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The Daily Need

Everything you need to know about the ‘fiscal cliff’

(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!

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  • Ml Hayes

    This fiscal cliff issue is the monster under the bed. All politics aside, this is the sole criterion for selecting the next POTUS. Our federal legistlatures have failed. The Republicans are gambling that their party will survive on hoarded wealth. Their candidate is presenting a plutocratic opt-out through tax avoidance obstinacy led by a prejudicial White House. They want to convince the 52% that they too will survive, if only they pay now to put ‘responsible’ representation on Pennsylvania Ave.

    A careful analysis of the law contrasted to the little Romney has actually revealed points to a conscious attempt to saddle Obama with the the history and the blame is pure prejudice of the absolute Jim Crow variety. Sophisticated, yes but none the less cynical and premeditated.

    So, this idea of social responsibility is a farce by Republicans seeking to obtain control of the Federal Executive so as to have authority to bust strikes, route picketers and jail protesters. This is a pragmatic fatalism worthy of the kind of thinking that the Dixiecrats brought to the Republicans way back in 1968.

    The fiscal cliff is not likely avoidable, but it is certainly more manageable under an encumbent administration that has already fought the battle to seat agency heads inside the Beltway. Romney won’t be greeted with open arms and the Democrats may gain enough control to make the mandatory tax increases even more draconian on the 52% Romney duped support from.

    In any case, it would appear that the whole cliff issue is a sequel to Gone With the Wind, only darker and sadder.

  • Kevin Faber

    Increase the capital gains tax to 23.8%? *gasp*

    Increase the corporate dividend tax to 43.4%? *gasp*

    Nichols is talking like this is going to have effects comparable to the ’08 meltdown.

    90% of the public will never pay a dime in higher taxes from either of these measures.

    If anything, capital gains taxes should be HIGHER, more like 70%.

    And there should be taxes on stock flips. And money trade flips. Say, 90% tax (90% of the value of the trade, not the profit) on shares held less than 7 days. 85% on trades held less than a year, 80% on holds under two years, & 70% on holds under 5 years.

    This doesn’t “discourage investment”: it DISCOURAGES SPECULATING. It REDUCES VOLATILITY. And these are supposed to be GOOD THINGS.

  • Anonymous

    America needs to jump off this cliff because it will force action. Defence expenditure has to fall rapidly. Talented people liberated from that industry will find roles in non-defence, and therefore more productive, industries. Focussing on energy efficiency or even geo-engineering would be good. There is enough money around to finance that from the private sector and such a move would cause a public to private switch which might be of some consequence.

    Secondly, getting marginal rates up for the super-wealthy can only be good. They are largely only hoarding the money, not investing it in new constructive activity. The reasons they work, beyond a certain point, are not about money but about ego, power and control. It would not make a significant difference to their lives if they paid more tax. On the other hand it makes a massive difference to the lives of poorer people if their benefits are reduced or their taxes raised. By the way, there is a long way to go in healthcare reform to get the industry efficient.

    But you might have to do this in an economy which, overall, is not growing. The economy must be restructured within that concept. ‘Flat is the new up’.

  • johnny mars

    The Republi-craps missed the boat when they failed to nominate Ron Paul, who had a better shot at beating Obamney than Rombama. Dr. Paul had a huge independent following, a libertarian following, a tea party following, and would have drawn from the Demo-craps as well. Ron Paul would have pushed for a balanced budget, cut ridiculous cold war military bases around the world, ended all wars and foreign aid (INCLUDING ISRAEL’S), ended the malicious Fed, cut unnecessary Washington bureaucracies, ended the failing war on drugs, and most importantly, ENDED ALL WARS!

    The ass media would have none of it and pushed for the status quo in the District of Corruption. The sheeple were too stupid and lazy to research Dr. Paul’s agendae and history, and they were mislead.

    So, what do we have? The status quo in the District of Corruption. Democracy sucks.