Finance & Loans

Understanding the looming “fiscal cliff”

There is so much talk about the automatic tax hikes and spending cuts going into effect at the begging of 2013 if the Congress fails to address the impending “fiscal cliff” before the end of the year.  All these are caused by the Budget Control Act of 2011 which is scheduled to go into effect at midnight, December 31, 2012.  It will end the temporary payroll tax cuts allowing a two percent payroll tax increase for employees, end certain tax breaks for businesses, start the Alternative Minimum Tax again taking a larger tax bite on income of many tax payers, and end the Bush-era tax cuts.  In addition, a separate agreement spending cuts agreed as part of debt ceiling deal in 2011 will also go into effect causing impact to over 1,000 government programs including the defense budget and Medicare.

The total is expected at $600 billion tax increases and spending cuts.  Tax increases will amount to about $536 billion which will affect all Americans.  Also included is approximately $110 billion in spending cuts including an eight percent cuts to Federal programs and nine percent cuts to Pentagon budget.  The duel blow, tax increases and spending cuts are known as the “fiscal cliff” and it could send the U.S. into a recession.