The “fiscal cliff” is getting more and more attention with a Dec. 31 federal government deadline looming, but Americans seem to have a lot of questions:
Just what is the fiscal cliff?
The simple answer is that Dec. 31 is the deadline for federal leaders to reach a budget agreement and the time when a variety of tax cuts are scheduled to end. Several tax increases and spending cuts would come almost immediately.
Why is this happening?
Democrats who control the White House and U.S. Senate could not agree with Republicans who hold a U.S. House majority on budget issues, particularly how to deal with the $16 trillion federal debt. In 2011, President Barack Obama signed into law the Budget Control Act, a compromise that allowed the country to borrow more money and at the same time introduced a complex mechanism to cut spending if no overall budget deal is reached.
What about this debt?
The federal government spends more than it collects in taxes and other revenues. Unlike 49 of the 50 states, federal officials are not required to approve a balanced budget. The government has borrowed money to pay bills, much of it from China, at a pace of nearly $4 billion a day since 2007.
Nearly $1 trillion (over 10 years) in cuts already are under way and another $1.5 trillion in spending reductions (also over a decade) is supposed to begin automatically after Dec. 31 if no agreement is reached. Cuts would apply to both domestic and defense spending, although programs such as Social Security, Medicaid, military employee pay and veterans’ benefits would not be affected. Most programs would be cut anywhere from 7.5 percent to 8.4 percent, but Medicare benefit cuts would be limited to 2 percent. Also, on Dec. 31, tax reductions approved in the President George W. Bush years expire, raising taxes at the same time federal spending would be reduced.
What will happen if there is no deal by Dec. 31?
Predictions range from nothing that Americans would notice to taxes soaring, huge budget cuts and even a recession. Many Upper Midwestern members of Congress say they expect the issue to be addressed, but not solved, by year’s end to make it more of a fiscal slope than a fiscal cliff.
What is the solution?
Simply put, the president and Congress must agree on a budget package.
That does sound simple. Why isn’t it?
There are too many reasons to list here. But the bottom line is that Obama and other Democrats want to allow taxes to rise on those making more than $250,000 a year, but not on other Americans. Republicans oppose all tax rate increases, but at least some GOP leaders support eliminating what they call tax loopholes, which would provide government more money without raising rates. There also is disagreement about what programs to cut, and how much.
So Dec. 31 is the deadline?
Well, one deadline. As things stand now, it appears the country will reach its congressionally authorized debt limit in late February, which would require an act of Congress to raise. And in March existing federal budgets expire, so Congress and the president must decide about whether to extend existing budgets or write new ones.
Why is it called “fiscal cliff?”
Chairman Ben Bernanke of the Federal Reserve introduced the phrase last winter and everyone picked it up.
Finally, what is this “sequestration” we hear about?
It is the federal government term for budget cuts that would happen if a budget agreement is not reached.