(Updated November 8, 2012)
Now that the election is over — everyone’s attention has turned to impending fiscal cliff. It’s a term seeped into the national psyche — the “fiscal cliff” is debated, interrogated, and endlessly hyped in the media. But most of us are still asking: What is it, exactly?
Recently Need to Know convened a panel of experts on the topics of federal budgets, entitlements — such as social security and medicare — and economics to gauge their opinions on these complex issues. And we followed that up with a pre-election analysis on the consequences for country after November 6.
Check out that coverage but before you watch, here’s a primer on the “fiscal cliff.”
The fiscal cliff (or “taxmageddon”) refers to a confluence of automatic roll-over measures that will be set in motion based on the Budget Control Act of 2011, signed into law by President Obama after the debt ceiling crisis last year.
The BCA was drafted as an incentive for Congress to keep a watchful eye on the national debt and continue to work towards deficit reduction. If a bill specifically enacted to decrease the deficit was not passed by December 31, 2012, ‘sequestration’ cuts (see below) would automatically be triggered to the tune of $1.2 trillion or the difference between that number and any deficit reduction previously achieved.
Simultaneously, the temporary payroll tax holiday expires at the end of 2012, leading to proclamations such as “160 million American wage earners will probably see their tax bills jump after Jan. 1.” The exemption was provided by The Temporary Payroll Tax Cut Continuation Act of 2011 and it temporarily extended a two percentage point payroll tax cut for employees.
Perhaps Ben Bernanke said it best when addressing Congress back in June of 2012: “If no action were taken and the fiscal cliff were to kick in in its full size, I think it would be very likely that the economy would begin to contract or possibly go even into recession, and that unemployment would begin to rise.”
Just this week, however, the New York Times reported that last minute amendments could mean preventing taxmageddon — if Congress acts quickly once the calendar rolls over.
There would be time for Congress to strike a deal before the economy started contracting. The economic effect would accumulate day by day, and much of it might be reversible.
Of course, getting anything done in Washington in a matter of days requires both grit and finesse. In the words of Eric Toder of the Tax Policy Center, also quoted in the Times piece, “It would be quite easy. Technically easy. I don’t know about politically easy.”
The Sequester is the technical name for that $1.2 trillion in deficit reduction outlined in the BCA.
The cuts are known as “across the board” and Congress has no influence on how they are distributed, therefore leaving all discretionary funding vulnerable to spending cuts. Cuts will be evenly relegated by halves- one part from defense, and the other from non-defense departments.
Erskine Bowles is a North Carolina native who spent a large part of his career serving former President Bill Clinton first as the Administrator of the Small Business Administration and then later as White House Chief of Staff. President Obama named him to co-chair the National Commission on Fiscal Responsibility and Reform.
Alan Simpson served three terms in the Senate representing the state of Wyoming from 1979 though 1997. Senator Simpson was a contributor to the Iraq Study Group report and was nominated alongside Erskine Bowles to co-chair the National Commission on Fiscal Responsibility and Reform.
Simpson-Bowles (the National Commission on Fiscal Responsibility and Reform) is the committee convened by President Obama to address ways the Federal Government could stymie the rising national debt. The committee had 18 members, with a portion appointed by President Obama and some nominated by Congress.
The partisan breakdown on Simpson-Bowles was nearly even as the committee tackled three major sets of reforms: discretionary spending, social security and Medicare/Medicaid and tax system reform. The committee drafted a plan that would “cap discretionary spending in 2012 to 2011 levels and limit spending in 2013 at 2008 levels and spending growth would be limited to half of inflation until 2020.”
That report needed to achieve a super majority (or the equivalent to 14 of the 18 members voting Yes) to move on to Congress for approval. The committee vote taken on December 3, 2010 resulted in only 11 “yes” votes. Vice Presidential candidate Congressman Paul Ryan was nominated to Simpson-Bowles and voted against approval of the report.
Highlights of the proposal include:
- Three-year pay freeze on federal workers and Defense Department civilians
- Sell excess federal real property
- Establish single corporate tax rate between 23 percent and 29 percent
- Reform Medicare cost-sharing rules.
The full Simpson-Bowles report can be read here.
Without the requisite super majority within Simpson-Bowles, the committee’s report could not be presented to Congress for a vote. Bowles has said he believes President Obama — who moved ahead without it — should have pressed further with the report’s findings. He is quoted saying, “I believe it was those Chicago guys, the political team that convinced him that it would be smarter for him to wait and let [incoming House Budget Chairman] Paul Ryan go first, and then he would look like the sensible guy in the game.”
Leave a comment below if we’ve missed anything of particular interest, if you have more questions or just to share your views!