the federal borrowing authority reaching a Congressionally-enacted limit.
* the reversion of the [[Alternative Minimum Tax]] thresholds to their 2000 tax year levels;
==Background==
The creation of the fiscal cliff was a consequence of a an unintended combination of events. The "cliff" refers to the large number of policies with economic impacts that are set to expire on December 31, 2012. Although such policies issues are usually addressed in advance of the expiration date, politicians fear angering taxpayers by voting on these items before the November 2012 general election. So, any action on the fiscal cliff issues was deferred to will occur during the [[lame duck]] session between the November 6, 2012 election and the end of the year. The action resulted in may be a permanent set of tax changes and or a short-term extension of the 2012 [[sequestration]] mandate and debt limit vote policies into the 2013 Congressto avoid or smooth-out the "cliff."
The tax cut legislation enacted in 2002 and 2003 was subject to "[[pay as you go]]" Congressional rules that required the cuts to be scored by the Congressional Budget Office over a ten -year period. As a result, the legislation provided for only temporary tax cuts that were scheduled to expire at the end of 2010. In a budget compromise, the Republican members of the House of Representatives and President Obama agreed to delay extend the permanent cuts until the end of 2012 in exchange for a temporary extension of extending unemployment insurance benefits.
During the summer of 2011, House Republicans refused to increase the ceiling on the president's proposal for total federal borrowing authority.<ref>"[http://online.wsj.com/article/SB10001424127887323894704578113033115035920.html the $830 billion stimulus of 2009 has now become part of the federal budget baseline. The "emergency" spending of the stimulus has now become permanent.]" ''The Hard Fiscal Facts, [[Wall Street Journal]], November 11, 2012.</ref> Although Congress had passed a [[continuing resolutionappropriation]] s on the assumption that additional money would be borrowed to meet deficit spending levels, without a higher [[debt ceiling]], the U.S. Treasury could not borrow the money to pay what the federal government owed to vendors, suppliers, employees or beneficiaries. The United States could would default on its debts and may be forced to shut down. A compromise compromised (called the [[Budget Control Act of 2011]]) was reached that raised the debt ceiling and authorizeed in exchange for the creation of a "Supercommittee" that would find spending cuts to take effect in 2013, with other spending cuts going into effect immediately. If the Supercommittee could not reach an agreement or if Congress rejected their recommendations, then automatic across-the-board cuts ([[sequestration]]) to both defense and domestic spending would take place. The law was drafted to make the automatic cuts so undesirable that Congress would be forced to work out a deficit reduction agreement. However, the Supercommittee failed to agree and both Republicans and Democrats decided in 2011 to leave the spending cut question for additional legislation in 2012. If a new law was not passed before December 31, 2012, then automatic spending cuts under the existing law would apply to almost all federal programs in 2013. At the last moment, the cuts were "kicked down the road" 60 days to the next Congress, Bush-era tax rates were made permanent, and the top marginal rate returned to the Clinton-era rate.
Although the 2011 agreement raised the federal borrowing ceiling, the federal debt has continued to grow and the new ceiling is expected to be reached in early 2013.
In 2009, Congress enacted a stimulus bill that included a Making Work Pay tax credit that expired at the end of 2010. The 2010 budget agreement replaced that tax credit with a two-year temporary 2% reduction in the Social Security payroll tax. Instead of individual workers paying those taxes into the Social Security Trust Fund, Congress moved money from the general fund to replace those dollars. This added about $1,000 per year to the average worker's paycheck.<ref name=aarp>{{cite news|title=AARP pushing for retirement of Social Security payroll tax cut|work=Washington Post|page=A17|date=October 19, 2012|first=Suzy|last=Khimm}}</ref> while reducing future obligations on the U.S. Treasury because workers paid in less. Without further action, the Social Security deduction on paychecks increased from 4.2% to 6.2%.
==Effects==
Letting these cuts expire would lead to higher taxes for every tax group. {{cquote|The existing 10% bracket will go away, and the lowest "new" bracket will be 15%. The existing 25% bracket will be replaced by the "new" 28% bracket; the existing 28% bracket will be replaced by the new 31% bracket; the existing 33% bracket will be replaced by the 36% bracket; and the existing 35% bracket will be replaced by the 39.6% bracket.}}
Capital gains will increase to 20% from 15%, the maximum tax rate on dividends will skyrocket to 39.6%. <ref>[http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/ What End of Bush Tax Cuts Would Mean for You, Smartmoney.com, May 12, 2012]</ref> Joint-filer (Marriage penalty) tax brackets will return to 167% of the amount for singles, causing higher tax bills for many low and middle income Americans. Phase-Out Rule for itemized deductions could eliminate up to 80% of higher-income bracket deductions for mortgage interest, state and local taxes, and charitable donations. Phase-Out Rule for personal exemptions could eliminate some higher-income bracket personal exemption deductions (typically average $3,800.).
==Democratic proposals==
The [[AARP]] is opposing any further extension of the Social Security payroll tax rate reduction. AARP fears that if the Social Security Trust Fund comes from general funds, Congress will be more likely to want to cut future benefits.<ref name=aarp/>
== Resolution: Permanent tax measures and 60 day respite on sequestration and [[debt ceiling]] debate ==
Although the basic elements of the 2013 federal spending levels, federal debt ceiling, and possible tax reform remain unaddressed, a new [[American Taxpayer Relief Act of 2012]] was passed by the Senate 89-8 and by the House 257-167 on January 1, 2013 with President Obama signing it on January 2, 2012. In brief, the law:
*allows [[spending authority]] to continue at current levels by [[continuing resolution]] for two months
*delays sequestration by two months
*adopts permanent reduction of income tax rates for 98% of taxpayers
*adopts a permanent "doc fix" adjustment to the reimbursement to doctors under medicare
*allows taxpayers to convert 401(k) retirement plan balances to Roth 401(k) plans (thereby accelerating the payment of taxes)
*delays action on [[debt ceiling]] for two months, setting parameters for next year's (FY 2014) budget priorities
*[[deficit reduction]] delayed
The president refused to negotiate on, and ignored the recommendations of, his own National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Deficit Reduction Commission) to
{{Quotebox|lower rates, broaden the base, and cut spending in the tax code. The current tax code is riddled with $1.1 trillion of tax expenditures: [[backdoor spending]] hidden in the tax code. Tax reform must reduce the size and number of these tax expenditures and lower [[marginal tax rates]] for individuals and [[corporation]]s – thereby simplifying the code, improving fairness, reducing the tax gap, and spurring [[economic growth]].<ref>http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf</ref><ref>http://www.americanprogress.org/wp-content/uploads/issues/2011/03/pdf/tax_expenditures.pdf</ref>}}
On January 4, 2013, the CBO issued a summary of the impact of the law.<ref>{{cite news|url=http://thehill.com/blogs/on-the-money/economy/275095-cbo-fiscal-cliff-deal-carries-4-trillion-price-tag|title=
CBO: 'Fiscal cliff' deal carries $4 trillion price tag over next decade|first=Peter|last=Schroeder|work=The Hill|date=January 1, 2013|accessdate=January 3, 2013}}</ref> It found a $3.9 billion increase in the deficit over 2013-2022 compared with the existing law allowing the economy to "go over the cliff." However, it projected a -0.5% immediate GNP hit on the economy under the existing law compared with a 1.5% to 1.75% GNP growth under the new law in 2013. Over the long term, the CBO projects that under the new law, GNP "would be 1.7 percent lower in 2022 than would have been the case under prior law."<ref>{{cite web|url=http://www.cbo.gov/publication/43835?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=812526&utm_campaign=0|title=The “Fiscal Cliff” "Fiscal Cliff" Deal|work=Congressional Budget Office|date=January 4, 2013|accessdate=January 6, 2013}}</ref>
== See also ==