With the 2012 election behind them, congressional leaders and President Obama will turn their attention toward a series of expiring tax provisions and automatic spending cuts scheduled to take effect at the beginning of 2013: the so-called “fiscal cliff.” Both parties and the president want to avert many of, if not all of, the pieces of the fiscal cliff puzzle, which includes defense cuts, cuts to domestic spending, and the end of the Bush tax cuts. Here’s what you need to know about the situation facing Congress come January:
— The Middle-Class Tax Hike: House Speaker John Boehner (R) won’t consider tax increases on the wealthy, he said this week, and President Obama has said he won’t sign an extension of the high-income Bush tax cuts. The parties agree on 98 percent of the cuts — those aimed at the middle class — but Republicans have refused to negotiate an extension of those cuts (which also benefit the rich) without an extension of the high-income tax cuts as well. Multiple recent studies have shown that high-income tax cuts don’t stimulate economic growth or job creation, a central claim in the GOP’s defense of them.
— The Payroll Tax Cut Expires: While the focus has largely revolved around the expiration of the Bush tax cuts, the most dangerous tax provision is the expiration of the payroll tax cut, a middle class tax cut that Republicans largely opposed when it came up for renewal earlier this year. After the issue was largely ignored by elected officials through 2012, Congressional Democrats have finally called for extending the payroll tax cut. The Economic Policy Institute estimated that the cut’s expiration would deliver one of the fiscal cliff’s biggest hits to economic growth next year.
— Austerity-Like Spending Cuts: In all, the fiscal cliff represents a bigger dose of austerity than even austerity-happy European countries have instituted. The spending cuts that would go into effect starting in January pose a greater risk to the economy than expiring tax cuts, according to Congressional Budget Office reports. However, the effect would be slow to kick in, making the fiscal cliff really more of a “fiscal slope.” As the Center on Budget and Policy Priorities put it, “if there is no agreement by January 1, policymakers will still have some (although limited) time to take steps to avoid the serious adverse economic consequences that the Congressional Budget Office (CBO) outlines
— The Debt Limit Is Back: Meanwhile, the U.S. is also on pace to hit its borrowing limit near the end of the year, setting up another fight over raising the debt ceiling. The “fiscal cliff” is itself a creation of the last debt limit fight, when Republicans insisted on massive spending cuts in exchange for raising the debt ceiling. That fight led to the downgrade of the nation’s credit rating, cost the U.S. as many as one million jobs, and increased the nation’s borrowing costs.