What is the fiscal cliff?
It’s a combination of the expiration of Bush-era tax cuts and major across-the-board spending cuts that the Congressional Budget Office estimates could total $800 billion next year. Congress and the White House must work out a budget deal by Dec. 31 to avoid the fiscal cliff.
Pictured, James Dresch of MND Partners Inc. worked on the floor of the New York Stock Exchange the day after President Obama was reelected.
Why are we headed for the fiscal cliff?
The so-called “fiscal cliff’’ is the painful antidote for the failures so far of Congress and the White House to deal with the government’s spiraling debt and overhaul its tax code. The US government has run annual budget deficits in excess of $1 trillion in each of the last four fiscal years. A November report showed the government started the 2013 budget year with a $120 billion deficit in October, suggesting a fifth $1 trillion annual deficit is likely, according to the Associated Press.
The Bush tax cuts would expire
Going over the fiscal cliff would eliminate the Bush-era tax cuts on income, investments, married couples, and families with children and inheritances. The tax cuts were enacted in 2001 and 2003 and extended in 2010 in the wake of President Obama’s drubbing in the midterm elections.
More than 50 percent of the tax increases from the fiscal cliff would come from the expiration of those tax cuts.
Pictured, President Bush pushed for the $1.35 trillion tax cut at the US Chamber Commerce in Washington, D.C., on April 16, 2001.
Middle-income family would see their taxes increase by $2,000
A typical middle-income family making $40,000 to $64,000 a year could see their taxes go up by $2,000 due to expiring tax cuts, according to a report from the Tax Policy Center.
In this April 18, 2011, photo, a man dressed as the Statue of Liberty tried to alert motorists on the final day to file taxes.
The alternative minimum tax would be imposed on more Americans
An alternative minimum tax would be imposed on about 26 million households, which would raise their taxes by an average of $3,700.
The alternative minumum tax was designed to prevent rich people from exploiting loopholes and deductions to avoid any income tax. But it wasn’t indexed for inflation, so Congress has acted each year to prevent it from encroaching upon middle-income taxpayers.
The lowest 20 percent of earners would pay an average of $412 more if the alternative minimum tax is imposed, according to the Tax Policy Center. The center calculates that the top 20 percent of earners would pay an average of $14,000 more, and the top one percent of earners would pay $121,000 more.
The payroll tax cut would expire
President Obama’s temporary 2 percentage point cut in payroll taxes would expire. This would cost about $95 billion.
Many tax credits would be eliminated
A variety of smaller taxes cuts for both businesses and individuals collectively known as tax ‘‘extenders’’ in Washington-speak would be expire. They include a tax credit for research and development and a deduction for sales taxes in states that don’t have an income tax.
This would cost about $65 billion.
Pictured, a Best Buy employee unloaded stock in Dedham in preparation for the 2011 Massachusetts sales tax holidays.
Payments to Medicare providers would be reduced
A 2 percent cut worth $11 billion in Medicare payments to providers would be imposed. Pictured, a large rally was held outside the Citi Performing Arts Center in Boston on Nov. 9 to protest proposed cuts to Social Security, Medicare, and Medicaid.
Social Security tax cuts would expire
About 20 percent of the tax increases from the fiscal cliff would come from the expiration of a Social Security tax cut enacted in 2010. This change would cost someone making $50,000 about $1,000 a year, or nearly $20 a week, and a household with two high-paid workers up to $4,500, or nearly $87 a week.
The end of the Social Security tax cut isn’t technically among the changes triggered by the fiscal cliff. But because it expires at the same time, it’s included in most calculations of the fiscal cliff’s effects.
Defense funding would be slashed
Defense spending would be cut by $55 billion next year if a deal is not reached on the fiscal cliff. US Defense Secretary Leon Panetta has said those cuts would cause temporary job losses among civilian Pentagon employees and major defense contractors. Spending on weapons programs would also be cut.
Pictured is an aerial view of the Pentagon in Washington.
Funding for domestic programs would be cut
For some programs, including highway funding, aid to state and local governments, and health research, spending would drop about 8 percent, a cut of about $55 billion. The White House also says that the FBI, other law enforcement, environmental protection programs, air traffic controllers, and other areas would be affected.
Pictured is the closing of the Interstate 93 northbound Central Artery in preparation for the opening of the new Interstate 93 built during the federally funded Big Dig project.
Many US companies would put off hiring and spend less
Businesses are already jittery that a deal won’t be reached. As a result, companies have put off expansion and hiring plans.
Pictured, John Cooke, a tool maker with Pratville Machine & Tools Co. in Peabody, worked on a custom order. Vincent Spinali, the part owner and general manager of Pratville Machine & Tools Co., says that the federal governemnt’s inability to resolve its budget issues regarding the fiscal cliff and set clear tax policies has slowed business to a crawl, forcing him to postpone purchasing new equipment. His business makes parts for semiconductors and the equipment that makes semiconductors. Read more.
Jobless benefits for the longterm unemployed would be cut
Unemployment benefits for the longterm jobless would expire. About 2 million people receive the extra benefts that provide up to 73 weeks of aid. This would cost about $26 billion. Pictured, people marched in a Labor Day parade in Charlotte, N.C., on Sept. 3.
The unemployment rate would shoot up
Up to 3.4 million jobs would be lost, according to estimates from the nonpartisan Congressional Budget Office. The unemployment rate would reach 9.1 percent from the current 7.9 percent.
Pictured, job seekers waited in line to see employers at a National Career Fairs’ job fair in New York on Oct. 24.