What Does the Fiscal Cliff Really Mean?

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There is a lot of talk about “falling off the fiscal cliff,” but what does that really mean?  If there isn’t an agreement on the fiscal cliff then Americans could see major cuts take place to entitlement programs like Social Security, Food Stamps and Medicare and a possible $2,000 tax hike on middle class families per year.  The president has called on Congress to extend middle class tax cuts, but no action has been taken.  A $2,000 tax hike could mean the difference with being able to afford groceries, books for school, mortgage payments, prescription drugs, extracurricular activities for kids, and a whole lot more for millions of Americans.

Congress and the president are in a political war about the future of tax hikes and spending cuts that are set to expire on December 31, 2012 if decisions are not made about extending middle class tax cuts.  If you remember, last year- around this time- Congress and the President were in a big debate about the temporary payroll tax cuts, which would have resulted in a 2% tax hike for workers among other things like tax hikes for businesses.  Much of the debate stems around the “Bush Tax Cuts,” when then-President Bush gave tax breaks to some of the wealthiest Americans.

Now that the middle class quality of life has been jeopardized by the failing economy, Congress and the President must act to ensure that the average American’s taxes don’t increase and entitlement programs are not cut.

Unemployment benefits are another area people may not think about when they think about the “fiscal cliff.”  Up to two million people could lose their jobless benefits on January 1 if Congress doesn’t act and Senate and Congressional leaders are saying this is the ‘real cliff.’  The economy would suffer without these benefits because people would be unable to pay their mortgages and buy groceries.At its peak, unemployment benefits reached 5.69 million Americans, but has dropped to 2 million as the economy continues to improve.

President Obama has called on increasing the tax rate on people making more than $250,000, a key focus in his reelection campaign.  However, Republican leaders have called for $900 billion in cuts to entitlement programs.

However, lawmakers do have choices.  They can a.) let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of Gross Domestic Product, would be cut in half. b.) cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow or c.) take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

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