The term “Fiscal Cliff” is being used to describe the dilemma facing the United States government at the end of tax year 2012. At midnight, on December 31, the Budget Control Act of 2011 will go into effect and the terms could have a dramatic effect on the economy. It is because of these potential economic ramifications that the politicians and media outlets coverage of the issue is becoming increasingly pervasive.
In an effort to make a very long story short, the Fiscal Cliff can be described as the perfect storm of politics and economics. It is the culmination of years of tax cuts and overspending and stop gap measures that are finally coming due ….all at once. Here is the basic breakdown:
Spending Cuts $100 Billion
Unemployment Benefits – $25 Billion
Lower Medicare Payments to Doctors – $10 Billion
Defense – $30 Billion
Other Cuts – $35 Billion
Tax Increases $380 Billion
Alternative Minimum Tax – $125 Billion
Bush Tax Cuts – $110 Billion
Payroll Tax Cuts – $90 Billion
Other Taxes – $30 Billion
New Health Care Tax – $25 Billion
So that is how the numbers breakdown, but the real question is what effect these changes could have on the US economy in general, and your wallet in particular. According to a recent article by Thomas Kenny on About.com, lawmakers have three options in dealing with the potential economic fallout:
1) They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
2) They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
3) They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Until lawmakers decide how they will address implications of the Fiscal Cliff, it is impossible to tell what changes we can expect for the economy or our wallets….just that their will be some! Hopefully, even in an election year, Congress will put aside partisan politics and address the issues in the Budget Control Act of 2011.
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