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Kimberly Amadeo

And Now...Avoiding the Fiscal Cliff

By November 14, 2012

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President Obama's highest priority now is to work with Congress to avoid falling off the fiscal cliff.  This is the simultaneous automatic expiration of the Bush tax cuts, the 2% payroll tax holiday, and extended unemployment benefits. At the same time, federal spending will be cut 10% across the board, mandated by the Spending Control Act. So far, a Democrat- controlled Executive Branch and Senate hasn't been able to work with a Republican-controlled House to negotiate a solution. However, both sides have been signalling their willingness to compromise in anticipation of a summit meeting between the President and Congressional leaders this Friday.

The goals are the same, but the two parties disagree on how to achieve it. The Democrat-led Senate wants the Bush tax cuts to expire for higher income taxpayers, while the Republican-led House wants the tax cuts to be extended for everyone. Since both sides agree that the tax cuts should continue for families making less than $250,000, President Obama said in a speech today that Republicans should agree to that while negotiating the rest.

House Republican Leader John Boehner said he would be willing to negotiate closing tax loopholes for high-income earners, but not increasing the tax rate. Treasury Secretary Tim Geithner said even closing some popular loopholes, like deductions on mortgage interest and charity, won't raise enough revenue. The President is holding firm on his call for a higher tax rate, unless a more specific and realistic tax plan is proposed. (Washington Post, Ezra Klein, White House Rejects Boehner's Bid, November 14, 2012)

Will it be a success? Probably, since there is simply too much at stake. No one wants to be seen as the one to push the economy off the fiscal cliff.

If they avoid the fiscal cliff, will it really make a difference? You bet! Lloyd Blankfein, CEO of Goldman Sachs, said,

"There is more than a trillion dollars of cash that is sitting on the balance sheets of U.S. nonfinancial companies. With certainty about tax rates, companies will increase their capital expenditures (currently at anemic levels), contributing to a virtuous cycle of jobs and growth." (Source: Huffpo)

Once confidence in our leadership is restored, this cash will fuel the mighty engine of U.S. economic growth. Even anxiety about the ongoing eurozone crisis won't be enough to stop it. In fact, we might set an example to the EU's Angela Merkel and the IMF's Christian LaGuarde on how to resolve serious philosophical differences for the good of all.

What It Means to You

Even if some or all of the Bush tax cuts are extended on Friday, you may pay more taxes come starting January 1, depending on your personal situation. The payroll tax holiday may be repealed, and new taxes to pay for Obamacare will kick in.  Check out these related articles to find out how you may be affected.

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November 21, 2012 at 1:37 am
(1) Chan says:

Helli kim,

It is already predicted that the credit rating of US will be down again in 2013. Now every bodiy is talking of the Fiscal cliff of the US. what is the big plan and how to set right these problems.Is there a effective solution.All you economists have to answer.Is it too late or some thing can be done for the better of the economy.

November 21, 2012 at 8:41 am
(2) Kimberly says:

Hi Chan,

I think they will find a resolution. It’s in no one’s political best interest to create another recession. Congress knows they will all be voted out of office if they allow that to happen. On the other hand, they will all be heroes if they solve this problem, which they themselves created. It’s all very doable.


November 22, 2012 at 2:09 pm
(3) Chan says:

Hope so the congress with the help of all public the economy of the country will bounce back for which the rest of world are waiting for. If it happens quickly all you economists and the congress and the people of the country will be having big smile in their face. isn’t it kim.

November 22, 2012 at 5:25 pm
(4) Kimberly says:

Hi Chan,

You bet!

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