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Fiscal Cliff 2012

House Speaker John Boehner and President Obama

(Credit: Getty Images)
Negotiations to avoid the fiscal cliff dominated the news in 2012. The Republican-controlled House wanted spending cuts, while the Democrat-controlled Senate and the White House focused on tax hikes. This bitter stalemate reflected a shift in political power that occurred after the 2012 Presidential election.

The difficulty in reaching a compromise showed just how far both sides had dug into their ideology. While they tried to work things out, the uncertainty over the outcome slowed economic growth, keeping millions unemployed.

Here's a timeline to follow exactly what happened while history was being made. The key players were Speaker of the House John Boehner (R), Senate Majority Leader Harry Reid (D) and President Barack Obama (D).

Over the Cliff:

During the final days of the year, Congress did not find a solution. However, this was partly because many Republicans had signed a pledge that they could not vote for tax increases. Instead, they would find it much easier to vote for a tax decrease after the Bush tax cuts had officially expired. For these political reasons, it would be easier to find an agreement if the country slipped off the cliff for a few days or even a week. This wouldn't be disastrous, as any agreement would be retroactive. For more, see We're Going Over the Cliff -- For About a Week.

Some Taxes Would Increase, Regardless of Fiscal Cliff Resolution:

Most people didn't realize that some tax increases weren't even part of the negotiations. For example, even though Republicans wanted to repeal Obamacare, they knew that horse had left the barn. Those taxes would go into effect in 2013 for those making $250,000 or more. The 2% payroll tax credit was probably going to go away, raising taxes for all wage earners. To find out why, see Did You Know Your Taxes Are Going Up, Anyway?.

House Caucus Rejected Boehner's Plan B:

In late December, Boehner lost support from his own party for a Plan "B." This included a compromise to allow the Bush tax cuts to expire for incomes above $1 million. Many Republicans were worried that, if they voted for ANY tax increase, they would lose the mid-term elections in 2014. Stock market futures dropped more than 200 points on the news. Congress adjourned for the holidays, promising to find a solution before the end of the year. For more, see Plan B Scrapped, Now What?

Fiscal Cliff Uncertainty Slowed Economic Growth:

On December 12, JP Morgan Chase CEO Jamie Dimon said that the business community was OK with a higher tax rate IF the Federal government would cut entitlement spending. This showed that businesses were more relaxed about tax increases than many Tea Party Republicans. He went on to add that the economy would immediately leap to a 4% growth rate once the cliff was resolved. His prediction indicated just how much the uncertainty around the fiscal cliff was hurting the U.S. economy. For more, read Dimon Says Once Fiscal Cliff Is Solved Economy Will Grow 4%.

Plan A - First Pass at a Solution:

In early December, the two parties were pretty close in some areas. For example, no one wanted sequestration. However, Obama included some stimulus spending, such as building roads, that he surely knew wouldn't get passed. This initial proposal left room for negotiation and compromise. Read Compare Fiscal Cliff Proposals.

The Two Sides Weren't That Far Apart -- Or Were They?:

On November 22, the leaders of the House and Senate met with President Obama, and it seemed a deal was imminent. Senate Majority Leader Harry Reid said the talks went so well that he thought it would be done before Christmas. It seemed the two sides were more than willing to compromise -- the Democrats would cut a little more than they wanted, and the Republicans would allow a little more tax increases than they wanted. For more, read The Gist of the Fiscal Cliff Negotiations.

$1 Trillion in Business Investment Waiting for Fiscal Cliff Resolution:

President Obama said his highest priority after winning the election was to work with Congress to resolve the fiscal cliff. Goldman Sachs CEO Lloyd Blankfein said that there businesses were sitting on more than $1 trillion in cash, waiting for Washington to sort it out. Once the uncertainty about tax rates was resolved, that money would be put to work, expanding companies and creating jobs. For more, see And Now, Avoiding the Fiscal Cliff.

Stock Prices Fell After the 2012 Election to Avoid the Fiscal Cliff:

After the November election, the stock market dropped. That's because stockholders began taking profits to avoid the tax rate increases on capital gains and dividends from the expiration of the Bush tax cuts and the imposition of Obamacare taxes.

Without a fiscal cliff solution, businesses continued to cut back on growth and hiring. They didn't want to expand in the face of a potential recession. Furthermore, some business owners sold their companies in 2012, to avoid capital gains tax increases in 2013.

What Exactly Was Included in the Fiscal Cliff?:

The fiscal cliff was a combination of four tax increases and two spending cuts that were scheduled to take place at the end of 2012. They included:
  1. Expiration of the Bush tax cuts.
  2. Expiration of the 2% payroll tax holiday enacted by the Obama Tax Cuts in 2010.
  3. Expiration of the alternative minimum tax patch.
  4. Enactment of Obamacare taxes.
The spending cuts included:
  1. Expiration of the extended unemployment benefits
  2. Sequestration.
As 2012 wound down, it looked increasingly like a solution would not be found. Even if the tax hikes and spending cuts were enacted, there was still time for the newly elected officials to negotiate a solution in January. It could be retroactive to January 1, avoiding the $600 billion impact on GDP. For more, see Fiscal Cliff Definition. Article updated December 27, 2012
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