Fiscal Cliff Looms as Congress, President Obama Return to Work

There is talk in the news about an upcoming “fiscal cliff.”  But what exactly is the fiscal cliff and what does it mean to you and me?  And what are Congress and President Obama doing about it?

The fiscal cliff refers to both tax cuts and various government spending measures.  The tax cuts were put into effect in the early 2000s and in 2009 for virtually every tax bracket.  They are set to expire after December 31, 2012.  This means that regardless of your wage level, if the tax cuts are allowed to expire, you will likely start having more taxes taken from your paycheck come January 1, 2013, than you have taken out right now.

In addition, the fiscal cliff includes various defense and domestic program spending measures totaling $110 billion that would expire.  While some consider less governmental spending to be a good thing, too much of a reduction too quickly could mean lost jobs.  But less governmental spending must occur in order to start reducing the federal deficit, which currently stands at over $16 trillion.

If either or both of the above issues are not addressed by Congress and President Obama, economists estimate almost 3.5 million jobs would be lost as businesses reduce hiring or scale back.  And those who are working would see the largest tax increase to hit America as a whole in over 50 years.

Since the elections last week, a number of businesses have taken a wait-and-see approach given the uncertainty of the situation.  And investors have begun to sell off stocks as they anticipate a negative hit to the economy, resulting in the stock market falling over 2% in the past week.

If appropriate steps are not taken, it could all lead to recession for America in early 2013.

In order to avoid the fiscal cliff, the House and Senate, who return today from a seven week vacation that allowed members to campaign for re-election, as well as President Obama, must reach an agreement to extend the tax cuts and spending measures and sign that agreement into law by December 31.  But before the presidential and congressional elections last week, Republicans and Democrats disagreed last week on how to address the fiscal cliff.

Republicans believe that there are various tax loopholes that can be closed for those in the highest tax brackets.  Closing these loopholes would effectively increase tax revenue without formally increasing tax rates.  Republicans support this plan as tax increases on the highest wages earners are generally believed to hurt businesses and job opportunities for others, since the highest wages earners are the ones who employee others.

But Democrats believe the tax cuts that have been in place for roughly a decade should be allowed to lapse entirely for the highest wage earners.  And measures would be put in place to extend the tax cuts for most Americas.

Leaders from both sides as well as President Obama have hinted that they are willing to compromise to reach a solution.  It is believed that at a minimum a temporary measure will be put in place to give Congress until early 2013 to establish a longer-term fix.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.