The Fiscal Cliff: What is the fight about? Created by msouder on 12/4/2012 8:10:10 AM
There are actually three short-term fiscal cliffs and one huge long-term fiscal cliff.
1) FISCAL CLIFF #1: December 31 the tax cuts that President Bush and the Republican Congress passed 10 years ago expire.
An average income family will have taxes go up by 2,000 to 3,500 dollars depending upon deductions. Higher income families will get hammered far more (for example, double the income the tax increase is 5 times that because of steeper rates). This is the absolute fiscal cliff.
Tax increases on everyone will absolutely send the economy into a deep tailspin. Increasing taxes on only the rich (as defined by Obama at 250,000) will stagnate the economy but probably not collapse it. But the highest income people would likely not reduce consumption but rather reduce investment and charitable giving. Plus some will move money to other countries, or stop bringing it into this country from elsewhere. Other nations would likely react, as they always do, to attract American investment with lower tax rates.
2) FISCAL CLIFF #2: Sequestration (which means the Treasury automatically does an across the board reduction of discretionary spending) was passed earlier this year stating that unless Congress reduced spending by 1.5 trillion dollars over ten years that an automatic cut of 10% would occur (which hits defense hardest because it is the largest category of discretionary spending). This could easily be repealed but neither party wants to do so: plus Democrats favor such huge defense cuts though concerned about the other cuts.
To conservative Republicans, it is the debt that is the biggest issue. Even with this cut, the annual deficits would still INCREASE. It isn't deficit reduction at all: it merely slows the growth of the deficit increase. (More in another post: entitlement spending is driving the deficit, not discretionary - counter to myth.)
3) FISCAL CLIFF #3: The debt limit will need to be expanded early in 2013. The President would like to include it in this deal so don't have another stand-off right away in 2013. The debt limit, BTW, is NOT like a credit card limit. In an analogous example, it would be like your credit card company letting you spend beyond your current limit assuming the limit would be raised when necessary to accommodate past spending. In other words, it is rather a moral question not to raise it: if you've already spent the money, how can you not pay the bill to those holding your credit (in this case, government bonds)? That is why it is called a default.
Conservatives get frustrated because they can't stop the spending bills so try to fight paying for it. What we need to do is stop the spending, not reneging on the debt.
THE LONG-TERM CLIFF: there is no way to pay for the commitments the government has made. In other words, "obligated funds" (e.g. Social Security) far exceed revenues and the ability to pay. At some point, no one will buy our governments junk bonds to fund the debt, so there will be no income to pay seniors, pensions, student loans, food stamps or any other program including mandatory (entitlement) ones.