United States Fiscal Cliff
The United States fiscal cliff is a phrase believed to have been first uttered by Goldman Sachs economist, Alec Philips. The term is used in reference to more than $500 billion in tax hikes and across-the-board spending cuts scheduled to be effective at the start of fiscal year 2013. If President Obama and the Congress had failed to act on averting the threats posed by the legislative changes by December 31, 2012, the United States would have been plunged into an economic crisis, with the highest tax increase to be experienced in 60 years.
What caused the United States Fiscal Cliff?
Many have expressed their opinions on the causes of the United States fiscal cliff. However, one of those that stand out is politics. Some economists argue that the fiscal cliff was a creation of the politicians, citing Republican Senate Leader, Mitch McConnell as the mastermind. McConnell initially concocted the idea as a means of getting past the 2011 standoff over hiking of the Federal Debt Ceiling.
In theory, the fiscal cliff comprised of higher and huge taxes, indiscriminant cuts in Federal programs, which would scare policy makers. Economists say that the Republicans manufactured the cliff as a result of fear of primary challenges from the Tea Party.
How the Situation Developed
The US fiscal cliff was impacted by a series of talks and actions from the previous years. The origin of the situation can be traced back to 2001, when President George W. Bush passed a programme of tax cuts valued at $1.7 billion. The measures were implemented on condition that the tax reductions would expire in the beginning of 2011.
In 2011, the Republican-led Congress agreed to a deadline extension of two years. The Republicans also accented to a payroll tax cut for American citizens. However, disagreements between the legislators led to an extension of the debt ceiling to 31 December, 2012. This was the same day of the expiry of Bush’s tax cuts.
Onto the legislation, other tax changes and temporary spending conditions were added. According to President Obama, these would enhance the US economy, which at that time was on the way to a humiliating recession. If no broader deal was struck by 31 December, automatic tax hikes of an estimated $536 billion and spending cuts worth about $109 billion would be implemented from domestic and military program.
For the next two years, politicians had not been able to make a deal on what would take place. However, this was interfered with by the US presidential elections. After the elections, there were plans for a deal, which required the backing of both the Republicans and Democrats.
Implications of the US Fiscal Cliff
There are various situations that would have been impacted by the United States fiscal cliff. The following are some the things that would have happened if the US went over the cliff.
- Taxes would increase to almost all taxpayers and businesses.
- Financing for a host of federal, military and domestic programs would be reduced
With the above, the United States would be pushed into a small recession, negatively impacting the economy. It is reported that America would have experienced a fiscal contraction of about $600 billion in 2013 if Congress failed to take action.
How the United States Fiscal Cliff was solved
In order to avoid the US from falling over the cliff, lawmakers met with President Obama without a final deal. There seemed some light in January 1 2013 when the two parties agreed to implement higher income tax rates for those with higher incomes. However, the two parties had to continue battling it out for tougher decisions on spending cuts.
The deal highlighted tax hikes for families making more than $450,000 and individuals raking in more than $400,000 annually. The rest were to remain as they were, with those earning under $9,000 a year paying 10% tax.
Although the measures were aimed at fixing the United States fiscal cliff, many economists were not convinced that it was the best way of fixing the situation. Americans still face economic uncertainty and fixing the cliff would not bring calm in the United States’ economic woes.
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References
http://www.investopedia.com/terms/f/fiscalcliff.asp
http://www.bbc.com/news/business-20237056
http://www.huffingtonpost.com/robert-creamer/the-one-and-only-cause-of_b_2382245.html
http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-explained.html?_r=0