You are about to travel over an enormous precipice not of sight or sound but of your check book; a journey into a terrifying land where Republicans and Democrats alike play on the wildest fears of your imagination… Next stop, the bottom of the Fiscal Cliff!
We are standing at the edge of this so called cliff… Just a little push and over we go falling straight down into the abyss below. Or is it more of a tumble down a mountain? Or is it possibly just a slow roll down a hill? Whatever it is: the fiscal cliff, mountain, or hill most Americans are very scared of this enigmatic occurrence that very few truly understand. Of course we are scared though what other choice do we have. Washington and the media have done their very best to scare the hell out of us with it. Not that this is a joke or by any means a good thing. I only wonder: Is it as bad as they have made it out to be? Rather than sound too flippant about this crisis we are facing I must admit that I do not know exactly what “falling” off this “cliff” would mean for us and to be perfectly honest I do not think anyone else really does either. That is why this is so terrifying for most people. Much like the mysterious December 21st 2012, a date that has remained in that frightening part of many people’s peripheral vision for several years now, no one really knows what is going to happen. The fear of the unknown, even in the most rational of people, can be very powerful. No one can see the future. No one really knows. In order to prepare yourself for your journey to the bottom of this so called cliff you need to understand exactly what the fiscal cliff really is.
The fiscal cliff is a direct result of the inability of our leaders to come to any type of bi-partisan agreement on the budget. In 2011 when Congress could not agree on raising the debt ceiling (and eventually led to us losing our AAA credit rating) Congress passed the Budget Control Act as a compromise between the parties. The Budget Control Act did the following things:
- Raised the debt ceiling.
- Provided mandatory spending cuts equal to the amount that the debt ceiling was to be raised ($917 billion in cuts). It also contained provisions for further debt ceiling increases upon Presidential request.
- Set up a committee of 12 members (6 Republican and 6 Democrats) to produce legislation that would reduce the deficit by $1.5 trillion over ten years. Their deadline was December 23, 2011 (needless to say they did not find a solution).
- As an incentivize to Congress to reach an agreement it also provided a provision that stated if an agreement was not reached by December 31, 2012 to reduce the deficit by at least $1.2 trillion (over the course of ten years) then an across the board “sequestration” of spending would occur.
The design of the sequestration was to be so horrendous that it would force both sides to come to a compromise over the budget. Why is the sequestration such a bad thing? This provision provides mandatory cuts across the board split evenly between defense spending and non-defense discretionary spending. The cuts will equal $109 billion a year or roughly $55 billion for each category. Programs that would be exempt from this cut would include Social Security, veterans and retirement benefits, CHIP, SNAP and TANF, along with a large part of other mandatory spending. You can get a more detailed list on the Cornell University Law School website (link provided at the bottom of my blog). Medicare could be cut but the cuts would be capped at 2% per year. Why is this so bad? Legislators have no control over where the money is cut. The cut is roughly equal across the board to all programs in the category. You cannot steer the cuts to programs with less impact. Many may say we should not have raised the debt ceiling in order to avoid this, but that was not the answer either. Why was raising the debt ceiling so important? The main reason being that without raising the debt ceiling the US would default on its debts. If we cannot pay our bills we make a lot of nations around the world very angry. Whether you agree with the spending choices of our government or not this is a very bad thing.
In addition to the Budget Control Act’s sequestration there are several other things set to occur that will affect Americans on January 1st.
- “Bush era” tax cuts expire.
- What this means: everyone’s income tax rates go up, as well as estate and capital gains tax rates.
- Alternative Minimum Tax (AMT) patch expires.
- What this means: Designed in 1982 to ensure the wealthy pay their fair share, this was not implemented taking into consideration inflation and each year has had to be “patched” in an effort to not hit middle income earners. Once this expires this will hit single earners making right at $34,000 and joint earners at $45,000.
- Payroll Tax cut expires.
- What this means: Social security payroll tax holiday ends increasing social security tax from 4.2 to 6.2%.
- Affordable Care Act taxes go into effect.
- What this means: Increased taxes for top earners mainly those making $200,000 or more.
- Extended unemployment benefits expire.
- What this means: less time to receive unemployment benefits.
- Rates paid to Medicare doctors decrease roughly 30%.
- What this means: There is a possibility that this may cause doctors to pull out of the Medicare program.
In theory this is a good thing for the deficit. It will reduce spending and income will rise because taxes will go up for everyone (both positives for the deficit; less money going out, more money coming in). However, in the big picture this is a bad thing, although it is hard to say just how bad. For sure it will deepen the recession we are already in. When American’s have less money they spend less (obviously) and save more out of fear. When American’s spend less, businesses sell less. When businesses sell less, manufacturers produce less. When manufacturers produce less, they need labor less. All of this leads to a decline in jobs and working Americans which lead to even less money in the economy which leads to a deeper recession and eventually if left unchecked, depression. It is a vicious cycle that must be carefully balanced.
Will it be this serious? The answer to that question is not easy the answer… The only real answer: Who knows? It will definitely hurt everyone’s pocket book that is for sure, but will it be as painful as the Washington fear mongers suppose it to be? If it is allowed to play out completely there is a good chance that it will (and possibly worse). The point of this blog is not to scare you but to give you a reason to remain calm about our “pending doom”. So, the main thing to understand here is that January 1st is not a magic date. The house of cards does not magically fall down around us on January 1st. Much of the consequences of going over the cliff will play out over the course of 2013 and some of it not until time to file 2013 taxes in early 2014. Congress can (and most likely would) pass retroactive bills that make the law effective as of January 1st no matter when they come to an agreement.
There is still plenty of time, and they will find a solution. If I had to bet I would put my money on it not happening by December 31st though. We will most likely witness Uncle Sam slip over the edge of the cliff. This is mostly because of politics and not because of a lack of an agreeable plan. However, I doubt it will take long before Uncle Sam is caught and set back on top of that cliff again, but I highly doubt an agreement will occur before the end of the year. I do not think this is anything we should stress right away though, as I believe that this will be a tumble down a gently sloping mountain rather than a free fall from a cliff. I am fairly sure that Congress and the White House will eventually find some middle ground to meet on. Now, if by the summer this is still an issue then you can start having panic attacks. Besides, if December 21st plays out this whole issue may be a moot point anyway.
All joking aside, I just hope they come to a long term agreement and not a Band-Aid fix that will need to be reapplied in a year (or less). Washington has got to remember who they represent and what their job is. Representing the people means doing what is best for the nation to ensure it is strong. To do this they must understand that yes, they are representing two different political ideologies but those ideologies must find common ground to ensure that both sides are fairly represented. If they cannot do this then they should not have a job. Also, as upsetting as it may be for those on the right to admit, they need to realize that they only hold one piece of the tri-force and that means they are going to have to give a little more than the left.
That is what legislating in the United States is all about isn’t it? Finding some middle ground between the two parties to represent all of America? You forced yourself into this corner with your Budget Control Act now do what all America expects you to do and act for us not for your parties…
Link to Cornell Law school website: http://www.law.cornell.edu/uscode/text/2/905