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United States fiscal cliff
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WIKIMAG n. 2 - Gennaio 2013
United States fiscal cliff
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In the United States, the fiscal cliff is the sharp decline in
the budget deficit that could have occurred beginning in 2013 due to
increased taxes and reduced spending as required by previously enacted
laws. The deficit—the amount by which government spending exceeds its
revenue—was projected to be reduced by roughly half in 2013. The
Congressional Budget Office (CBO) had estimated that the sharp
decrease in the deficit would have likely led to a mild
recession in 2013 with the unemployment rate rising to roughly 9
percent in the second half of the year.[1]
The fiscal cliff was largely eliminated by the eleventh-hour passage of
the
American Taxpayer Relief Act of 2012.
The previously enacted laws leading to the fiscal cliff had been
projected to result in a 19.63% increase in revenue and 0.25% reduction
in spending from fiscal years 2012 to 2013. Those laws included the
expiration of the
2010 Tax Relief Act and planned spending cuts under the
Budget Control Act of 2011. The former extended the
Bush tax cuts for two years, while the latter was enacted as a
compromise to resolve a dispute concerning the public
debt ceiling and address the failure of the
111th Congress to pass a Federal Budget. Under the fiscal cliff
scenario, some major programs like Social Security, Medicaid, federal
pay (including military pay and pensions), and veterans' benefits, would
have been exempted from the spending cuts. Spending for federal agencies
and cabinet departments would have been reduced through broad, shallow
cuts referred to as
budget sequestration.
The
American Taxpayer Relief Act of 2012 was signed into law by the
President on January 2, 2013 and eliminated much of the tax side of the
fiscal cliff, with the CBO projecting a 8.13% increase in revenue and
1.15% increase in spending for fiscal year 2013. Adjustments to spending
were expected to be hashed out in early 2013. The Act resulted in a
projected $157 billion decline in the 2013 deficit relative to 2012,
rather than the sharp $487 billion decrease projected under the fiscal
cliff. The increase in revenue came from increased marginal income and
capital gains tax rates relative to their 2012 levels for annual income
over $400,000 ($450,000 for couples); a phase-out of certain tax
deductions and credits for those with incomes over $250,000 ($300,000
for couples); an increase in estate taxes relative to 2012 levels on
estates over $5 million; and expiration of payroll tax cuts (a 2%
increase for most taxpayers earning under approximately $110,000). These
changes would all be made permanent. A reduction in spending due to
budget sequestration was delayed for two months under the act and the
debt ceiling was not changed, leading to further debate during early
2013.[2][3]
The House passed the bill without amendments by a margin of 257–167
around 11 pm EST on January 1, 2013,[4]
and President Barack Obama signed it the next day.[5]
Because of the projected short-term impact on the economy, the fiscal
cliff had stirred intense debate and media coverage toward the end of
2012.
Background
Etymology
Budget deficits, projected through 2022. The "CBO Baseline"
(in red) shows the effects of the fiscal cliff under current
law. The "Alternative Scenario" (in blue) represents what
could happen if Congress extends the
Bush tax cuts and repeals the
Budget Control Act-mandated spending reductions.
The term fiscal cliff has been used in the past to refer to
various fiscal issues.[6]
The term started being used in the context of the expiration of the
Bush tax cuts in 2010.[6][7]
In 2011, the term started to be used to refer to the deficit reductions
that would have occurred in 2013 under a fiscal cliff scenario.[6][8]
In late February 2012,
Ben Bernanke, chairman of the
U.S. Federal Reserve, popularized the term "fiscal cliff" for the
upcoming reduction in the deficit.[9]
Before the
House Financial Services Committee he described that "a massive
fiscal cliff of large spending cuts and tax increases" would take place
on January 1, 2013.[6][10][11]
Some analysts had argued that fiscal slope or fiscal hill
would have been a more appropriate analogy because while the cumulative
economic effect over all of 2013 would be substantial, it would not have
been felt immediately but rather gradually as the weeks and months went
by.[6][9][12][13]
Legislative
history
During a
lame duck session in December 2010, Congress passed the
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act
of 2010. The act extended the
Bush tax cuts for an additional two years and "patched"
the
exemptions to the
Alternative Minimum Tax (AMT) for tax year 2011. This act also
authorized a one-year reduction in the Social Security (FICA)
employee payroll tax. This was extended for an additional year by the
Middle Class Tax Relief and Job Creation Act of 2012, which also
extended federal unemployment benefits and the freeze on
Medicare physician payments.[14]
On August 2, 2011, Congress passed the
Budget Control Act of 2011 as part of an agreement to resolve the
debt-ceiling crisis. The Act provided for a
Joint Select Committee on Deficit Reduction (the "super committee")
to produce legislation by late November that would decrease the deficit
by $1.2 trillion over ten years. When the super committee failed to act,[15]
another part of the BCA went into effect. This directed automatic
across-the-board cuts (known as "sequestrations") split evenly between
defense and domestic spending, beginning on January 2, 2013. Also, the
Affordable Care Act imposed new taxes on families making more than
$250,000 a year ($200,000 for individuals) starting at the same time.[16]
At the end of 2011, the patch to the AMT exemptions expired.
Technically, the AMT thresholds immediately reverted to their 2000 tax
year levels, a drop of 26% for single people and 40% for married
couples. Anyone over these reduced thresholds at the end of 2012 would
be subject to the AMT. Therefore, more taxpayers would pay more unless
some legislation was passed (as was done in 2007) that affects the
exemptions retroactively.[14]
The fiscal cliff was finally eliminated at the very last minute
during late night and early morning sessions of congress on
New Year's Eve and
New Year's Day. During a 2 am vote on January 1, 2013, the Senate
passed the American Taxpayer Relief Act of 2012 by a margin of 89–8. The
House passed the bill without amendments by a margin of 257–167 at about
11 pm that same morning.[4]
Eighty-five House Republicans and 172 Democrats voted in favor while 151
Republicans and 16 Democrats were opposed.[17][18]
Key laws leading to the fiscal cliff
CBO projections of the sources of deficit reduction in the
FY2013 budget, not counting economic feedback.
Expiration of 2% FICA payroll tax cut: $95B
(15.65%)
Other expiring tax provisions: $65B (10.71%)
Expiration of federal emergency unemployment
insurance: $26B (4.28%)
Reduction in Medicare payment rates for
doctors: $11B (1.81%)
Other changes (mostly revenue, primarily
reflecting economic growth): $105B (17.30%)
A number of laws led to the fiscal cliff, including these provisions:[19][20]
- Reversion of the Alternative Minimum Tax thresholds to their
2000 tax year levels;
- Expiration of the 2% Social Security payroll tax cut, most
recently extended by MCTRJCA;
- Expiration of federal unemployment benefits, as extended by
MCTRJCA.
Without new legislation, these provisions were to automatically go
into effect on January 1, 2013.[21]
Some provisions increased taxes (the expiration of the Bush and FICA
payroll tax cuts and the new Affordable Care tax and AMT thresholds)
while others reduced spending (sequestration, expiration of unemployment
benefits and implementation of the
Medicare SGR).[19]
Some lawmakers had intended to attach a bipartisan extension to the
expiring
wind-power tax credit.[22]
Unlike the provisions above, this will reduce, not increase,
taxes by $1.3 billion.[23]
Proposals to avoid the fiscal cliff involved repealing legislation
containing certain of these provisions or passing new legislation to
extend provisions that were due to expire. Different proposals were to
include changes to some or all of the above provisions. For example, the
Congressional Budget Office's "Alternative Fiscal Scenario" included
only the first four items above. Changes to other provisions were
sometimes included in such proposals, such as changing the original caps
on discretionary appropriations contained in 2011's Budget Control Act,
indexing the AMT exemptions for inflation (rather than capping them for
one year at a time) or the wholesale or partial reform of the tax laws
and/or the entitlement programs (sometimes called "the grand bargain").[24]
Effects
Effects of
sequestration
U.S. Federal budget deficit as % of GDP assuming
continuation of certain policies for 2012–2022. The baseline
deficit indicates the scenario with the fiscal cliff,
meaning tax cuts expiring and spending cuts applied.
Avoiding the "fiscal cliff" increased the projected deficit.
The spending reduction elements of the fiscal cliff are primarily
contained within the
Budget Control Act of 2011, which directed that both defense and
non-defense discretionary spending[note
1] be reduced by "sequestration" if Congress was unable to
agree on other spending cuts of similar size. The scope of the law
excludes major mandatory programs such as Social Security and Medicare.
As of January 2013, Congress was unable to reach agreement on spending
cuts and the sequestration was delayed until March 2013 as part of the
American Taxpayer Relief Act of 2012.
The effect on discretionary spending will be significant if the
sequestration is not avoided. Cuts totaling $110 billion per year will
be applied from 2013 to 2022, split evenly ($55 billion each) between
defense and non-defense discretionary spending. For scale, discretionary
funding for 2011 totaled $1,278 billion: budget authority of $712
billion for defense and funding totaling $566 billion for non-defense
activities.[24]
During 2013, discretionary spending would be maintained around 2012
levels due to the sequester. However, the spending begins to rise
thereafter, but not at the pace projected prior to the sequester. In
other words, the trajectory of spending increases is reduced, but
spending is not frozen at 2012 levels. Increases in discretionary
spending from 2013–2021 would be about 1.5% annually, significantly
below the prior decade.[24]
For example, according to the CBO Historical Tables, defense spending
(including overseas contingency operations for the wars in Iraq and
Afghanistan) grew from $295 billion in 2000 to $700 billion in 2011, an
annual
growth rate of 8.2%. Non-defense discretionary spending grew at a
6.6% annual rate during that time, from $320 billion to $646 billion.[25]
The austerity represented by the sequester is not unprecedented; from
1990–1999, defense spending actually declined by about 1% annually, from
$300 billion to $276 billion, although non-defense discretionary
spending grew by 4.5% annually, rising from $200 to $297 billion.[25]
The CBO estimated the possible impact on defense spending in October
2011 testimony: "Compliance with the caps on discretionary funding could
occur through many different combinations of defense and non-defense
funding. For example, defense and nondefense appropriations might be cut
proportionally relative to the funding that would be necessary to keep
pace with inflation. In that case, funding for defense programs apart
from overseas contingency operations would drop from $552 billion in
2011 to $538 billion in 2012 before rising again and reaching $637
billion in 2021 (see Table 3).[24]
Between 2012 and 2021, such funding would be $445 billion less than
the amount that would occur if the amount of funding for 2011 grew at
the rate of inflation. When measured as a share of GDP, funding for
defense would decline by about 1 percentage point from 2011 to 2021, or
by more than one-fourth (see Table 5). Funding for defense in 2021
(excluding overseas contingency operations) would represent 2.7 percent
of GDP; by comparison, annual funding for defense (excluding overseas
contingency operations) has averaged 3.4 percent of GDP during the past
decade."[24]
The CBO estimated the possible impact on non-defense discretionary
spending in October 2011 testimony: "If defense and nondefense
appropriations were cut proportionally relative to the funding that
would be necessary to keep pace with inflation, nondefense budget
authority would decrease from $511 billion in 2011 to $505 billion in
2012 before rising again and reaching $597 billion in 2021 (see Table
4). Between 2012 and 2021, budget authority for nondefense purposes
would be $418 billion less than the amount that would be provided if
funding grew at the rate of inflation after 2011. Under an assumption
that the obligation limitations for certain transportation programs grow
over time at the rate of inflation, nondefense funding in 2021 would
represent 2.8 percent of GDP; by comparison, such funding has averaged
4.1 percent of GDP during the past decade (see Figure 6)."[24]
A number of organizations have also argued that significant cuts to
programs included under non-defense discretionary spending would harm
low-income families deeply.[26]
Effects of
tax increases
Various sources have estimated the impact on taxpayers from the tax
increases that would have occurred if the Bush income tax cuts and the
Obama payroll tax cut had been allowed to expire with the fiscal cliff.
The table below shows the dollar and percentage increase in income taxes
for the 2013 tax year, if the fiscal cliff had taken effect.[27]
Income
level |
Single
(1 allowance) |
Married
(2 allowances) |
Married, two children
(4 allowances) |
$50,000 |
$1,693 / 17% |
$1,870 / 32% |
$1,870 / 32% |
$100,000 |
$4,193 / 16% |
$3,272 / 17% |
$3,038 / 18% |
$150,000 |
$5,967 / 15% |
$5,046 / 16% |
$4,812 / 15% |
$200,000 |
$7,467 / 13% |
$6,546 / 14% |
$6,312 / 14% |
$250,000 |
$8,046 / 13% |
$8,046 / 13% |
$7,812 / 13% |
Each piece of the fiscal cliff would have had varying effects on
people at different income levels. Low-income households are most
affected by expiring expansions of the child tax credit and earned
income tax credit. Middle-income households are affected most by the
payroll tax and
income tax. Households at the top income level are most affected by
the income tax and the tax increases on unearned income such as capital
gains.
Although European companies and investors will hardly see any direct
taxation effects, corporate taxation of their U.S. subsidiaries may
change significantly.[28]
Congressional Budget Office projections
CBO scenarios
While Congress was debating actions to take to mitigate the fiscal
cliff, the
Congressional Budget Office provided policy-makers with projections
of two fiscal scenarios for the years 2013 to 2022:[29]
- The baseline projection (if Congress took no action and the
cliff occurred): This scenario would have lower deficits and debt
but also have lower spending and higher taxes.
- The alternative fiscal scenario (another option in which some
laws are changed): This would have had higher deficits and debt but
lower taxes and higher spending.[note
2]
These painted starkly different fiscal futures. If Congress and the
President did not act, allowing tax cuts to expire and mandated spending
cuts to be implemented, the next decade would have more closely
resembled the baseline projection. If they acted to extend current
policies, keeping lower tax rates in place and postponing or preventing
the spending cuts, the next decade would more closely resemble the
alternative fiscal scenario.
U.S. federal debt from 1940 to 2022. The right side of the
diagram projects what would happen to the debt if Congress
(a) allowed the "cliff" laws to take effect and reduce the
deficit (the baseline) or (b) extended the existing
policies, such as keeping tax cuts in place (the
alternative).
Baseline projection. The CBO has been publishing baseline
projections, following existing law, since 1985.[24]
Under the baseline projection (with the "cliff" occurring), tax cuts are
allowed to expire and spending cuts are implemented in 2013, resulting
in higher tax revenues plus reduced spending thus lowering deficits,
debt and interest for the next decade and beyond. Future deficits would
be reduced from an estimated 8.5% of GDP in 2011 to 1.2% by 2021.
Revenues would rise towards 24% GDP, versus the historical average 18%
GDP.[30]
The total deficit reduction or debt avoidance over ten years would
have been as much as $7.1 trillion, versus the projected $10–11 trillion
debt increase under the CBO's alternate scenario. In other words,
roughly 70% of debt increases projected over the next 10 years could
have been avoided by "going over the cliff" and allowing the expiration
of tax cuts and required sequestration expected at the end of 2012.[31]
CBO estimated, under the baseline projection, that public debt would
rise from 69% GDP in 2011 to 84% by 2035.[32]
In the long run, lower deficits and debt would have lead to relatively
higher growth estimates. But, in the short run, real GDP growth in 2013
would have likely been reduced to -0.5% from 1.1%. This would mean a
high probability of recession (a 1.3% GDP contraction) during the first
half of the year followed by 2.3% growth in the second half.[33][34]
Alternative fiscal scenario. If Congress had "avoided" the
fiscal cliff by continuing it's existing policies, the future would have
more closely resembled the CBO's "alternative fiscal scenario." This
scenario involved extending the Bush tax cuts, repealing the automatic
spending cuts, restricting the reach of the AMT and keeping
Medicare reimbursement rates at existing levels (the so-called "doc
fix", versus declining by one-third). Revenues were assumed to
remain around the historical average 18% GDP. Under this scenario,
public debt rose from 69% GDP in 2011 to 100% by 2021 and approaches
190% by 2035. This scenario has considerably higher debt and interest
payments than the baseline projection, but the short-term impact on the
economy would have been avoided.[32]
Projected effects
Overall effects of the fiscal cliff.
The Congressional Budget Office estimates that allowing certain laws
on the books during 2012 to expire or take effect in 2013 (the baseline
scenario) would cut the 2013 deficit approximately in half and
significantly reduce the trajectory of future deficits and debt
increases for the next decade and beyond. However, the 2014 deficit
reduction would adversely impact the economy in the short-run. On the
other hand, if Congress acts to extend current policies (the alternative
scenario), deficits and debt will rise rapidly over the next decade and
beyond, slowing the economy over the long run and dramatically
increasing interest costs.[29]
CBO estimates that if the baseline scenario is allowed to take effect
in 2013, it would reduce federal spending by $103 billion and increase
tax revenues by $399 billion (and another $105 billion "mostly in
revenue") through September 2013 (the end of
FY2013). This would amount to a net total of $560 billion, roughly
half the $1.2 trillion FY2011 deficit.[33]
The White House estimates that a family of four with an income of
$50,000 to $85,000 would pay an additional $2,200 in federal taxes.[35]
The CBO has identified the following metrics for its baseline and
alternative scenarios for the period starting January 2013:[36]
Fiscal or Economic Measure |
CBO
Baseline |
Alternative
Scenario |
Federal deficit in FY2013 |
$641 billion |
$1037 billion |
Economic growth in FY2013 |
−0.5% of GDP |
1.7% of GDP |
Unemployment rate for October thru December 2013 |
9.1% |
8.0% |
Public debt in 2022 |
58% of GDP |
90% of GDP |
Consideration of these scenarios and other options[note
2] leads to what the CBO calls "a broad spectrum of fiscal
policy choices".[36]
Estimated deficit for the first year
The CBO estimated that the
total deficit of
fiscal year 2012 (which ended on September 30, 2012) will be
$1.171 trillion. The CBO also estimated that the total reductions to the
fiscal year 2013 deficit by letting current laws take effect
(which increase taxes and reduce spending) would be about $560 billion.[33]
Therefore, since the total
U.S. public debt was approximately $11.053 trillion as of July 2012,[37]
the public debt will climb by the end of FY2013 to either $11.664
trillion.
Under current laws scheduled to take effect by the end of 2012, the
total 2013 deficit will be $612 billion, as opposed to $1,171 billion
for the previous year. The pie chart to the right contains a breakdown
of the currently authorized reductions to the FY2013 deficit. The total
of this chart is $606 billion but this is without considering economic
feedback. Reduced taxes and increased spending, due to the 1.3%
contraction in the first half of 2013, as well as other constraints, are
expected to decrease the savings by $47 billion, giving a net total of
$560 billion in deficit reduction during FY2013.[33][34]
CBO
analysis of policy options
The CBO reported in November 2012 the economic and employment effects
of various policy options related to the cliff. Each option has a
different GDP and employment
impact per dollar of deficit impact. In other words, some choices
are economically more efficient. CBO explained why spending cuts have a
more significant adverse impact on the economy than tax increases per
dollar of deficit reduction: "The larger 'bang for the buck' next year
of the spending policies under the alternative fiscal scenario occurs
because, CBO expects, a significant part of the decrease in taxes
(relative to those under current law) would be saved rather than spent."[38]
CBO analysis of 2012-2013 ATRA changes
The CBO’s August 2012 “Baseline scenario” assumed revenue would
increase from $2,435B (billion) in 2012 to $2,913B in 2013, an increase
of $478B or 19.63%. It also assumed spending would decline from $3,563B
in 2012 to $3,554B in 2013, a decrease of $9B or -0.25%. The deficit was
projected to be $641B in 2013.[39]
The CBO’s January 1, 2013 analysis of the
American Taxpayer Relief Act of 2012 (ATRA) included adjustments to
the Baseline scenario for 2013 of -$280B in revenues and +$50B in
spending. This lowers the 2013 Baseline revenue projection from $2,913
to $2,633B, an increase of $198B or 8.13% versus 2012 revenues of
$2,435B, while raising the 2013 spending from $3,554B to $3,604B, an
increase of $41B or 1.15% versus 2012 spending of $3,563B. After
adjusting for these changes, the deficit was projected to be $971B in
2013 instead of the $641B projected prior to ATRA, an increase of $330B.
Both deficit projections were below the 2012 deficit of $1,128B by $157B
and $487B, respectively.[40]
Negotiations
Democratic
proposals
Democratic and Republican leaders meet in late November as
part of the fiscal cliff debate.
On July 25, 2012, the Democratic-controlled U.S. Senate voted 51–48
to pass a bill supporting the President's tax proposal which extended
the Bush tax cuts for 98% of taxpayers, while allowing them to lapse for
the top 2%. The Senate also rejected the Republican proposal of
extending the tax cuts for all by 45–54.[41]
The U.S. House of Representatives rejected, 170–257, the President's tax
proposal on August 1, 2012.[42]
During November 2012, President Obama expressed a preference for
replacing the more blunt cuts of the sequester with more targeted cuts,
while raising income tax rates on the top 2% of earners. Senior White
House officials recommended a veto of any bill that: 1) averts defense
cuts while leaving intact non-defense cuts; or 2) excludes an increase
in tax rates for top earners.[43]
Obama wants to continue to extend the
Bush tax cuts for American couples earning less than $250,000 and
individuals earning less than $200,000.[43]
As of November 30, 2012, Obama was calling for an undeclared amount
of spending cuts, $1.6 trillion in higher taxes over ten years, and cuts
of $400 billion from
Medicare and other benefit programs over a decade. Obama also wanted
"an extension of the 2 percentage point payroll tax cut" and spending of
"at least $50 billion" in 2013 "to boost the economy."[44]
Although Democratic Congresspersons have in general supported President
Obama's proposal,[45]
its November version was based on the President's 2013 budget proposal,[46][47]
which Republicans say was rejected unanimously in both the House and the
Senate earlier in 2012.[48]
In March, House Minority Leader
Nancy Pelosi said that the bill proposed by House Republicans for a
vote "was a caricature of the President's budget, so we voted against
it."[49]
Republican
proposals
Congressional Republicans have proposed that the Bush tax cuts be
extended in their entirety.[50]
In August 2012, the CBO estimated that extending these tax cuts for the
2013–2022 time period would add $3.18 trillion to the national debt
relative to the current law baseline, comprising $2.74 trillion in
foregone tax revenue plus another $0.44 trillion for interest and debt
service costs.[51]
On December 3, 2012, Speaker John Boehner proposed a Republican plan
that included $2.2 trillion in deficit cuts over a decade. Revenue would
be generated mainly by reducing tax expenditures (exemptions and
deductions) rather than increasing income tax rates. Further, it
included raising the Medicare eligibility age from 65 to 67 and slowing
increases in Social Security costs by reducing
cost of living adjustments.[52]
On December 18, 2012, Boehner announced that a new "Plan B" would be
taken up by the House.[53]
This plan would raise tax rates for those who earn over a million
dollars.[54]
However, by December 20, 2012, he was forced to pull the measure when it
became clear that House Republicans would not support it.[53]
Other viewpoints
Gang of Eight
As of November 1, 2012, a group of senators, now being referred to as
a
Gang of Eight,[55]
composed of Democratic Whip Richard J. Durbin D-Il., Finance Committee
member Tom Coburn, R-Okla., Budget Committee Chair Kent Conrad, D-N.D.,
Sen. Michael F. Bennet, D-Colo., Sen. Mark R. Warner, D-Va., Finance
member Mike Crapo, R-Idaho., Sen. Saxby Chambliss, R-Ga., and Sen. Mike
Johanns, R-Neb., have been working since 2011 but "[have] so far failed
to reach an agreement after more than a year of talks."[55]
Because of the number of spending cuts and tax changes, at least half a
dozen committees, such as the House Ways and Means and Senate Finance
committees, might want to weigh in on the bill.[55]
Congressional rules allow bills to skip committee hearings, but the
group lacks the clout to "push its plan through Congress outside the
regular order of business".[55]
IRS
In a three-page letter, Steven Miller, acting
IRS Commissioner, outlined the effects of the fiscal cliff and said
that the IRS is working under the assumption that Congress would "patch"
the
Alternative Minimum Tax (AMT). The patch prevents the AMT from
affecting many more taxpayers. This is similar to what Congress has done
in previous years.[56]
The
Congressional Budget Office (CBO) estimated in August 2012 that if
the patch were not implemented, federal revenues would rise by a total
of $864 billion over the 2013–2022 period.[57]
Federal Reserve
On December 12, 2012, the
Federal Reserve announced it would keep short-term interest rates
near zero percent in an effort to lower unemployment to 6.5 percent.[9][58]
However, when commenting on the upcoming fiscal cliff, Federal Reserve
officials "agree that the impact of the bank's stimulus campaign will be
trivial in comparison to the consequences, and the economy will most
likely return to recession."[58]
Treasury
The
US debt ceiling became involved in the fiscal cliff debate when
Treasury Secretary
Timothy Geithner introduced the President's authority to raise the
country's borrowing limit as a part of his first formal proposal.[59]
Although not strictly part of the fiscal cliff,[note
3] the current debt-ceiling will also expire around the end of
the year, unless
"extraordinary measures" are used.[60]
On December 26, 2012, Geithner announced that the federal government
would exceed the current debt ceiling on December 31, 2012. Therefore, a
number of measures would be put into place to delay this from happening,
starting with suspending issuance of State and Local bonds on December
28 and investing in two government pension plans. These and other
measures would normally delay reaching the debt ceiling for about two
months but, because of debate over the fiscal cliff, this might be
extended if there is no change in the current laws.[61]
Defense
According to former Secretary of Defense Robert Gates the deep
across-the-board cuts in defense spending required by the Budget Control
Act will threaten military-dependent local economies and "do great
damage" to American military strength and homeland security.[62]
Others
Many experts have argued that the U.S. should avoid the fiscal cliff
while taking steps to bring the long-term deficit and debt trajectory
under control.[63][64][65][66]
For example, economist
Paul Krugman recommended that the U.S. focus on employment in the
short-run, rather than the deficit.[65][66]
Federal Reserve Chair
Ben Bernanke emphasized the importance of balancing long-term
deficit reduction with actions that would not slow the economy in the
short-run.[64]
Charles Konigsburg, who directed the bi-partisan Domenici-Rivlin deficit
reduction panel, advocated avoiding the fiscal cliff while taking steps
to reduce the budget deficit over time. He recommended the adoption of
ideas from deficit panels such as Domenici-Rivlin and
Bowles-Simpson that accomplish these two goals.[63]
Other experts at the
Center on Budget and Policy Priorities and the
Carlyle Group have argued that allowing the tax increases and
spending cuts to occur under current law may be necessary to create the
"grand bargain" required to get the U.S. deficit and debt trajectory
under control for the long-run. In other words, allowing current law to
take effect would create conditions under which legislators might be
forced to enact better designed deficit reduction approaches of similar
or greater magnitude.[67]
Conservative budget experts have opposed calls to raise taxes or to
allow defense sequestration, and have called on congressional leaders to
return to normal budgetary process. Patrick Knudsen, a
Heritage Foundation fellow, argued that lawmakers should seek
long-term stability by rejecting short-term fixes and "grand bargains."[68]
Summary
This table[69][70]
contains a comparison of the official proposals and counter-proposals
from President Obama and Speaker Boehner, as of December 18, 2012. It
does not include leaked or partial information about one specific aspect
of an offer nor does it include partisan votes in the House or the
Senate.
Dollar amounts are shown in billions.
Budget Category |
Obama#1
Nov 29 |
Boehner#1
Dec 3 |
Obama#2
Dec 10 |
Boehner#2
Dec 14 |
Obama#3
Dec 17 |
Discretionary Spending |
$0 |
$300 |
$0 |
$850 |
$200 |
Health Care |
$350 |
$600 |
$350 |
$400 |
Other Mandatory |
$250 |
$300 |
$250 |
$200 |
Chained CPI for Spending |
$0 |
$150 |
$0 |
$150 |
$125 |
Spending Subtotal |
$600 |
$1,350 |
$600 |
$1,000 |
$925 |
Upfront Revenue |
$950 |
$800 |
$1,400 |
$250 |
$1,150 |
Additional Revenue Through Tax
Reform |
$600 |
$700 |
Chained CPI for Revenue |
$0 |
$50 |
$0 |
$50 |
$50 |
Revenue Subtotal |
$1,550 |
$850 |
$1,400 |
$1,000 |
$1,200 |
Interest |
$225 |
$325 |
$200 |
$300 |
$300 |
Stimulus / Tax Extenders[note
4] |
−$425 |
$0 |
−$425 |
$0 |
−$175 |
Total |
$1,950 |
$2,525 |
$1,775 |
$2,300 |
$2,250 |
|
|
|
|
|
|
Public Debt in 2022 as a
percent of GDP |
74% |
71% |
74% |
72% |
72% |
Partial resolution
American Taxpayer Relief Act of 2012
At around 2 am on January 1, 2013, the Senate passed a compromise
bill, the American Taxpayer Relief Act of 2012, by a margin of 89–8. The
bill faced uncertain prospects in the House of Representatives as
Eric Cantor, the highest ranking Republican in the House after
Speaker Boehner, said on January 1 that he did not support it.[71]
The prospect was raised that the House would pass an amended bill, but
it was determined to be unlikely that the Senate would vote on any
amended legislation before the end of the 112th Congress at noon on
January 3, 2013 (all legislation under consideration expires at the end
of each Congress). The House passed the bill without amendments by a
margin of 257–167 at 11 pm on January 1, 2013.[4]
85 Republicans and 172 Democrats voted in favor while 151 Republicans
and 16 Democrats were opposed.[72]
The act contains the following provisions:[2][3]
- The budget sequestration was delayed by two months, to give time
for further negotiations on deficit reduction. The $24 billion cost
was offset by tax increases, as well as a provision allowing 401(k)
accounts to be rolled over into Roth IRA plans, requiring taxes to
be paid on the assets.
- Marginal income and capital gains tax rates increased relative
to their 2012 levels for those with annual income over $400,000 for
individuals and $450,000 for couples, but the rates below these
levels remained at their 2012 levels. The top income rate increased
from 35% to 39.6%, and the capital gains rate increased from 15% to
20%.
- A phase-out of tax deductions and credits for incomes over
$250,000 for individuals and $300,000 for couples was reinstated.
Limits on deductions had existed before the Bush tax cuts, and had
disappeared in 2010.
- Estate taxes were set at 40% of the value above $5,000,000, an
increase from the 2012 rate of 35% of the value over $5,120,000.
- Changes were made to the alternative minimum tax to index it to
inflation, to avoid its application to middle-class families.
- The two-year old cut to payroll taxes was allowed to expire.
- Federal unemployment benefits were extended for a year without a
budget offset elsewhere, at a cost of $30 billion.
- Some tax credits for poorer families were extended for five
years, including ones for college tuition and an expansion of the
Earned Income Tax Credit.
- The Medicare "doc fix", suspending a decrease in physician
payments due to the
Medicare Sustainable Growth Rate, was be extended for one year.
- A pay freeze for members of Congress was extended, but the
general pay freeze for government workers was not.
- Some portions of the farm bill that had expired in September
were extended for nine months, but without changes supported by
dairy farmers and legislators.[73]
- A number of corporate tax breaks and loopholes were extended,
including the "active financing" tax exemption for major
corporations (cost $9 billion[74]),
a rum tax supporting Puerto Rico rum industry ($547 million in 2009)
and a tax benefit for NASCAR racetrack owners (around $43 million).[75]
In all, the bill included $600 billion over ten years in new tax
revenue, about one-fifth of the revenue that would have been raised had
no legislation been passed. This would be the first year-to-year
income-tax rate increase since 1993. The new rates for income, capital
gains, estates, and the alternative minimum tax would be made permanent.
The passage of the bill came after days of negotiations between Senate
leaders and the Obama administration, with the final agreement being
attributed to talks between Vice President Joe Biden and Senate Minority
Leader Mitch McConnell. Some Democrats criticized the bill for not
raising taxes on the wealthy more, while Republicans criticized it for
raising tax rates while not providing explicit spending cuts.[2][3]
According to CBO, the total deficits for the 2013–2022 period would
be increased by $3,971 billion relative to not passing the bill.[76]
CBO separately indicated in January 2013 that $600 billion in additional
interest costs over the 2013-2022 period were not included in their
initial assessment discussed above. This increases the deficit estimate
to $4,571 billion. While ATRA would reduce short-term economic impact
due to the cliff, it would slow long-term growth relative to the lower
deficit Baseline scenario.[77]
The sequestration fight is now expected to occur during negotiations
over the expected debt limit increase.[78]
Effect of tax law changes for 2013
The table below shows the estimated impact on taxpayers from the tax
increases that occurred with the expiration of the Obama payroll tax cut
and partial expiration of the Bush income tax cuts. The estimated impact
is given as an average for the different income levels. The baseline
that is used is if the payroll tax cut had been extended, new health
care tax not implemented, and Bush income tax cuts fully extended.
Average federal taxes include individual income taxes, corporate income
taxes, payroll taxes, and estate taxes as a percentage of average cash
income.[79]
Income Level |
Average Federal Tax Change |
Average Federal Tax Rate |
Change in % Points |
Under New Law |
$0 – $20,112 |
$120 |
1.1% |
1.9% |
$20,113 – $39,789 |
$367 |
1.2% |
9.5% |
$39,790 – $64,483 |
$679 |
1.3% |
15.6% |
$64,484 – $108,266 |
$1,147 |
1.4% |
19.0% |
> $108,266 |
$5,574 |
2.3% |
28.1% |
|
|
All Income Levels |
$1,257 |
1.8% |
21.7% |
Timeline
- March 23, 2010: President
Barack Obama signed into law the
Patient Protection and Affordable Care Act. One of this law's
provisions is to impose new taxes on families making $250,000 per
year or more starting in 2013.[80]
- December 17, 2010: Obama signed the
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010,
patching the AMT through 2011 and extending the
Bush tax cuts to the end of 2012.[81]
- August 2, 2011: The President signed the
Budget Control Act of 2011. This act provided that, if the
Joint Select Committee did not produce bipartisan legislation,
across-the-board spending cuts would take effect on January 2, 2013.[82]
- February 22, 2012: Obama signed into law the
Middle Class Tax Relief and Job Creation Act of 2012, which
extended the following provisions until December 31, 2012: the 2%
Social Security payroll tax cut, federal unemployment benefits and
the freeze on Medicare physician payments.[83]
- February 29, 2012:
Ben Bernanke popularized the term "fiscal cliff" in his
testimony before the
House Financial Services Committee.[10][11]
- July 3, 2012:
IMF head
Lagarde warned that the threat of "going over the fiscal cliff"
could weaken the U.S. economy later in 2012. The IMF also reduced
its projection for U.S.U.S. growth in 2013 from 2.4 to 2.25 percent
of GDP.[84]
- July 17, 2012:
Bernanke pushed Congress to avoid the fiscal cliff, warning that
a failure to do so will further dampen the sluggish economic
recovery.[64]
- July 31, 2012:
Reid and
Boehner agreed on a
continuing resolution that would pay for the day-to-day running
of the government until the end of March 2013. This does not affect
the fiscal cliff or the debt-ceiling.[85]
- August 7, 2012: Obama signed the Sequestration Transparency Act
of 2012, which directed his administration to detail in 30 days how
they plan to implement the automatic cuts mandated by the Budget
Control Act.[86]
- September 14, 2012: Obama released a 400-page report[87]
listing his proposal for spending cuts.[88][89]
- October 22, 2012: At the third of three
presidential debates, Obama says sequestration will not happen.[90]
- November 16, 2012: President Obama met with Republican and
Democratic congressional leaders to discuss the fiscal cliff and to
try to come up with their initial plans immediately after the
Thanksgiving break.[91]
- November 28, 2012: Certain Republicans, such as
Orrin G. Hatch (R-Utah), supported "modifying tax expenditures
as a way to raise revenue."[92]
- November 29, 2012: Treasury Secretary
Timothy Geithner delivered a proposal containing $1.6 trillion
in new taxes, $50 billion in stimulus spending, and $400 billion in
federal health savings over the next decade. As part of the
proposal, the President wanted an extension of the 2% payroll tax
cut and authority to raise the debt ceiling.[59][93]
- December 3, 2012: Both
Republicans and
Democrats remain in the early stages of negotiations for a
possible solution.[94][95][96][97][98]
Republicans proposed adding $600 billion in spending cuts by
increasing the Medicare eligibility age from 65 to 67 and reducing
Social Security benefits.[98][99]
However, both parties continued to ridicule each other's proposals,[100]
such as when
Jay Carney called a proposal "magic beans and fairy dust"[98]
or when Boehner called a proposal a "La-La Land offer."[99][101]
- December 5, 2012: Senate Minority Leader
Mitch McConnell (R-Ky.) offered to vote on President Obama's
proposal, as proposed by Treasury Secretary Geithner, as an
amendment to H.R. 6156, the Russian trade bill, in the Senate.[101][102][103][104]
However, Senate Majority Leader
Harry Reid, (D-Nev.), prevented the vote.[101][102][103][104]
Reid's reported reasons was that the Russian trade bill "is to
protect American jobs"[101][103]
and "there is no Geithner proposal."[104]
McConnell said he would introduce the bill as "a stand-alone vote."[101][104]
- December 5, 2012: Confirming leaks from the White House,[105][106][107]
Treasury Secretary
Geithner told CNBC that the Obama Administration is "absolutely"
willing to go over the fiscal cliff if Republicans refused to back
off from their opposition to raising rates on wealthier Americans.[100][108]
- December 13, 2012: Both parties have publicly stated the
negotiations are at a stand still.[109][110]
Several commentators have reported that a deal is not expected until
after December 25, 2012 but not before December 30, 2012.[109][111][112][113][114]
Furthermore, one commentator described the parties as "playing
familiar roles in a largely choreographed drama."[115][116][117][118]
- December 15, 2012: In confidential talks, Boehner proposed an
increase in tax rates for those who earn over a million dollars.[119]
- December 17, 2012: According to media reports, various proposals
were exchanged between President Obama and House Speaker Boehner to
deal with the fiscal cliff. These included: changing the
Consumer Price Index for entitlements to a
"chained" CPI,[119][120][121]
allowing marginal tax rates to increase on income over $400,000,[120][121]
a one- or two-year increase in the debt ceiling[120][121]
and increasing the eligibility age for Medicare from 65 to 67.[121][122]
- December 18, 2012: Speaker Boehner announced that the House
would vote on a "Plan B", which would raise tax rates on people
earning more than a million dollars a year.[54]
- December 20, 2012: "Plan B" was pulled from consideration in the
House because the Republican leadership could not find enough votes
to pass the legislation.[123]
This was seen as a defeat for Speaker Boehner.[53]
- December 21, 2012: With just 10 days left before the end of the
year, President Obama scaled back his proposals and urged Congress
to adopt stopgap measures to: prevent taxes from rising on income
under $250,000 a year, restore unemployment benefits and "lay the
groundwork" for budgetary action next year.[124]
- December 26, 2012: The
U.S. Treasury Department announced that it will begin a series
of measures, similar to the ones taken in the summer of 2011, to
delay exceeding the current 16.4 trillion dollar debt ceiling.[61][125]
- December 27, 2012: Obama cuts short a vacation to
Hawaii
and returns to Washington D.C. in a last-chance attempt at a deal
regarding the fiscal cliff.[126]
- December 28, 2012: According to confidential sources,[127][128][129][130][131]
the 112th Congress could not pass legislation to avert the fiscal
cliff until January because Congress would not meet until December
31, 2012.[132]
The 113th Congress is scheduled to convene January 3, 2013 at 12 pm.[132]
- Four bills are being discussed.
-
H.R. 8, the Job Protection and Recession Prevention Act of
2012 (which was later renamed the
American Taxpayer Relief Act of 2012), would extend the
expiring 2001 and 2003 Bush-era tax cuts for one year.[1]
- H.R. 6684, the Spending Reduction Act of 2012, would prevent
the scheduled sequestration cuts.[2]
- Senate-passed Middle Class Tax Cut Act (S. 3412), which was
voted on in the Senate in July 25, 2012, would extend for one
year the Bush-era tax cuts on the first $ 250,000 of income
reported on joint returns and would patch the alternative
minimum tax for 2012, but not 2013.[3]
- H.R. 15, the House-passed Middle Class Tax Cut Act, mirrors
the Senate-passed bill with substantial similarities.[4]
- Late December 28, 2012: Speaker Boehner and President Obama
turned negotiations over to Senator
Harry Reid and Senator
Mitch McConnell to create a last minute agreement.[133]
Boehner stated the House of Representatives "would act on whatever
the Senate could produce."[133]
- December 29, 2012: Reid and McConnell proposed various plans to
avert the fiscal cliff, but confidential sources say both Senators
"were still far apart from a deal."[134][135][136]
For the Senators' positions, see
this Politico newspaper video. Various elected U.S. officials
said they are concerned how the fiscal cliff negotiations will
impact their reelection campaigns and the public image of the U.S.
Congress.[134][137]
- December 30, 2012: Because Senate leaders could not produce a
fiscal cliff agreement deal, Vice President
Joseph R. Biden Jr. decided to become part of the negotiations.[138]
When reporters asked Senator Reid if negotiations were continuing,
Reid said "Talk to Joe Biden and McConnell," which signified that
negotiations between Reid and Senator McConnell have ended.[138]
- Early December 31, 2012: According to confidential reports,
negotiations were proceeding well.[137]
- Late December 31, 2012: An unnamed source in the Obama
administration reported that a temporary deal had been reached that
would delay harsh spending cuts by two months, postponing the
potential "falling off" to at least March 2013.[139]
- At around 2 am on January 1, 2013, the Senate passed a
compromise bill, the American Taxpayer Relief Act of 2012, by a
margin of 89–8. The bill would delay the budget sequestration by two
months, and increase marginal income and capital gains tax rates
relative to their 2012 levels for annual income over $400,000 for
individuals and $450,000 for couples. A phase-out of tax deductions
and credits for incomes over $250,000 would be reinstated from the
times before the Bush tax cuts. The two-year old cut to payroll
taxes would expire, while estate taxes would increase, and changes
would be made to the alternative minimum tax to avoid its
application to middle-class families. These changes would all be
made permanent. In addition, federal unemployment benefits would be
extended for a year without a budget offset elsewhere.[2][140]
- The afternoon of January 1 it was reported that House
Republicans had expressed "anger" over the Senate-passed deal,
potentially jeopardizing its passage.[141]
The House nonetheless passed the
American Taxpayer Relief Act of 2012 (H.R. 8) that evening with
two thirds of the supporting votes coming from Democrats and one
third from Republicans.[142]
- Late on January 2, 2013, Obama signed into law the official copy
of the bill that Congress had passed the previous day.[143]
See also
Notes
-
^ Discretionary
spending is that part of the federal budget that Congress
generally controls through annual
appropriation acts including the
cabinet departments and
federal agencies. This is as opposed to mandatory spending:
those "self-funded" programs (such as
Medicare and
federal crop insurance) that have had their expenditures
written into their "enabling acts"; that is, the acts that
created them.
In 2011, discretionary spending totaled about $1.35 trillion,
accounting for close to 40 percent of federal expenditures.
Slightly more than half of the discretionary money went for
defense. The rest of the discretionary spending funded a wide
variety of government programs and activities, including
education, veterans' benefits, public health and the
administration of justice.
- ^
a
b
The Alternative Scenario
incorporates the following assumptions over the Baseline: (a)
Expiring tax provisions (other than the FICA tax cut) are
extended, (b) the AMT is indexed for inflation after 2011, (c)
Medicare's payment rates for physicians are held constant and
(d) the automatic sequestrations do not occur.[29]
Both scenarios would have allowed the federal unemployment
benefits and the 2% FICA payroll tax cut to expire. Both would
have implemented the original caps on discretionary
appropriations contained in 2011's
Budget Control Act and allowed the new taxes for the
Affordable Care Act to come into effect.
-
^ This is because
the debt ceiling is not a factor in the budget process per se;
if the deficit is increased above the debt ceiling then that
debt must be authorized in what has historically been a separate
process.
-
^ These provisions
are basically corporate tax credits or specific spending
authorizations, which are set to expire from time to time and
therefore must be renewed (or made permanent) if Congress wants
that particular effect not to run out. They act against
the primary purpose of avoiding the fiscal cliff, either
increasing spending or decreasing taxes.
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1)
scrivi
le parole inglesi dentro la
striscia gialla 2)
seleziona il testo 3)
clicca "Ascolta il testo"
DA INGLESE A ITALIANO
Inserire
nella casella Traduci la parola
INGLESE e cliccare
Go.
DA ITALIANO A INGLESE
Impostare INGLESE anziché italiano e
ripetere la procedura descritta.
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