As little time remains for an agreement to be met by parties on Capitol Hill to avoid the “fiscal cliff” the anxiety continues to grow as negotiations continue on how to avoid the “fiscal cliff”. In the United States, the “fiscal cliff” refers to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the United States’ budget deficit beginning in 2013 if existing laws remain unchanged.

Why are we at the fiscal cliff?

The “fiscal cliff” has been on the horizon for two years yet we are right on the edge of falling off the “fiscal cliff”. What will happen if an agreement is not reached by the parties on Capitol Hill and we fall off the “fiscal cliff”? The Washington Post reports that the failure to reach a deal by December 31, 2012, will result in automatic spending cuts and tax rises will be triggered. It all comes down to the fiscal policy which is the government’s borrowing, spending and taxation decisions. If a government is worried that it is borrowing too much, it can engage in austerity – raising taxes and cutting spending. Alternatively, if a government is afraid that the economy is going into recession it can engage in fiscal stimulus cutting taxes, raising spending and raising borrowing.

Looking back over the history of our government, the taxes and spending cuts involved in the fiscal cliff will be the be the largest tax increase since World War II, at about 3.5 percent of GDP. The fiscal cliff is a historic income tax cliff. It will result in the highest tax rate on individual income (39.6 percent) since 2000, the highest tax rate on capital gains (23.8 percent) since 1997, and the highest tax rate on dividends (43.4 percent) since 1986. Economic theory and evidence indicates these are among the worst kind of tax increases for the economy. As a result, most economists, including those at the Federal Reserve and the Congressional Budget Office, think this will lead to a recession in the first half of 2013. Arguably, this would be the first recession created by a tax increase since 1969, or, before that, the Great Depression. The fiscal cliff will be the first major tax increase since World War II to occur under a Republican controlled House of Representatives. (

So what exactly does this mean for United States’ citizens if we fall off the “fiscal cliff”?

Simply put, everyone’s income will be reduced because of taxes in one form or another.

On December 31, 2012, a raft of temporary tax cuts is due to expire, just as huge automatic spending cuts are introduced. Individuals and companies will be hit simultaneously with tax rises and reductions in government contracts, benefits and support. Some six hundred and seven billion dollars ($607,000,000,000.00) of cuts and tax rises are planned, including reductions in the defense budget, the end of an employee tax holiday, changes to Medicare allowances and higher personal taxes. The lower-income individuals/families will lose some child and income credits, while the long-term unemployed will lose their right to continue drawing benefits.

What is the main point of controversy preventing an agreement and avoiding the fiscal cliff?

The political intention behind the cliff is that both sides have too much to lose: 1) Republicans are loath to allow the Bush-era tax cuts for high income earners to expire or defense spending being slashed; and 2) Democrats want to maintain President Obama’s temporary measure to help the unemployed and low-income earners, and to avoid deep cuts in non-defense spending.

What happens with Medicare if the fiscal cliff is avoided?

The Washington Post reports that “if an agreement is reached, taxes would go up a bit for the very wealthy. But there would be no changes to entitlement programs, such as Medicare and Social Security, and no grand strategy to raise more cash through a simpler tax code. Instead of a fresh start for the new Congress and Obama’s second term, Washington is likely to be mired in the battle over the budget for months.”

President of the bipartisan Committee for a Responsible Federal Budget states that “[a] small deal solves virtually nothing . . . We still have to find ways to cut spending, reform entitlements, raise more revenues and get the debt under control.” However, according to the Denver Post, “President Barack Obama urged Congress on Saturday to at least pass a short-term measure that would avert major tax-rate increases for most Americans in the new year while continuing to press for a comprehensive deal to avoid the “fiscal cliff” of severe budget cuts and tax increases.”

What happens next?

Next up is a debate over the federal debt limit, which is $16.4 trillion. The United States federal debt limit is set to hit its limit on Monday, December 31, 2012. Thereafter, according to Treasury Secretary Timothy F. Geithner states he can juggle the books for about two months before the nation runs out of cash to pay its bills. Federal employees have been put on notice of a possible furlough, which is the placing of an employee in a temporary non-duty, non-pay status because of lack of work or funds. An administrative furlough is a planned event by an agency which is designed to absorb reductions necessitated by downsizing, reducing funding, lack of work, or any other budget situation other than a lapse in appropriations.

Medicare Pathways is concerned about the “fiscal cliff” and will continue to follow all the reports that are being released. As more information becomes available, the information will be posted. We use reliable sources of information so that only the most accurate and up-to-date information is provided to you. Please feel free to share this link with your friends so they too can stay up to date on the latest news regarding the “fiscal cliff”. Medicare Pathways is a family owned business that has been in business for over 20 years and takes much interest in the financial status of our country.


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