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What is the Fiscal Cliff?

Jul 11, 2012 • Economic Debates, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 149 Views    No Comments

The fiscal cliff is composed of 8 tax and spending events. Permitting all to occur might be the equivalent of jumping over the edge in an economic dive.
Tax Increases
  1. Bush era tax cuts: expire
  2. 2010-2011 2% payroll tax cut: expires
  3. Affordable Care Act taxes: kick in
Spending Cuts
  1. Emergency unemployment benefits: expire
  2. Budget sequester (cuts) from Super Committee failure: kick in
  3. Previously legislated budget cuts: kick in
  4. Defense cuts from Iran/Afghanistan reductions: kick in
  5. Medicare payment rates for physicians: reduced

 

Affecting financial planning for businesses and households, the 8 fiscal cliff events have countless implications even before 2013. Then, during 2013, if they are implemented, many predict they will lead to diminished economic growth. Others point out though that rather than a fiscal cliff, the cuts in government spending represent fiscal discipline that will lead to a smaller deficit.

During 1969, we might have created another fiscal cliff. There was a 10% surcharge on personal and corporate income taxes, an increase in telephone and auto excise taxes, and a hike in social security payroll taxes. All were supposed to constrain inflation and pay for the Vietnamese War. They did, though, precede the recession that began during the fourth quarter of 1969.

Finally, just 2 definitions. Fiscal refers to the spending taxing and borrowing that the President and the Congress oversee. Fiscal policy is used to guide our economic trajectory and to decide which goods and services government should provide. By contrast, overseen by the Federal Reserve, monetary policy focuses on our supply of money and credit.

These businessinsider articles here and here have excellent summaries and analysis of the fiscal cliff while this CBO (Congressional Budget Office) paper provides a lot more detail. If ever you want to confirm the dates of a specific business cycle, this NBER (National Bureau of Economic Research) site is ideal.

 

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