Five Things You Need to Know About the ‘Fiscal Cliff’

    Where do you stand on the so-called “fiscal cliff,” which the U.S. economy may or may not be stepping off of at midnight Dec. 31?

    Before you answer, read over this list of five things you need to know about the “fiscal cliff.”

    1. What is the “fiscal cliff”?

    In simple terms, it is a law that requires across-the-board spending cuts and the expiration of several tax cuts, unless Congress and President Obama can reach an agreement before Dec. 31, 2012. It was enacted by Congress in the summer of 2011 after Democrats and Republicans came to an impasse over raising the debt-ceiling limit. They passed the “Budget Control Act” to force themselves to deal with the exploding deficit. The Budget Control Act calls for $1.2 trillion in automatic budget cuts over 10 years, $1.2 billion of which is due to happen in 2013.

    The debt ceiling is a legislative instrument enacted in 1917 to force the president and Congress to be more accountable with fiscal policy. When they get close to the prescribed debt ceiling, the president and Congress usually just vote to raise it higher, which they have done 10 times in the last 10 years. The current debt ceiling is $16.694 trillion, and the United States will go over that unless it solves the “fiscal cliff” crisis. That could cause calamity in the financial markets.

    2. Where did the term “fiscal cliff” come from?

    Federal Reserve Chairman Ben Bernanke is credited with popularizing (not coining) the term when he told the House Financial Services Committee that, “Under current law, on January 2, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.’’ That was on Feb. 29 of this year and headlines on newscasts that night and in newspapers around the country the next day seized on the phrase “fiscal cliff.” However, two weeks before that, a Reuters news agency story was headlined “Fiscal Cliff looms for United States.” Reuters generously punted credit, saying the term was already popular on Capitol Hill.

    The oldest usage of the term dates to an article in The New York Times in 1957 that talked about homeowners going over a fiscal cliff. A 1982 editorial in the Chicago Tribune  read: “Should the economy worsen or Congress approve all the new budget cuts proposed for the next year, a number of states are sure to go over the fiscal cliff.” According to the New Words Committee of the American Dialect Society, “fiscal cliff” is battling “Gangnam Style,” “Frankenstorm” and “YOLO” (You only live once) for word of the year.

    3. Will you feel it if we step off the cliff?

    Yes, your taxes are definitely going up if we step off the cliff. The White House estimates that the average American family of four will pay an additional $2,200 in taxes if the Bush tax cuts expire.  Then there is the 2 percent Payroll Tax Cut that also could expire Dec. 31 and cost middle-income families an additional $672-$1,135.  The Alternative Minimum Tax also could expire, which would mean about 30 million households would be hit with an additional tax of $100 or more. Finally, other tax credits for children and education could expire. If all of these taxes are allowed to expire, it will add an estimated $536 billion in revenues to the U.S. Treasury, or about $3,500 per household for middle-income earners.

    4. What about spending cuts?

    The U.S. military is going to be the hardest hit, with $55 billion in cuts expected in 2013, if an agreement is not reached. The Defense Department has begun working on cuts of 10 percent in more than 80 areas. Medicare payments to doctors would be cut by 30 percent, or about $14 billion. Federal benefits for the unemployed, which supplement state funds for payments up to 99 weeks, would end. The Congressional Budget Office forecasts a rise in unemployment to 9.1 percent, and the economy will shrink by 0.5 percent.

    5. What are people saying about this?

    The thoughts are as diverse as the subject. Here is a smattering from random sources:

    Wisconsin Republican Congressman Paul Ryan, reported by The Daily Caller: “We’re nowhere. We’re farther than where we started. He (President Obama) took 40 minutes to reject the deal. That leads us to conclude he’s trying to get us to our fiscal cliff.”

    Financial commentator Peter Schiff: “We can’t keep avoiding the pain and in the process making the problem worse, because then we’re just going to have even more pain in the future to fix an even bigger problem.”

    Clay Cosby, University of Kansas student: “A failure to compromise on this issue, whether the cliff is only a matter of perception or not, would further characterize the dysfunction of the government and negatively impact our democratic process.”

    David Fry at Exchange Trader Funds Digest: “Most of you remember the hype and angst over Y2K in late 1999, no doubt. But it turned out to be a non-event. The fiscal cliff seems profound in a different way, but may result in just another shrug.”

    The People’s Daily, official newspaper of China: “A country such as the United States that is accustomed to telling other nations to be responsible, should, on the one big problem concerning the future of the global economy, show itself to be a responsible power. … This proves the U.S. political system has problems and lacks the responsibility that a big nation should have.”

    In debt? We can help!

    • Amount
    • Type
    • Contact

    How much do you owe?

    What can we help you with today?

    Related Articles

    CFPB changes rules regarding payday loans

    Payday Loans Face Tough Rule Changes from CFPB

    The Consumer Financial Protection Bureau has proposed new rules aimed at putting more responsibility on payday loan lenders and their crippling triple-digit interest rates. The CFPB proposals would require lenders to determine before making a loan whether ...

    Continue Reading
    Auto Sales Slow Because of New Legislation

    New Legislation May Slow Record-Breaking Car Sales

    Analysts predict record-setting sales for the automobile industry over the next year, though feuding between government leaders over whether discrimination exists in car financing could slow things down. WardsAuto Dealer Magazine says that new car sales ...

    Continue Reading
    Student Cap on Money

    Borrowers Get Another Way To Repay Student Loan Debt

    The U.S. Department of Education (DOE) announced it was imposing regulations to prevent colleges from steering students to specific debit and prepaid cards for use with federal grant and loan money. The DOE also said that it was dramatically improving ...

    Continue Reading
    Debt is Due Now On Paper

    CFPB Orders Debt Collection Agencies To Refund Millions

    The 77 million Americans pursued and often harassed by debt collection agencies won a moment of relief when the Consumer Financial Protection Bureau (CFPB) ordered the nation’s two largest debt buying companies to stop collecting on $128 million in debt and ...

    Continue Reading

    Alleged Student Loan Debt Scams Face Lawsuits

    Another round of alarms sounded in the trillion-dollar student loan crisis when the Illinois Attorney General accused two student loan debt settlement firms of scamming borrowers. Illinois Attorney General Lisa Madigan sued First American Tax Defense and ...

    Continue Reading
    CashCall mortgage information

    CFPB Files Lawsuit Against CashCall for Illegal Online Loan Servicing

    The Consumer Financial Protection Bureau (CFPB) sounded the alarm about online loan services, filing a lawsuit against CashCall Inc., for collecting exorbitant amounts of money the bureau says consumers didn't owe. It is the first time the CFPB has sued an ...

    Continue Reading
    Speaker of the House John Boehner speaks before the budget deal

    U.S. House Passes Budget Deal; Senate Likely to Follow Suit

    Democrats finally scored a victory in the U.S. House of Representatives on Thursday, joining Republicans to pass the Bipartisan Budget Act by a stunning margin of 332-94. The unanticipated truce in the neverending battle among House members pushes the bill ...

    Continue Reading
    President Barack Obama speaking

    Federal Government Reopens, Cloud of Uncertainty Passes for Now

    The cloud of financial ruin threatening the U.S. and world economy floated away Wednesday, but it will be back. President Barack Obama and Congress made sure of that when they approved a measure to raise the debt limit and reopen the federal government, ...

    Continue Reading
    Get Help Now

    Overwhelmed with debt? You have options for lower monthly payments!