The Fiscal Cliff

According to The New York Times, the fiscal cliff is a “more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1 — for fiscal year 2013 alone — unless Mr. Obama and Republicans reach an alternative deficit-reduction deal.” What does the fiscal cliff look like? What was the compromise the federal government reached on New Years Day? What is the public reaction to all this and what will the future hold for us?

Federal Reserve chairman Ben Bernanke coined the metaphor “fiscal cliff” when describing the United States financial future. The fiscal cliff is part of a realization within government that it spends more money, and adds more debt faster than it takes in money or can pay off in debts.

The amount of division between Washington politicians is at an all time high. The Democrats want to keep funding several of the big social welfare programs, such as Medicare and Social Security. They feel that the wealthiest Americans should be paying more in taxes. The Republicans want to give those same wealthiest Americans tax breaks and incentives to grow their business. They feel we need to cut unnecessary spending on our social welfare programs. Democrats believe in larger government control. Republicans believe in smaller government control. All agree we have to do something about our national debt crisis. According to The New York Times, “their main disagreement is a familiar one.”

America was set to go over “the cliff” on Jan 1st if an agreement could not be reached in Washington.

To avoid a panic,Vice President Joseph R. Biden Jr. and the Republican Senate leader, Mitch McConnell, worked furiously with the senators to get this deal passed as soon as possible before the stock market opened Wednesday the 2nd.

Hours into the new year Congress hammered out a compromise that would keep the country running for few more months. The New York Times explains, “in a predawn vote two hours after the deadline passed to avert automatic tax increases, Congress overwhelmingly approved legislation on Tuesday Jan 1st that would allow tax rates to rise only on affluent Americans while temporarily suspending, across-the-board spending cuts.” The vote was passed 89-to 8 with 3 Democrats and 5 Republicans voting no.

The New York Times reports “tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear victory for President Obama, who ran for re-election vowing to impose taxes on the wealthy.”

How does the average citizen reacted to all this? A new Washington Post-ABC News poll gives us some answers. By a narrow margin, Republicans voters disapprove of the way the Republican Speaker of the House Boehner negotiates. And when voters look at just Obama and Boehner, head-to head they still favor Obama. According to the poll, “53 percent of voters say they approve of the way Obama handled the matter, while 40 percent disapprove.” Regarding the agreement reached, “67 percent of Democratic voters approve of the overall deal; 68 percent of Republican voters disapprove.”

What this all means it that we are all going to be paying more in taxes. The federal government is going to keep borrowing more money to pay for programs, which are getting too big to keep running at their current size.  And the government is just going to keep growing, unless Republicans in the house have any say about it. All this is still causing investors and business to hold back their money. We still are “kicking the can down the road,” so to speak. Politicians, again, gave up some small things, not willing to make any really serious compromises. Our future generations will still be paying large parts of our national debt in the years to come. In a few months time, unless something drastic happens in Washington, we will have to sit down again and do this all over again. My advice? Listen closely to the arguments and proposals and let your congressmen and women know what you think.

References:

Investopedia

The New York Times

Washington Post