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'Fiscal cliff' combines tax hikes, spending cuts

  • Speaker of the House John Boehner, R-Ohio, talks about the elections and the unfinished business of Congress, at the Capitol in Washington, Wednesday, Nov. 7, 2012. The first post-election test of wills could start next week when Congress returns from its election recess to deal with unfinished business — including a looming "fiscal cliff" of $400 billion in higher taxes and $100 billion in automatic cuts in military and domestic spending to take effect in January if Congress doesn't head them off. Economists warn that the combination could plunge the nation back into a recession. (AP Photo/J. Scott Applewhite)

WASHINGTON — So just what is this "fiscal cliff" that has the financial markets rattled and economists and policymakers alike in a tizzy over the potential for sending the economy into another tailspin?

It's a one-two punch of expiring Bush-era tax cuts and major across-the-board spending cuts to the Pentagon and domestic programs that could total $800 billion next year, based on Congressional Budget Office estimates.

The cliff is the punishment for previous failures of a bitterly-divided Congress and White House to deal with the government's spiraling debt or overhaul its unwieldy tax code.

The largest component of the cliff comes with the expiration of tax cuts enacted in 2001 and 2003 and extended two years ago in the wake of President Barack Obama's drubbing in the 2010 midterm elections.

It also includes sharp spending cuts imposed as a consequence of the failure of last year's deficit-reduction supercommittee" to reach agreement. There are other elements, chiefly a 2 percentage point cut in payroll taxes orchestrated by Obama and unemployment benefits for the long-term jobless that would disappear.


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