man over cliff(122147)

What is this "Fiscal Cliff" anyway?

The cliff refers to certain laws that are currently in place for various reasons.  If these laws are not changed or repealed by January 1, 2013, bad things could potentially happen to the US economy.  As of now, these things will automatically take place and our economy will go over the proverbial "fiscal cliff". 

What exactly will happen if we go over this cliff?

The two main results of inaction will be, generally speaking, tax increases and budget cuts.  There are actually numerous laws and federal acts that are in play here, but simply put, taxes will go up and government spending, via budget cuts, will go down.  

Which taxes are going to go up?

The government needs to increase tax revenues.  They need to bring in more money.  They will do this by increasing certain taxes like your income tax, long-term capital gains tax and payroll tax.  They will also increase tax revenues by allowing certain tax breaks to expire or "phase out".  The standard exemption and itemized deductions will be lowered, which will increase one's overall tax.  The earned income tax credit, child tax credit, and American opportunity tax credits would expire, also increasing the overall tax bill for many.  The tax system in America is extremely complicated; there are many nuances that are hard to follow.  Basically the government will be increasing the tax bill for most people. 

How much more will the average person have to pay next year?

This is a common question and one that is nearly impossible to answer.  Because your tax bill is a result of income, deductions and credits it is unique to you and your family.  Generally speaking though, these tax increases will have the greatest effect on high income earners.  The income tax on the highest bracket would increase from 35% to 39%.  This isn't to say you won't be  affected if you don't make a lot of money-you will; just not as much.

I thought George Bush just lowered taxes, we are we already raising them again?

Yes, he did lower them.  This is an important point to make.  If these tax increases occur, we will simply be returning taxes to pre-George W Bush rates.  These are Clinton era tax rates returning.  George W Bush lowered them in 2001 and Obama extended those cuts in 2010 on a two-year basis.  There is a lot to be said for lowering taxes to help the economy and a lot to be said against it.  Neither of which will be discussed here at this time as those are complicated points.  In simple terms, the government has spent more money in the last 10 years than it has brought in.  A LOT MORE.  This is a result of many things, most notably the military interventions in Iraq and Afghanistan and increased entitlement spending.

OK, so the government will raise taxes, what kind of spending will be reduced?

Again, we are dealing with cuts and benefits that will be expiring.  If the government lets them expire, the spending will be lower.  The spending cuts that receive the most attention are to medicare, social security and un-employment insurance. 

I heard that we are going to cut our military spending in half, is this true?

Sort of.  The Budget Control Act of 2011 was a spending reduction element of this whole mess.  The idea is to save $110 billion a year in spending; half of which comes from defense spending and the other half from non-defense spending.  This law was passed by Obama in 2011 to avoid the first debt ceiling crisis we faced.  This was a band-aid fix, a temporary one, with the hopes of coming up with something better in the upcoming year (this year). 

Why can't they just figure this out and put an end to it?

It seems simple but it is far from it.  Republicans and Democrats have very different ideas and philosophies on how the government should do it's job.  These ideals are mixed up and entangled in all of these laws and acts.  Often times the parties are forced to negotiate certain things in order to accomplish others. 


*Note from author

In the upcoming weeks I will be releasing more articles on these issues and other issues related to these.   This is a complicated matter, but it is a critically important one.  I will break things down further and more simply so that you can understand what is going on!