Fiscal

Cliff FAQs

What is the fiscal cliff? The fiscal cliff is a nearly $600 billion combination of tax hikes and indiscriminant spending cuts set to take effect on January 2, 2013. The cliff is twice the size of GDP growth this year alone. The term was coined by Fed Chairman Ben Bernanke in February of 2012. The fiscal cliff is comprised of seven legislative components: The expiration of the 2001/2003 tax laws. The expiration of the Alternative Minimum Tax. The expiration of the payroll tax holiday. The introduction of new taxes in the Affordable Care Act, including the Medical Device Excise Tax and the 3.8 percent tax on people earning $250,000 or greater. The trigger of sequester spending cuts, defense and non-defense. The expiration of the current rate for Medicare physician reimbursements (SGR). The expiration of the current Unemployment Insurance policies.

The fiscal cliff is not the debt ceiling nor is it necessarily the avenue for tax reform or entitlement reform. The existing components of the fiscal cliff are large as is. What will happen if Congress fails to avert the fiscal cliff? The Congressional Budget Office, independent economists and the business community have warned that going over the fiscal cliff will cause a recession and could drive unemployment up to at least 9 percent. Tax rates will increase for all families and many businesses, while harmful spending cuts will hit government programs -- both defense and non-defense, threatening the security of our economy and our country. AAF calculations -- using the Administration's own math -- found that going over the fiscal cliff will cause job losses between 2.8 and 10 million, bringing unemployment above ten percent, and sparking a 6 percentage point drop in GDP. Furthermore, our calculations found that an increase in the top effective individual tax rate from 35 percent to 42 percent would lower a small business likelihood of adding jobs by 18 percent. Ratings agencies have also warned of another debt downgrade if Congress fails to avert the fiscal cliff. Going over the cliff will not only cause great economic distress in the United States, but the effects will likely be felt around the globe. Is the fiscal cliff already hurting the economy? Reports indicate that businesses are already preparing for the fiscal cliff. Hiring, growth, and investment has slowed as businesses look at the policies scheduled to become law on January 2, 2013. Can the effects of the fiscal cliff be delayed? No. The fiscal cliff is already being felt. Getting to 2013 without a solution will cause a recession. If the United States goes back into recession, it will make solving the larger debt crisis even more difficult.