Getting Acquainted With the Fiscal Cliff

Getting Acquainted With the Fiscal Cliff December 21, 2012

In the month after President Obama’s reelection, the first major hurdle facing the country is how to handle the threat of the fiscal cliff.  But what exactly is the fiscal cliff?  By definition, the fiscal cliff is the steep edge of a financial situation.  The term was first used in 2010, in reference to the original expiration of the Bush tax cuts.  Later, in 2011, it was used to refer to deficit reductions that would occur after the expiration of the renewed Bush tax cuts.  The fiscal cliff, in present terms, refers to a more than half budget spending cut by governmental programs that will fall into effect in 2013.

A long set of terms set by the Budget Control Act of 2011 will expire at midnight on December 31, 2012, and lawmakers in the House, Senate, and in the White House must figure out how to resolve the expiration, which had previously given tax breaks to businesses, established the 2011 debt ceiling, and funded over 1,000 government programs.  One of the major hurdles facing the resolution of the fiscal cliff is that a bipartisan compromise seems nowhere in sight.  Even more troublesome is that all proposed scenarios of a compromise could potentially end with a further recession, an increase in the national debt, or a limited impact that would only push back resolution to a further date.

According to Huffington Post’s Aruna Viswanatha, on December 2, 2012, U.S. Treasury Secretary Timothy Geithner pressed Republicans to “offer a plan to increase revenues and cut government spending,” with an expressed intent of raising tax rates on wealthier Americans to avoid the fiscal cliff.  The cuts would return tax rates to Clinton-era numbers and effectively deflate the deficit over time, according to the Geithner.  Despite Geithner’s suggestion, House Republicans proposed their own strategy on December 3, which would keep the Bush-era tax cuts in place, and instead focused on proposing a plan that would cut a higher percentage of funding to farm subsidies, Medicare, Social Security, and Medicaid.

As of Monday, December 3rd, 2012, neither side had reached an agreement, serving as one of many failures of the Obama Administration and the GOP to reach common ground on the issue of financial importunity.  As the deadline approaches, many are left wondering if compromise is even a viable option in the divisive political climate.  In the wake of reelection, many are wondering if this first critical action will end in bipartisanship, or a bitter power grab by both sides over political dominance.  Regardless, many millions of Americans will be affected by the outcome of the new terms and limits, cuts and expenditures, or renewals and amendments to the terms as they stand.

With the potential quagmire of the fiscal cliff facing legislators, the next big obstacle for Americans is right around the corner.  In the first quarter of the coming year, the “debt ceiling” will be reached once again, and the legislators will be called into action.  The precedent they set in determining the outcome of the fiscal cliff may very well be a sign of “business as usual” in the never-ending gridlock between the Obama Administration and the GOP.

Angie Picardo is a staff writer for NerdWallet, an analysis driven website dedicated to helping consumers find the best credit cards for all their spending needs.

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