How Did the Fiscal Cliff Get Resolved? The U.S. Economy, Finance and Tax Cuts (2012-13)

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• published: 05 Jan 2013
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In the United States, the fiscal cliff is the sharp decline in the budget deficit that could have occurred beginning in 2013 due to increased taxes and reduced spending as required by previously enacted laws. The deficit—the amount by which government spending exceeds its revenue—was projected to be reduced by roughly half in 2013. The Congressional Budget Office (CBO) had estimated that the sharp decrease in the deficit would have likely lead to a mild recession in early 2013 with the unemployment rate rising to roughly 9 percent in the second half of the year. The fiscal cliff was largely eliminated by the eleventh-hour passage of the American Taxpayer Relief Act of 2012. The previously enacted laws leading to the fiscal cliff had been projected to result in a 19.63% increase in revenue and 0.25% reduction in spending from fiscal years 2012 to 2013. Those laws included the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011. The former extended the Bush tax cuts for two years, while the latter was enacted as a compromise to resolve a dispute concerning the public debt ceiling and address the failure of the 111th Congress to pass a Federal Budget. Under the fiscal cliff scenario, some major programs like Social Security, Medicaid, federal pay (including military pay and pensions), and veterans' benefits, would have been exempted from the spending cuts. Spending for federal agencies and cabinet departments would have been reduced through broad, shallow cuts referred to as budget sequestration. The American Taxpayer Relief Act of 2012 was signed into law by the President on January 2 and eliminated much of the tax side of the fiscal cliff, with the CBO projecting a 8.13% increase in revenue and 1.15% increase in spending for fiscal year 2013. Adjustments to spending were expected to be hashed out in early 2013. The Act resulted in a projected $157 billion decline in the 2013 deficit relative to 2012, rather than the sharp $487 billion decrease projected under the fiscal cliff. The increase in revenue came from increased marginal income and capital gains tax rates relative to their 2012 levels for annual income over $400,000 ($450,000 for couples); a phase-out of certain tax deductions and credits for those with incomes over $250,000 ($300,000 for couples); an increase in estate taxes relative to 2012 levels on estates over $5 million; and expiration of payroll tax cuts (a 2% increase for most taxpayers earning under approximately $110,000). These changes would all be made permanent. A reduction in spending due to budget sequestration was delayed for two months under the act and the debt ceiling was not changed, leading to further debate during early 2013. The House passed the bill without amendments by a margin of 257--167 around 11 pm EST on January 1, 2013, and President Barack Obama signed it the next day. Because of the projected short-term impact on the economy, the fiscal cliff had stirred intense debate and media coverage toward the end of 2012. http://en.wikipedia.org/wiki/Fiscal_cliff