By Shannon Sullivan

Subjects

Economics, Mathematics, Language Arts

Estimated Time

Two Class Periods Plus Homework

Grade Level

Grades 9-12

Objective

Students will:

• Review vocabulary related to debt, spending and tax legislation.


• Review the pros and cons of three economic plans.
  
  
  Consider the impact political and economic solutions with “sunrise provisions” can have on future administrations, and American citizens.

Background

The fiscal cliff is a term used to describe the economic situation characterized by automatic “large spending cuts and tax increases,” in order to reduce the national debt. The date of the so-called fiscal cliff is set for January 2, 2013. Federal Reserve Chairman Ben Bernanke used the expression. He is credited with coining it (although it had been used by others in the past) when he spoke to Congress in February 2012, and politicians, economists, and CEOs have been using it ever since to describe the danger associated with prioritizing our budget in such as way that the risk of immediate recession is greater. The reason the January 2 deadline is so critical is because it marks the end, or “expiration” of certain policies that had been extended to offer tax breaks and incentives that were to expire during President Obama's administration to offer flexibility on the debt ceiling. Since a better compromise could not be reached, these were extended until January 2, 2013. The “cliff” is the time beyond January 2, 2013 when there either will not be enough money to make the obligations, without raising the debt ceiling, or to come up with a different solution. While no politician likes to be known for raising taxes or reckless spending, the money to address the deficit must be acquired, or the economy will suffer, or slow down (see the PBS NewsHour VIDEO: Slow Growth Is Biggest Economic Challenge Facing Incoming President for additional information). For this reason, the executive branch and the Congress are striving to find a solution that balances the needs of many Americans. The average cost to the American household would be $3,500.  How much each individual actually owes, under the current tax code, depends on many factors, especially income. Review the facts outlined on the infographic here .

Procedure

Step 1: Review the vocabulary list below with students. Keywords include:

• Bush Tax Cuts (EGTRRA, & JGTRRA)


• Debt ceiling


• Default


• Fiscal cliff


• Taxmaggedon

(A guide to keywordscan be found here .) Ask students to define these terms, as a 1st draft in class, and for homework, have student research more detailed definitions, using resources online, such as financial web sites, and PBS NewsHour: What is the "Fiscal Cliff"? Step 2: Share with students the video on PBS NEWSHOUR that includes the speech presented by President Obama, immediately after the election (transcript is also available online). The url is: http://www.pbs.org/newshour/bb/politics/july-dec12/cliff_11-09.html Ask students to listen for opportunities to compromise mentioned in the speech, as well as the approach that the President cites as the best direction to take. In which lines does the President define his plan? In which parts of the speech does he express the urgency of the situation? How does he imply that he has the consent of the American people to raise taxes and make changes? Encourage students to listen with a critical ear. Is the President persuasive? Knowing that he can’t win a third term, does the President take additional risks in his direct approach? Step 3: Direct the class in discussion about the pros and cons of what President Obama suggests in the video (raising taxes on those in higher income brackets) compared to the two scenarios outlined in the infographic for, as an example, a family making $55,000 a year. When the Bush-era tax cut expires, what might they owe? When the payroll tax holiday expires, what would the amount owed be? In higher income brackets, such over $150,000, how would those number change? Encourage students to “do the math” for which citizen, based on income would be paying the most? Would they find these changes affordable, over the course of year? At what point would a small business owner be impacted by the increase in taxes? Discuss the overall impact this could have on unemployment (or low wages for those currently employed)? If a solution is found that increases interest rates, but doesn’t raise taxes for consumers, is that better or worse for small business owners?  Think about the pros and cons, using a real-life scenario, like a video game storeowner, or a landscaper who has 3 part-time employees. Step 4: Divide the class into 3 groups.  Have the each group discuss the strengths of one of three solutions, and have each group make a case for their own solution to present at the end of the class period:

• The current policy could go into effect.  In this case, it is possible the economy will go into recession because the spending cuts and tax increases could slow growth. The deficit would decrease, though.


• Some or all of the spending cuts and tax increases would be canceled. This would add to the deficit and America’s debt would grow.


• A “middle of the road” approach could be used, in which budget issues are addressed, but there is a smaller impact on growth.

ASK THE ENTIRE CLASS TO VOTE ON THE BEST SOLUTION. Could they decide on one? Summary: How did tax cuts and legislation passed approximately 10 years ago impact the current economy?  Based on the visual created by the timeline, does a sunrise provision seem like an appropriate way to “end” a piece of legislation or were politicians too optimistic that a better solution would be reached by Congress in the years that were ahead of them? What seems to be standing in the way of a compromise? What barriers could be eliminated in our system that might expedite this decision? Which role in this process would be the most interesting one, if any?

Extension Activities

Have students create a timeline of events from the creation of the Bush-era tax cuts, their extension during the Obama administration, and the presentation in which Bernanke used the term Fiscal Cliff, and the discussion about whether or not to raise the debt ceiling in 2011.