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The Fiscal Cliff is an Inept Metaphor

Updated on December 8, 2012

Is America going over the physical cliff because of the fiscal problem? Is there really a fiscal cliff?

The first week of January, 2013, unless the Gods in Congress reach an agreement, will cause $500 billion in tax increases and $200 billion in spending cuts, which is 4% of the GDP and enough to toss the country into a recession. Are we already there? The past year was bad. The "cliff" is dependent how fast financial markets panic if no agreement is reached. If there is no panic, the cliff becomes a slope.

The Fiscal Cliff is basically too much austerity, too quickly. Deficit reductions are too severe in a short period of time.

The "cliff" is that five tax measures will expire: individual tax rates, reduced estate tax, lower rates for investment income like capital gains\dividends, and expanded tax rates. If extended, they will cost $203 billion in 2013.Then, there is the 2009 stimulus that would $10 billion inearned income credit, child credit tax and those that help pay for college tuition. There is the payroll tax, which would cost $115 billion, this cuts the payroll tax from 6.2 to 4.2%. There is the Alternative minimum tax, costing $114 billion, this will hit middle income earners if not extended. There corporate tax breaks needing to be extended, if done, would cost $109 billion.

Spending cuts include: a 2% cut in doctor and other provider Medicare payments, an across the board 7.6% to 9.6% in all discretionary spending except for low-income households. These cuts will be evenly distributed between defense and non-defense programs amounting to $110 billion.

Budget caps to limit spending, which would reduce spending by $78 billion. Unemployment insurance was expanded and is set to expire, if extended in an agreement, would cost $39 billion, if not, save the same amount. The debt ceiling needs to be raised by February from the current $730 billion to $1.25 trillion. If this is not done (with an agreement) then the economic consequences will be very bad for the US economy, very bad.

Going over the cliff means a weaker US economy and a likely recession and unemployment could hit 10%. Most average Americans will see a annual tax increase of $3500. Those earning over 1 million dollars will have a tax of $254,000. Those earning between $40-50,000, a $1700 tax increase.

What might happen is that we go over the cliff, but a deal is reached the first week or two in January.


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