Answers to Common Questions on the 'Fiscal Cliff' ; ANALYSIS

By Plumer, Brad | Evansville Courier & Press (2007-Current), November 28, 2012 | Go to article overview

Answers to Common Questions on the 'Fiscal Cliff' ; ANALYSIS


Plumer, Brad, Evansville Courier & Press (2007-Current)


WASHINGTON - Washington is engaged in an all-consuming debate about how to resolve the "fiscal cliff." But what is that and why does it matter? Here are some questions and answers Q: What is the fiscal cliff?

A: The fiscal cliff is a metaphor for the looming consequences of some congressional decisions.

On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect.

That's equal to about four percent of GDP, which is, according to the Congressional Budget Office, more than enough to throw us into a recession.

Analysts disagree on exactly how quickly the recession would begin. That's why the "cliff" metaphor is inapt. If financial markets freak out, it might happen very quickly, proving the "cliff" imagery correct. But it might happen gradually, affirming those who've argued it's a "slope."

Either way, both parties agree it shouldn't be permitted to happen at all. But that's the rub. The reason the fiscal cliff could push us into another recession in 2013 is because it enacts too much deficit reduction upfront, not too little. And yet, deficit reduction is something that most members of Congress support, at least in the abstract. So both sides want to replace the fiscal cliff with.. something. The question is, with what?

Q: What is the fiscal cliff in one sentence?

A: Much too much austerity, much too quickly.

Q: If it's not a cliff, what is it?

A: The term "fiscal cliff" comes from testimony Fed Chairman Ben Bernanke delivered delivered before Congress earlier this year. But, as we mentioned, the "cliff" imagery has sparked some dissent. The Center on Budget and Policy Priorities thinks it's more of a "slope." The Economic Policy Institute calls it an "obstacle course."

The term "austerity crisis" solves two problems. First, the danger the economy faces is too much austerity too quickly, so swapping the term "fiscal" for the word "austerity" actually better reflects the situation. Second, we do know that it will, if permitted to go on for long enough, be a "crisis." Thus, the "austerity crisis."

Q: What's in it?

A: Taxes: Five tax measures have provisions expiring at year's end

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.

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. …

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