Fiscal Cliff: What happens if Congress can't strike a deal?
The deadline is fast looming, and we're still some way from a deal. So how would tax, spending and the economy be affected?
The United States looks set to leap, eyes wide open, off the fiscal cliff, as an enormous $560bn package of tax increases and government spending cuts will land together on January 1. The fear is that taxes and spending cuts will hurt consumers and cause unemployment to rise, which in turn will slow down the US economy. The economy has made only meager progress toward growth in the past two years.
The fiscal cliff is a creation of the US Congress, which could not agree on a yearly budget that would also help the country reduce its deficit, or long-term debt, of $1.3tn. To resolve the impasse in August 2011, the Congress decided to push the big decisions off by 17 months. Now the 1 January deadline looms, and with little sign of a deal in Washington, so too do tax hikes and automatic spending cuts.
So what happens if the US begins the New Year by going over the fiscal cliff?
The tax hikes, which will hit 90% of Americans, come from the expiration of two stimulus measures: the Bush-era tax cuts and the payroll tax holiday. The Tax Policy Center estimates that the combined effect of the tax hikes will raise taxes by an incredible $500bn over the next decade, which means a $3,500 increase in the yearly tax bill for the average American.
The first and biggest tax hike is end of the so-called Bush tax cuts – a package of tax cuts for Americans of all income levels introduced by President George W Bush in 2001 to stimulate a sluggish economy after the technology boom ended, and which have been kept in place since then.
The U.S. Treasury estimated that the elimination of the Bush tax cuts will raise taxes by $849bn over the next decade. That would work out to about $2,200 a year in increased taxes for the average middle-class family, according to the National Economic Council and the president's Council of Economic Advisors. It would also include halving the tax credit usually given to families with children to $500 per child.
A major casualty would be the elimination of unemployment benefits to 2.1 million Americans who are long-term unemployed. Those benefits are due to expire, and Barack Obama has urged Congress to extend them as part of any deal. The benefits are worth about $30bn, according to the Congressional Budget Office, or just under one-third of all the unemployment benefits the government paid out last year. More Americans will lose their benefits over the course of the next few months.
At the same time as all these tax hikes and benefit cuts, there will also be a big slash in government spending, to the tune of $984bn cut from the federal budget between now and 2021.
Congress agreed last year that every year for the next 10 years, it would cut government spending by $110bn a year – half from defense spending, and half from batches of other government programs such as Medicare, which would take a 2% cut to pay doctors who provide healthcare. The cuts would also hit programs like farm subsidies, student loan support, national parks, and assistance to those living in low-income housing as well as big agencies including the Federal Bureau of Investigation and the Environmental Protection Agency.