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The Fiscal Cliff Isn’t a Cliff

Ignore the talk of a “fiscal cliff.” It’s not true.

That phrase—fiscal cliff—suggests that the fiscal status of the government will go off a cliff, debt increasing dramatically, which would be bad. What’s actually going on is a combination of revenue increases and spending cuts kicking in January 1st that would improve the fiscal situation by lowering debt.

But it would withdraw money from the economy at a time when many people believe that money is needed for economic recovery.

We’re really talking about a sharp, but insufficient, improvement in the fiscal situation, not a “fiscal cliff.” But don’t hold your breath waiting for any politicians to start fretting about the coming “sharp, but insufficient improvement in the fiscal situation”…

Here’s what’s actually going on.

First, there’s the expiration of tax cuts. They’ve been called the “Bush tax cuts,” but President Obama signed the most recent extension of them. The expiration of these temporary tax cuts would increase income taxes (and government revenues) by about $221 billion.

Then there’s “sequestration.” That’s automatic spending cuts of about $65 billion that kick in because Congress did not come up with its own deficit control deal as it planned to do when it passed the Budget Control Act of 2011. No deal means that automatic spending control goes into effect. But everyone’s worried that “sequestration”—reduction in government spending—will undercut the wobbly economic growth that everyone talks about happening. (Is it?)

A couple more policies from another law, the Middle Class Tax Relief and Job Creation Act of 2012, change with the new year. One is the temporary, 2% reduction in the payroll tax—about $95 billion in revenues would result from its expiration. Spending on unemployment benefits would stop, producing a $26 billion improvement in the fiscal situation.

The Alternative Minimum Tax would return to 2000 tax-year thresholds, increasing revenue and improving the fiscal situation. Some 26 million households might become subject to the AMT which could raise taxes by as much as $3,700 for some people.

There are other policies triggered by the coming turn of the year—new health care taxes and the expiration of an increase in Medicare payments, for example. They all point in the same direction: lowering U.S. debt.

But they’re calling it a “fiscal cliff.” It’s a phrase Federal Reserve Chairman Ben Bernanke used in congressional testimony back in February. Now his dramatization of tax increases and spending reduction that would put the government into better fiscal order has taken on a life of its own.

When Congress comes up with a deal later this year to address the “fiscal cliff,” it probably won’t actually improve the fiscal situation. It will make the fiscal situation worse, giving higher priority to maintaining high spending and low taxes due to the belief that this does more good for the economy than maintaining high levels of debt does harm.

Watch this space as events unfold…

Visitor Comments for The Fiscal Cliff Isn’t a Cliff RSS 2.0

Mary Steele

Higher taxes on businesses and individuals reduces our ability to spend and grow our economy! It also hinders businesses ability to hire and provide health care! If you want to see massive cost cuts in health care, extended unemployment for the ones lucky enough to get it, and Welfare by getting people back to work, start with replacing the 7+ million illegal workers with unemployed legal immigrants and citizens! The current enforcement Obama is doing is working to push illegals out of their current job, but not deporting them leaves them to just go to another job where the employer doesn’t verify their ability to work here which hinders unemployed legal immigrants’ and citizens’ ability to find work! Obama admitted “illegals go to the ER and we pay for it” yet he is making it worse by allowing most of the illegals to stay and keep working jobs needed by unemployed legal immigrants and citizens!

Replacing illegal workers with unemployed legal immigrants and citizens cuts $Billions in expenses and it gives our economy, states, and even most of the employers that switch to legal workers, the boost it needs to grow and hire more workers! The others will recover as their neighborhood returns to legal residents!

So what part of massive unemployment and its costs don’t he and the Democrats get? And as noted above, current enforcement is opening jobs but allowing the illegals to go to another one instead of deporting them, is hurting unemployed legal immigrants’ and citizens’ ability to get back to work and start spending again, which grows our economy and creates more jobs which = more revenue!

Hence saving $ billions and growing our economy starts with replacing the 7+ million illegal workers with unemployed legal immigrants and citizens with current enforcement audits but deporting the illegal workers so they can’t compete with our unemployed for jobs at other companies that don’t verify their workers!

It’s not hard and it don’t cost a lot, if illegals and businesses knew illegal workers would no longer be tolerated!

And to try and add 11 million illegals to already struggling 14-22 million unemployed legal immigrants and citizens is irresponsible and pandering, to say the least!

We can only absorb so many people! We have too many for the number of jobs and resources available!

Robert Young

I am sick and tired of Congress blaming the Oval Office, and our House & Senate cutting our bennefits and health care, while making sure they get their pay increases and free top of the line health care which we pay for in our increased taxes. How much more is their health care going to cost them next year, compared to our Medicare payments from our SS? Our Representatives are to blame for all of it. They allow the President to skirt our laws instead of challenging him on important matters of citizenship. And they allow him to create more taxes instead of validating them correctly themselves. They should all be put on unemployment in my opinion.

Patricia

This problem we are having started long before now and why is congress trying to hold onto these tax cuts for 2% who don’t need them. If middle class and lower class can’t spend anyone due to tax increases then no one wins.

Congress is suppose to be for the people, instead its for business, rich and Congress. Congress should have the same insurance and retirement plan that we tax payer have. Instead we pay for them to have best insurance and retirement plan for themselves. If up coming insurance is sooo good for people why did Congress voted NO to new Obama care plan?

No one is saying anything about Bush prescription plan where we had to pay those company’s before we even start using plan. We can’t even negotiate for price change. When this bill was signed it was already over budget. So whats the different between prescription plan and Obama care? They are both needed even though they are and will cost lot of money.

We have too many congressman that have money and they are looking out for themselves. We need all new people in office.

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[...] This was the statement given by spokesmen for both President Obama and House Speaker John Boehner (R-OH) today (Sunday, Dec. 9), as the rest of us wait for them to get together on a solution for the so-called “fiscal cliff.” [...]

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[...] Senate passed “fiscal cliff” legislation today (New Year’s Day – January 1, 2013), sending it to the House. [...]

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[...] Senate passed “fiscal cliff” legislation today (New Year’s Day – January 1, 2013), sending it to the House. Will the [...]

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