What is the fiscal cliff?
By JACKIE CALMES, New York Times
Published: November 15, 2012
Many Americans must be wondering: What is all this about a
“fiscal cliff”? And why did it receive so little attention during the
presidential campaign?
Well, it’s complicated — the so-called cliff, that is. And
most solutions are politically painful. In a rare show of bipartisanship, or
mutual protection, both parties ducked the debate until after the election.
What follows is an attempt to demystify the issue, which President Obama and
the lame-duck Congress now are struggling over, and which may occupy them right
through the holidays.
Q. What is the fiscal cliff?
A. The term refers to more than $500 billion in
tax increases and across-the-board spending cuts scheduled to take effect after
Jan. 1 — for fiscal year 2013 alone — unless Mr. Obama and Republicans reach an
alternative deficit-reduction deal. Ben Bernanke, the chairman of the Federal
Reserve, who is not known for catchy phrases, coined the metaphor “fiscal
cliff” last winter to warn of the dangerous yet avoidable drop-off ahead in the
nation’s fiscal path. It stuck.
Q. If we go over this so-called cliff, what
happens?
A. Taxes would rise for nearly every taxpayer
and many businesses. Financing for most federal programs, military and
domestic, would be cut. Many economists say that while annual budget deficits
are too high, these new taxes and spending cuts would be too much deficit
reduction, too suddenly, for a weak economy. More than $500 billion equals
roughly 3 percent to 4 percent of gross domestic product. The Congressional
Budget Office has said the result would be a short recession, though some
analysts say the measures could be managed so they do less damage. “Slope,”
they argue, is a better metaphor than cliff.
Q. Exactly what tax increases are in store?
A. When a tax cut expires, the practical effect
is a tax increase. And a slew of tax cuts — $400 billion for 2013 — expire on
Dec. 31: All of the Bush-era rate reductions; smaller tax cuts that
periodically expire for businesses and individuals; and the 2-percentage-point
cut in payroll taxes that Mr. Obama pushed in 2010, which increased an average
worker’s take-home pay by about $1,000 a year.
Also, 28 million taxpayers — about one in five, all middle-
to upper-income — would have to pay the alternative minimum
tax in 2012, raising their taxes more. That is because Congress has
failed to pass an inflation adjustment, as it usually does, to restrict the
number of taxpayers subject to the alternative minimum largely to the affluent.
Q. What spending would be cut?
A. An emergency unemployment-compensation
program is expiring, which would save $26 billion but end payments to millions
of Americans who remain jobless and have exhausted state benefits. Medicare payments
to doctors would be reduced 27 percent, or $11 billion, because this year
Congress has not passed the usual so-called “doc fix” to block the cuts, which
otherwise are required by a 1990s cost-control law.
The biggest cut would be $65 billion, enacted across the
board for most federal programs over the last nine months of fiscal year 2013,
from January through September. This cut, known as the sequester, was mandated
by an August 2011 budget deal between Mr. Obama and Congress that ended their
standoff over raising the nation’s debt limit. In that deal,
they agreed to reduce spending by $1 trillion over 10 years and to identify an
additional $1.2 trillion in savings by January 2013. If they fail to agree on
the second installment — as is the case so far — the automatic cuts will kick
in.
Q. Why did the parties create such a fiscal
and economic threat?
A. It was part intentional, part coincidental.
The intentional: Since Ronald Reagan’s administration, with
mixed results, presidents and Congresses have occasionally mandated a
self-imposed future crisis to force themselves to agree on unpopular tax and
spending actions. In that spirit, the idea behind the August 2011 deal was that
Republicans would so greatly fear the military cuts, and Democrats the domestic
spending cuts, that they would negotiate a deficit-reduction alternative by the
Jan. 1 deadline.
The coincidental: The measures from the 2011 deal are set to
take effect at the same time as the changes to jobless benefits, the
alternative minimum tax adjustment and the Medicare “doc fix,” and the
expiration of the Bush tax cuts — a
confluence that the two parties did not fully expect back in August 2011. The
nation will also reach its debt ceiling in January, creating additional
uncertainty. Accounting maneuvers by the Treasury Department could push that
deadline to March, but Mr. Obama wants a debt-limit increase as part of any
deal, adding another item to the agenda.
Q. Can’t Democrats and Republicans agree on
anything here?
A. They actually agree on a lot. Neither side
favors the sequester, an expanded alternative minimum tax or Medicare cuts for
doctors; the issue in preventing those outcomes is where to find offsetting
savings to avoid adding to annual deficits. And both parties want to extend all
of the Bush tax cuts for 98 percent of taxpayers — on income below $250,000 for
couples and on income below $200,000 for individuals.
Their main disagreement is a familiar one: the Bush rates on
income above that, for the top 2 percent of taxpayers. Mr. Obama campaigned
against the rates in 2008 and in 2012. In December 2010, when the Bush tax cuts
originally were to expire, Mr. Obama reluctantly agreed to extend all of them
for two years in exchange for Republicans’ support for the temporary payroll tax cut and
extended jobless aid. This time, he swears, is different.
Q. If the president extended all the Bush
rates once, why wouldn’t he do so again for the right concessions?
A. The economy was weaker in 2010, and so was
Mr. Obama. Republicans had just triumphed in the midterm elections, taking
control of the House. Now Mr. Obama is fresh off re-election, and Congressional
Democrats have gained seats. He vows that he will not allow the top tax rate to
stay at 35 percent; a return to 39.6 percent would raise about $1 trillion over
10 years. Chastened Republicans have suggested they would support higher
revenues, but only from limiting tax deductions for high-income taxpayers, not
from higher rates. Mr. Obama has not ruled out a compromise that would limit
deductions as well as setting the top rate above 35 percent but below 39.6
percent.
Q. What now? Might they really reach an
impasse?
A. No one knows. Despite market jitters about
that outcome, Democrats suggest that they are willing to let Jan. 1 come and go
without resolution unless Republicans relent on the top rate. That could simply
be bravado, to make Republicans blink. A Washington Post-Pew Research Center poll this week found that a majority of Americans
would blame Republicans for failure.
Q. Is there a best-case outcome here?
A. Many budget experts and economists are hoping
for a two-part deal. The first part would extend many of the tax cuts and
repeal the automatic spending cuts to avert the changes scheduled after Jan. 1.
But it would be contingent on the second part: a framework for reducing
projected long-term deficits by overhauling both the tax code — to raise
revenues — and entitlement programs — chiefly Medicare and Medicaid, whose
rising costs in an aging population are unsustainable. Those overhauls would
preoccupy Mr. Obama and Congress through 2013 and perhaps 2014.
Such an agreement would set specific targets for new tax
revenue and spending cuts to reduce deficits by about $4 trillion over a
decade, giving Congress and the president more time to work out the details. If
they failed to do so, presumably other automatic changes might be in store as
an enforcement action — setting up yet another looming deadline.
A version of this article appeared in print on November 16,
2012, on page A20 of the New York edition with the
headline: Demystifying the Fiscal Impasse That Is Vexing Washington.
