Primer on what's at stake and proposed solutions

  • Updated: December 8, 2012 - 6:56 PM

The fiscal cliff? The term refers to the combination of forced cuts and tax increases, worth more than $500 billion.

Primer on what's at stake and proposed solutions

Q What is the fiscal cliff?

A The term refers to the combination of forced cuts and tax increases, worth more than $500 billion. The best-known parts are the expiration of the George W. Bush-era tax cuts and the automatic across-the-board cuts to federal spending.

Q If that's all that is involved, what is all of the talk of deficits, debt ceilings and other taxes have to do with the cliff?

A The roots of the deadline are in the Budget Control Act of 2011. Congress had to increase the debt limit so that the government could continue to borrow money but conservatives balked unless the increase was coupled with spending cuts. When the dust cleared, caps were placed on some spending, the debt limit had been increased by $2.1 trillion and a supercommittee of Congress had been charged to find spending cuts worth $1.2 trillion over 10 years.

Q Were $1.2 trillion of spending cuts found?

A No. Because the panel couldn't reach agreement, automatic spending cuts will be triggered beginning Jan. 2 -- a practice known as sequestration. Most analysts agree that defense would take a hit of about 9.4 percent. Civilian spending would lose about 8.2 percent, including a 2 percent cut to Medicare providers and additional cuts to programs such as Head Start.

Q That's the spending portion of the cliff, what about taxes?

A The part of the tax package that has gotten the most publicity has been the Bush-era tax cuts. Tax cuts were approved in 2001 and 2003 that brought down tax rates for everybody and those cuts are set to expire Dec. 31.

Q Is it just the income tax rate at stake?

A No. There are a range of tax policies that expire at the same time. For example, the tax extenders, including some business tax breaks and limits on the alternative minimum tax, also expire. About 4 million pay the AMT, but unless Congress acts, that number could jump to around 28 million, the Tax Policy Center said. That could add $3,700 a year in taxes to many payers' bills. Also set to end is the holiday on the payroll tax, which temporarily dropped from 6.2 to 4.2 percent. If that is not extended, the typical worker will have to pay another $1,000 a year in taxes. Also, the emergency unemployment benefits that have allowed out-of-work people to get money beyond the usual 26 weeks (or 39 weeks in high unemployment states), expire at year's end.

Q How do the parties want to solve the fiscal cliff?

A President Obama's proposal, about $1.6 trillion over 10 years, is based on the idea of increasing the share of the revenue paid by the wealthy, individuals earning more than $200,000 a year and couples who annually earn more than $250,000. It would allow tax rates for the wealthy rise to what they were before the Bush-era cuts, worth about $442 billion. It would also include changes to the value of some deductions, end breaks on capital gains and dividends and raise taxes on estates and gifts.

Republicans want all of the expiring tax rates be extended. They seek to raise $800 billion over 10 years through curtailing tax breaks. By changing the way the inflation formula is computed, Republicans are also seeking to slow spending increases in programs such as Medicare and Social Security. The GOP proposal also calls for $600 billion in cuts to health care programs, including an increase in the eligibility age for Medicare and more testing to shrink health benefits for the affluent elderly. Obama has proposed $400 billion in Medicare and other savings.

Q What happens if the nation jumps off the fiscal cliff?

A It could be mean recession longer term. Cuts in government spending, coupled with higher taxes that decrease consumers' purchasing power usually mean a drop in production and a loss of jobs.

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