The Nine Components of the Fiscal Cliff

July 19th, 2012
in econ_news, syndication

Warning – This news contains interwoven material that is  editorial in nature.

Econintersect: The fiscal cliff refers to a collection car-off-cliffSMALLchanges in taxes and spending that will simultaneously occur at the stroke of midnight 31 December 2012.  The changes in taxes are all increases and the changes in spending are all decreases.  What will happen then is the economy will be hit with a double whammy:  increased taxes will take more money out of the economy and decreased spending will put less money into the economy.  The result for the economy will something like what would happen to a reservoir if you cut the amount of water flowing in and increased the amount pumped out:  it will shrink.

Follow up:

The situation has arisen because the U.S. Congress decided to create a Super Committee in 2011 to come up with a deficit cutting plan for the U.S. budget. In setting up that committee, the legislation attempted to hold the members’ feet to a fire by specifying a series of events (tax hikes and spending cuts) that would occur automatically if the Super Committee failed to complete its assignment. They failed to come to an agreement and thus was conceived the fiscal cliff which still has 5 ½ months of gestation remaining before becoming an economic Rosemary’s baby.

There is a way that what could become a reality can be turned into just a bad dream. The country and Congress could awaken to a different world than what still exists only as a nightmare, not yet actual reality. All Congress has to do is to agree to pass legislation that changes some or all of the otherwise automatic events. But that requires what has become an oxymoron: Congress agreeing to pass legislation.

So there is a possibility that Congress will not take action and the economy will “fall off” the fiscal cliff. It will not be completely like a long sleep (with the nightmare) becoming a coma (with a nightmare reality). But there would be a hit to economy, estimated today by Fed Chairman Ben Bernanke to put the country in a shallow recession in 2013 and cost 1.25 million jobs (GEI News).

Jeff Benjamin has written an article in Investment News that discusses nine issues that are driving the fiscal cliff. Here is his list:

  • Bush tax cuts;
  • Extended unemployment insurance benefits;
  • No further changes to AMT ‘patch’;
  • Sequestration (automatic budget cuts across the board);
  • Discretionary spending cap;
  • Additional healthcare law taxes;
  • Reduced Medicare reimbursement to physicians;
  • End Social Security payroll tax cuts; and
  • Estate tax exemption falls back to $1 million.

Read the details for the nine steps over the fiscal cliff at Investment News.

Hat tip the FPA Smart Brief from the Financial Planning Association.

John Lounsbury


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