The Fiscal Cliff defined: What going over means to you

The news is full of warnings that we are approaching the fiscal cliff.  But what happens if we fall? Photo: The government is pushing us over the Fiscal Cliff en masse / 300 The movie

WASHINGTON, DC, December 27, 2012 — After today, there are just two full working days before we reach the precipice of the fiscal cliff at midnight, December 31. 

That’s two days that Congress and the President have left to negotiate a budget deal or send America into economic free fall. 

Failure to avoid the fiscal cliff will negatively affect almost every single person in the US, regardless of economic status – poor or wealthy. This is not only dangerous; it shows a complete disregard by our elected officials, from the White House to the Hill – for the people who elected them to office in the first place.

President Obama cut short his Hawaii vacation, returning to Washington in hopes of negotiating a deal with House Speaker John Boehner. That is, he hopes to work out something with Harry Reid that Senate Minority Leader Mitch McConnell won’t block in the Senate and that Boehner will allow to go up for a vote in the House. Congress returns to session today to yeah or nay whatever Obama, Reid and Boehner may hash out.

There are some defined ideological issues at the heart of the negotiations between political liberals and conservatives, and they fuel the dispute between the Democratic President and the Republican House. 

For liberals it starts with taxes and the fear that someone, the rich, has something that someone else, the poor, does not: money. More money. The liberal Obama wants higher taxes on the “richest Americans”, while a conservative Congress does not want higher taxes for anyone.

For conservatives it starts with the budget, and fear that government will swallow the economy. Congress (conservative) wants spending cuts, including limits on Medicare, Medicaid and Social Security, all of which Obama and the Democrats strongly oppose, even though these are the items driving the debt. Taxing the rich at a higher rate will hardly budge the deficit, nor make a dent in our $14.5 trillion dollar debt, if we don’t reform entitlement spending.

China is the largest foreign buyer of US debt, holding more than $1 trillion in U.S. government IOUs. The scary part of that number is that China and other foreign governments can hedge the US Treasury’s ability to act, and the interest we have to pay them becomes an ever-growing part of our federal budget.

The deeper our debt, the more US Treasury resources go to China and the less they go to spending at home. China will use that money to buy American assets.

Obama wants more economic stimulus spending as part of a deal. He believes borrowing more money will push the economy forward. Congress says the enormous deficit means there is simply no way the country can afford to allocate more spending. 

Their message is you can’t spend what you do not have.

So, with the two sides unable to fix spending and unable to agree on taxes, the Democrats and the Republicans are deadlocked while America careens toward the fiscal cliff.

What is that “fiscal cliff”? It is a disaster that Congress created, hoping that it would help it remember to be more responsible in the future (which is now here). It is as if a homeowner lit the curtains on fire in the hopes that it would remind him to pay his water bill. It is as if you donated all your large-size clothes in the hopes that it would keep you from eating too much over the holidays.

If there is no agreement between the executive and the legislature, the Bush tax cuts and Obama’s payroll tax holiday will expire, as will Federal jobless benefits (unemployment insurance), affecting approximately two million Americans.

How does falling off the Fiscal Cliff directly affect you? Medicare and Social Security are exempted from automatic cuts, but if you receive unemployment benefits and other federal payments, you will see less money starting January 1, 2013, or none at all.

* The Alternative Minimum Tax will hit 30 million Americans, and another 100 million households will be unable to file until late March, delaying any tax refunds.

* If you pay payroll taxes, your tax bill will go up (that includes just about everyone who works), and your income tax bill will also rise.

* Try not to die; federal estate taxes will rise to over 50 percent on estates over $1 million. Investment income will be taxed at a higher rate: 20 percent on dividends and capital gains, up from 15 percent. Add on the Obamacare surcharge, and that goes to 23.5 percent.

This isn’t going to be a “tax the rich” situation; it will be a “tax everyone” situation. Eighty-eight percent of all Americans will pay higher taxes next year, about $3,500 per household on average. The average will be about $2,000 for families earning between $50,000 and $100,000, more for those earning more.

And then there’s that $1.2 trillion “sequestration,” federal spending cuts spread over ten years.

While none of that sounds good, there’s more. 

If all this takes place, economists predict the US will face a huge recession and increased unemployment – a more than 1 percent hike in official unemployment figures, to 9.1 percent. Notoriously fickle markets will collapse, as will investor confidence, further complicating the already incredibly complicated problem. 

Consumers paying more taxes will have less money, and they’ll be more likely to save the money they have or use it to spend down debt. That isn’t really a bad thing, unless you’re a Keynesian and believe the consumption is the best economic fuel.

That’s why Obama feels the need to couple austerity with stimulus spending; if you can’t be trusted to spend money in hard times, at least the government can.

So, we’re looking at a 5 percent drop in economic output.

Let’s understand, if there is no agreement on 31 December 2012, the world will not end.  It is not a hard and fast deadline that prohibits future compromise, and the two sides can continue to negotiate into January. 

However, anything after December 31 will require cleaning up of the mess that starts on that day if there is no deal. Fixing this late won’t be costless, and the damage to consumer and business confidence has already started. 

Additionally, there is a price of political brinksmanship on both sides, and the inability to reach an agreement on the budget before the last minute bodes ill for the next four years.

To most Americans, the downsides of jumping over the cliff are obvious, and it makes enormous sense to reach some compromise to avoid the negative repercussions. 

So why don’t our politicians get it?


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Lisa M. Ruth

Lisa M. Ruth started her career at the CIA, where she won several distinguished awards for her service and analysis.  After leaving the government, she joined a private intelligence firm in South Florida as President, where she oversaw all research, analysis and reporting.

Lisa joined CDN as a journalist in 2009 and writes extensively on intelligence, world affairs, and breaking news. She also provides investigative reporting and news analysis. Lisa continues to write both for her own columns and as a guest writer on a wide variety of subjects, and is now Executive Editor for CDN and edits the Global, Family and Health sections.  She is also a regular contributor to Newsmax and other publications.

Contact Lisa M. Ruth

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