What is the "fiscal cliff"?
The "fiscal cliff" is an inept metaphor for the looming consequences of some bad congressional decisions.
On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect. That's equal to about 4 percent of GDP, which is, according to the Congressional Budget Office, more than enough to throw us into a recession (more on that later).
Analysts disagree on exactly how quickly the recession would begin.
That's why the "cliff" metaphor is inept. If financial markets freak out, it might happen very quickly, proving the "cliff" imagery correct. But it might happen gradually, affirming those who've argued it's a "slope." Either way, both parties agree it shouldn't be permitted to happen at all. But that's the rub.
The reason that the fiscal cliff could push us into another recession in 2013 is because it enacts too much deficit reduction upfront, not too little. And yet, deficit reduction is something most members of Congress support, at least in the abstract.
So both sides want to replace the fiscal cliff with something. The question is,with what? What is the fiscal cliff in one sentence? Much too much austerity, much too quickly.
If it's not a cliff, what is it?
The term "fiscal cliff " comes from testimony Federal Reserve Chairman Ben Bernanke delivered before Congress earlier this year. But, as we mentioned, the imagery has sparked some dissent. The Center on Budget and Policy Priorities thinks it's more of a "slope." The Economic Policy Institute calls it an "obstacle course." We call it the "austerity crisis." That solves two problems. First, the danger the economy faces is too much austerity too quickly, so swapping the term "fiscal" for the word "austerity" actually better reflects the situation. Second, while we don't know if it'll be a cliff or a slope, we do know it will, if permitted to go on for long enough, be a crisis. Thus, the "austerity crisis."
What's in it?
Taxes. Five tax measures have provisions expiring at year's end: 2001/2003 George W. Bush tax cuts. These cut individual income tax rates, pared back the estate tax, lowered rates for investment income, such as capital gains and dividends, and expanded a number of tax credits, including the child tax credit.
According to the Economic Policy Institute, these would cost $203 billion next year if extended
2009 stimulus. This included expansions of the earned income tax credit, which provides aid to low-income workers, as well as the child credit and the American Opportunity tax credit, which helps families pay for college tuition. Extending these would cost $10 billion next year.
Payroll tax holiday. This was included in the December 2010 tax deal and slashed the payroll tax rate on employees from 6.2 percent to 4.2 percent. Extending it would cost $115 billion next year.
Alternative minimum tax. Intended as a baseline tax for high earners, the AMT is not indexed for inflation and will hit a lot of middle-class taxpayers if not "patched" before next year. A patch would cost $114 billion.
Extenders. This is the catch- all term tax wonks use for corporate tax breaks that need to be extended regularly. Doing that again, as per usual, would cost $109 billion.