Part 1: What is the Fiscal Cliff?

For what seemed like an eternity, members of Congress, along with our newly re-elected President, have been squabbling over how best to deal with the Fiscal Cliff mess that they created themselves.  Yep, you read that correctly.  All of this banter and arguing over the dreaded Fiscal Cliff was entirely the doing of the House of Representatives and the Senate…all because they refused to work together and, GASP!, compromise with each other to get something positive done for the citizens of this great country.  This post will focus on explaining the details of the Fiscal Cliff.

Stay tuned to TheLeftyWolfe today to read Part 2, about the 11th-hour deal struck just last night with our Senate and House legislators to finally push the Fiscal Cliff down the road…for two months, that is.  Enjoy!

fiscal cliff3

What is the Fiscal Cliff? – It all comes down to two things: tax reductions to spur economic growth and spending reductions to tackle the budget deficit.

TAX REDUCTIONS

During a lame-duck session of Congress in December 2010, our lawmakers actually did something TOGETHER and passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The act did several things:

1.) It extended the Bush-era tax cuts of 2001 and 2003 for an additional two years…until Jan 1, 2013.

2.) It “patched” the exemptions to the Alternative Minimum Tax (AMT), saving middle class earners thousands of dollars a year…until Jan 1, 2013.

3.) It also authorized a one year reduction in the Social Security (FICA) employee payroll tax (in fact, this part of the Act was later extended for an additional year by the Middle Class Tax Relief and Job Creation Act of 2012, which also extended unemployment benefits and prevented a coming drop in Medicare payments to physicians…protecting senior citizens from being dropped by their doctors due to lowered payments from the Medicare system)….these patches all lasted until Jan 1, 2013.

**These three components are the parts of the Fiscal Cliff mess that would most directly affect us as taxpayers.  Without the deal that was reached late last night, all of these measures would have expired on Jan 2, 2013…leading to massive tax hikes on ALL EARNERS in America (the rich, middle class and poor).

This, though, explains just one part of the Fiscal Cliff fiasco.  While these tax reductions are great for us, they resulted in a major cash crunch for the Federal government.  With dramatically lower revenues pouring into federal coffers, some spending reductions were also needed to balance things out a bit.  Thus, spending cuts were also part of the package…

SPENDING REDUCTIONS

In early August 2011, Congress passed the Budget Control Act of 2011 in an effort to begin curbing runaway federal spending.  This act really is the linchpin that triggered all of the Fiscal Cliff craziness we now find ourselves in.  The act stipulated that…

–>Were Congress unable to pass legislation reducing the federal budget by at least $1.2 TRILLION over ten years (cutting only $120 billion from the budget each year for ten consecutive years), then MASSIVE spending cuts would automatically go into place: $600 BILLION in cuts to the Department of Defense and $600 BILLION in cuts to various domestic programs.  These cuts would go into effect on Jan 2, 2013 and all reductions would take place in just ONE YEAR.

No politicians, of course, ever wanted such draconian measures to go into effect.  Spending cuts of this magnitude, all in one year, would have a disastrous effect on our military, putting America’s safety and world standing at risk.  Alongside those military cuts, the $600 BILLION in cuts to domestic programs would hurl the U.S. back into recession…severely harming our still-fragile economic recovery and raising the unemployment rate back above 9% by the end of 2013.

Since no politician on either side of the aisle wanted to be responsible for letting the TAX REDUCTIONS expire or allowing those disastrous SPENDING REDUCTIONS to go into effect, it was thought that that would provide enough impetus for them all to work together towards a common cause.  All they had to do was come up with a credible plan that would reduce our spending by the aforementioned $1.2 trillion over a ten year period.  Seeing as how the federal government spends more than $1 trillion EACH YEAR, the cuts should have been a piece of cake for legislators.  Unfortunately for us, however, Democrats and Republicans spent the last year playing the Election 2012 game.  Most of them cared less for averting the Fiscal Cliff than they did for simply winning re-election to their posts.

So…since Congress was unable (or unwilling?) to produce any sort of meaningful deficit reduction plan by the end of Nov 2012, the across-the-board spending cuts were then set to automatically go into effect on January 2, 2013 (along with the expiration of all those tax cuts mentioned at the start of this post).

In a nutshell, here is where we stood just yesterday:

1.) Numerous tax cuts were one day away from expiring…meaning a huge tax increase for everyone.

2.) Massive spending cuts were one day away from beginning…virtually destroying our military and economy in an instant, throwing us back into recession.

Thankfully, the House and Senate were both able to pass a deal that saved us…for the time being, that is.  TheLeftyWolfe will release the next segment of this piece, Part 2, later today.  Come back to read about the deal struck just last night to avoid the pesky Fiscal Cliff.  Is it great?  Is it awful?  Is it somewhere in between?  Stay tuned!

Chris

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