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As the fiscal cliff approaches, the clock starts to tick louder. For those who have yet to understand: the fiscal cliff is a soup of expiring tax cuts scheduled for the end of the year.
The core of the fiscal cliff consists mainly of the cuts passed from 2001 to 2003 under then President George W. Bush. There are also across-the-board cuts: the expiration of measures delaying the Medicare Sustainable Growth Rate, and the expiration of the 2 percent Social Security payroll tax cut, among others.
If the federal government allows this to happen, the effect on a still-weak economy may be drastic, perhaps even sending it back into a recession. On the other hand the fiscal cliff can significantly decrease the federal budget deficit. This brings us to the question of possible positive effects for the economy in the long run.
According to some surveys, about two-thirds of Americans do support reduction of the federal budget deficit, even if it means cutting Medicare and Social Security. Aside from this data, it is quite hard to believe that the majority will eagerly give away their money for seemingly no good reason. It is better to not take into consideration some quavering long-term improvement projections for the common citizen who is not keen on economic analysis.
Unfortunately according to the experts, if Obama and Congress do not avert these legislative changes, America may “fall over the cliff.” It will also mean that taxes will rise the most in the last 60 years or so. The Tax Policy Center reports that middle-income families will pay $2,000 or more in taxes in 2013.
In addition to this, the Congressional Budget Office predicts that about 3.4 million people will lose their jobs. The Unemployment rate of 7.9 percent in October 2012 represents a significant improvement over the October 2009 rate of 10 percent. According to research millions of jobs would be lost after the fiscal cliff. This could result in an unemployment rate of up to 9.1 percent or more.
Some say there is a bright side. The cliff would be a long-term positive, they say. Everybody understands that at some point the U.S. government should deal with the deficit. But in what way and when are the questions. The policy of kicking the can down the road may no longer be effective or will at least become so in the near future. So will the short-term disaster be worth the possible benefits? The truth is, it’s hard to tell.
The Congressional Budget Office estimates that by 2022, the budget deficit would fall to $200 billion from $1.1 trillion now, in the fiscal cliff case scenario. But that is a pretty long shot and in order to get there, the economy would have to face certain financial difficulties.
The bottom line is the cliff will certainly result in the tax rate increases. But the problem is that increasing taxes won’t necessarily increase total tax revenue. The only right way to increase tax revenue is for the economy to recover.
So the bottom line may be that the fiscal cliff doesn’t matter that much any more. The U.S. may have passed the point of no return long ago. For everyone with average income there is only one thing that can be suggested. Use everybody’s old favorite: cash, not credit. Congress will eventually have to learn this lesson also and finally cut back on a wasteful spending.