Understanding the Fiscal Cliff: An Inside Look

Understanding the Fiscal Cliff: An Inside Look

The Fiscal Cliff threatens to cut down on holiday spending. It could also potentially push the United States economy into a downward spiral.

Katie Hoskins, Editor-in-Chief

If you have listened to the morning news or glanced at a newspaper in the past few months, odds are you’ve seen or heard something about a so-called Fiscal Cliff. Some of you may be wondering, what exactly is this Fiscal Cliff? How did we get to this point? Is this a sign that the world will indeed end tomorrow?

 The Background: In case you didn’t tune in to any Romney/Obama debates this past election, our country is in debt, a lot of debt. Funding and maintaining the hundreds of government programs and the wars in Afghanistan and Iraq has driven us into a dire state of fiscal (economic) instability. In the past, Congressmen and the President have attempted to aid the situation through various pieces of legislation. But many of these temporary fixes will end at the end of this year, a time that has come to be known as the Fiscal Cliff. The use of the word cliff in describing the situation refers to the sudden and drastic severity of possible spending cuts and tax increases to the economy.

Take a step back: To really understand how this whole situation came about, we have to look back a few years at what created this debt. First came the Bush Tax Cuts, which, as the name suggests, cut individual tax rates. Upon inception, the cuts were scheduled to end in 2010, but the expiration date was extended to 2012 at the end of last year.

Next came the Simpson-Bowles Commission in 2010 when Obama presented a $4 trillion deficit reduction plan that failed to make its way through Congress. Soon after, Congress seemed to make some progress when both houses agreed to spending caps that will decrease the deficit by $1 trillion over the next 10 years.

But more had to be done. So the Budget Control Act of 2011 came about, establishing some spending cuts up front and the infamous “supercommittee,” a group of 12 bipartisan members charged with creating a $1.2 trillion deficit reduction plan.

To ensure that the group actually produced something useful, congress created the sequester, or the impending combination of massive across the board spending cuts and tax increases for all Americans. If the group failed, the sequester would take place Jan. 1, 2013. The group did indeed fail and now, 11 days before the sequester is scheduled to take its toll, Congressmen and the President are scrambling to find a way to somehow avoid the Fiscal Cliff.

The Sequester Itself: Starting on Jan. 1, there will be $500 billion in tax increases for everyone and $200 billion in spending cuts for almost all programs. The Congressional Bu­­­­dget Office estimates that if Congress fails to pass an agreement and we do fall over the Fiscal Cliff, the United States economy will shrink by .5 percent and unemployment will rise from 7.9 to 9.1 percent. Such numbers could send us spiraling back into the recession we still seem to be recuperating from, a fear that is driving discussions between Congressmen and Obama as we speak. Let’s look at the details.

The Tax Increase: In the United States we have tax brackets so that not everyone pays the same amount, but rather their share based on their income, among other factors. Sometimes, legislators will alter tax rates for only a few brackets to gain sufficient revenue. But starting Jan.1, everyone in the United States will see an increase, no matter what. According to the Tax Policy Center a “typical middle class family of four would see income taxes go up by $3500.” Among the hardest hit groups are college students, who will face a 37.5 percent increase. While this may seem like a dramatic statistic, the actual amount will total about $308 per student.

Analysts fear that an increase in taxes will drive people to spend less, causing businesses to invest less, which would slow our entire economy. One solution that Obama has put forward is to raise taxes on the wealthy, those whose incomes top $250,000. The problem with that proposal is that in order to implement it, the legislation must pass through both houses of Congress, including a Republican-run House of Representatives.

Why Republicans Disagree: The Republican platform is against tax increases for anyone. Some congressmen have even signed the Republican Taxation Pledge, which began in 1986 under the Reagan administration. Signers of the pledge promise to oppose any and all legislation that involves any tax increases for as long as they hold office. Signers include Speaker of the House John Boener of Ohio, one of the main players in discussions with Obama.

Spending Cuts: The sequester also includes massive $200 billion spending cuts for both defense related and non-defense programs. There are some programs that will not be cut, including Social Security, veteran’s benefits, military personnel, Medicaid the Children’s Health Insurance program and other programs for low-income families.

According to a statement issued by the White House Office of Management and Budget, “the sequestration would result in a 9.4 percent reduction in non-exempt…funding and an 8.2 percent reduction in…nondefense funding.” Programs in which such cuts are implemented would undoubtedly decrease the functionality of such programs.

Among the departments that fall under the nondefense category, is the Department of Education, which helps fund public schools and other student related programs. California would be among the hardest hit states, suffering an 8.8 percent cut on average for funding, some of which is used to fund special education programs here at Acalanes Union High School District.

Cut to the Chase: The economy of is infinitely complicated and the upcoming Fiscal Cliff only complicates things further. But the bottom line is that no one really wants us to fall over the Fiscal Cliff. In the same statement, the White House Office of Management and Budget said: “the Administration strongly believes that sequestration is bad policy, and that Congress can and should take action to avoid it.” Hopefully our senators and representatives will find a way to do just that.