What’s in the Fiscal Cliff?

This entry is part 3 of 9 in the series The Fiscal Cliff Explained

Part 3 – What’s in the Fiscal Cliff?

There are 3 components in this section of “The Fiscal Cliff Explained”:


Taxes

Five tax measures have provisions expiring at year’s end:

  1. 2001/2003 Bush tax cuts: These cut individual income tax rates, pared back the estate tax, lowered rates for investment income (such a capital gains and dividends) and expanded a number of tax credits, including the child tax credit. According to the Economic Policy Institute, these would cost $203 billion next year if extended.
  2. 2009 stimulus: This included expansions of the Earned Income Tax Credit, which provides aid to low-income workers, as well as the child credit, and the American Opportunity tax credit, which helps families pay for college tuition. Extending these would cost $10 billion next year.
  3. Payroll tax holiday: This was included in the December 2010 tax deal and slashed the payroll tax rate on employees from 6.2 percent to 4.2 percent. Extending it would cost $115 billion next year.
  4. Alternative Minimum Tax: Intended as a baseline tax for high earners, the AMT is not indexed for inflation and would hit a lot of middle-class taxpayers if not “patched” before next year. A patch would cost $114 billion.
  5. Extenders: This is the catch-all term tax wonks use for corporate tax breaks that need to be extended regularly. Doing that again, as per usual, would cost $109 billion.

Spending Cuts

Four types of spending cuts take effect next year (2013):

  1. The sequester (or, as we sometimes like to call them, the big, dumb spending cuts that no one wants): Mandated by the Budget Control Act of 2011 (better known as the debt ceiling compromise), this institutes a 2 percent cut in physician and other providers’ Medicare payments, and a 7.6 to 9.6 percent across the board cut in all discretionary spending, except programs for low-income Americans. The cuts are evenly divided between defense and nondefense programs, with analysts predicting a crippling effect on all affected departments and agencies.

    The sequester can be averted either by repealing the portion of the BCA mandating the cuts or by passing $1.2 trillion in deficit reduction, which under the BCA’s dictates would prevent a sequester from being triggered. Its cuts amount to $50 billion next year, using EPI’s figures.

  2. Budget caps: Also in the Budget Control Act, these set a firm limit on discretionary spending within which policymakers must operate. They are set to reduce spending by $78 billion next year.
  3. Doc fix: This policy, passed every Congress for 15 years now but lapsing at the end of 2012, reverses temporarily cuts that Congress passed, and former President Bill Clinton signed, as a deficit reduction measure in 1997. The cuts, known as the “Sustainable Growth Rate” or SGR, require that growth in provider payments not exceed growth in Gross Domestic Product. If the doc fix is not extended, physician payments would fall by almost 30 percent, dwarfing the cuts enacting as part of the debt ceiling deal. That would cut spending by $14 billion next year.
  4. Unemployment insurance: Unemployment insurance was expanded following the recession, and due to the slow recovery this expansion has been regularly extended. Doing so again would cost $39 billion.

Debt Ceiling

When exactly the debt ceiling is next reached depends on how much the government actually spends and taxes in the coming months. But most analysts think the next debt-ceiling increase will come due around February 2013. The Bipartisan Policy Center estimates we’ll have to raise the debt limit by anywhere between $730 billion and $1.25 trillion to avoid the debt ceiling for all of 2013 (depending on whether the Dec. 31 fiscal changes measures are enacted or not) and between $1.3 billion and $2.2 billion in 2014.

the fiscal cliff

A fiscal cliff deal is likely to include an increase to the debt limit. But in a world without a deal, an ongoing austerity crisis could be worsened by a default. The economic consequences of that are hard to even imagine, but we’re talking about a crisis on the order of what we saw in 2008, at least.


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