1. Education
You can opt-out at any time. Please refer to our privacy policy for contact information.
Jodi Beggs

So What's the Deal With the Fiscal Cliff?

By November 12, 2012

Follow me on:

Now that election season is over in the United States, legislators and policy makers can turn their focus back to, well, doing their jobs. One immediate issue of concern is what is colloquially referred to as the "fiscal cliff." So what is this ominous-sounding metaphorical cliff, anyway? (Surprisingly enough, it's not the thing that Republicans seem to want to throw themselves off of rather than raise taxes on rich people.) Some highlights:

  • The overall idea is that there are a number of fiscal policies (read, policies having to do with government spending and taxation) that are scheduled to automatically expire or take effect at the end of the year. Because letting these policies go as planned would be fiscally contractionary, people are worried that not amending them could jeopardize the nation's economic recovery.
  • On the tax front, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will expire at the end of 2012. One of the main provisions of this law is a two-year extension of the "Bush Tax Cuts," i.e. the combination of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
  • Because the Economic Growth and Tax Relief Reconciliation Act of 2001 lowered income tax rates on pretty much everyone, letting the provisions of the act expire would raise taxes on lower and middle-class households in addition to high-income households. (The Jobs and Growth Tax Relief Reconciliation Act of 2003 mainly accelerated the changes in income tax rates stipulated by this legislation.)
  • There are also provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 concerning capital gains taxes, tax credits, and so on that affect a large number of households throughout the income spectrum. If these expire, affected households will see their taxes increase further. (In related news, it's probably not a bad idea to check out that link to see how you might be affected personally.)
  • Remember the debt-ceiling debate from last year? Basically what happened was that legislators achieved a compromise whereby the debt ceiling was raised but plans for reigning spending were put into action. That compromise culminated in the Budget Control Act of 2011, and one of its provisions includes automatically triggered spending cuts that will happen unless they are preempted by other legislation. These spending cuts will take effect in January 2013, and they are what are known as "across the board" spending cuts, meaning that they will touch virtually every category of government program. (These automatic cuts are the "sequestration" that you've been hearing about but no one bothered to define for you.)
  • These scheduled changes, all taken together, are not what either political party wants. Therefore, it's (hopefully) a top priority to develop a plan that will be palatable to the president and a majority of legislators in both houses of congress. Granted, some pundits say that going off of the fiscal cliff will provide the proper incentive for the parties to cooperate and compromise, but it's not clear how large the cost of that incentive would be.

If you're still looking for more fun with fiscal cliffs, here is a video produced by the Wall Street Journal and recommended by Greg Mankiw. I can't help but hear the part at the beginning about how Obama built a fiscal cliff and want to insert a "you didn't build that" joke. I think the video does an okay job of being reasonably impartial, but I would like to remind everyone that, for example, China only holds about 8% of US treasury debt, so I encourage you to judge the suggestion implied by the comment about debt being held abroad for yourself. Also, for your convenience, I've provided links for the experts mentioned in the video so that you can also judge the claim that they cover the political spectrum for yourself, or at the very least learn a bit more about some of the players in the debate.


November 13, 2012 at 12:24 am
(1) Art Spain says:

I guess this was about as even handed as something from the Wall Street Journal could be. I bristle at the idea of Calling Grover Norquist an expert on anything other than pushing an extreme senseless ideology.

November 24, 2012 at 10:23 pm
(2) VTYSFRWE says:

I was wondering, when we sent all our jobs, to China, is there some kind, of clause, that says we get so much percentage, from these foreiign manufacturers and retailers?

It is almost like we gave everything away, to other countries, and we just lost out, on everything. This puts us, in a bind, with no way, to pay back our debts we owe.

Leave a Comment

Line and paragraph breaks are automatic. Some HTML allowed: <a href="" title="">, <b>, <i>, <strike>

©2014 About.com. All rights reserved.