What is the Fiscal Cliff?

Let me begin by saying the term “Fiscal Cliff” is misleading.  Before January 1, 2013 the US government collected too little in taxes as a result of various tax cuts.  Also, the US government spent too much money.  After January 1, 2013 various tax cuts expire (read: more tax collection with a caveat) and spending is cut.

So, what exactly is “cliff-like” regarding two steps towards a balanced budget: increased tax revenues (expiration of tax cuts that didn’t help anyway) and cutting spending (of admittedly bloated entities)?

Here is the article.  My interpretation of what constitutes the “Fiscal Cliff”:

  1. The end of the payroll social security tax cut.  SS will go back to 6.2% from the current 4.2.
  2. End of the capital gains and dividend tax cuts.  This will “harm “Bill Gates more than you or me.  Conversely, the tax cuts benefited Bill Gates way more than you or I could imagine.  Just see my post on the trillion dollar increase in net worth of the richest 400 Americans over the past year while the tax breaks were in effect.
  3. Spending cuts agreed to as part of the debt ceiling increase negotiations of 2011.  This includes the military and medicare.
  4. End of certain business tax breaks.
  5. Beginning of taxes related to healthcare reform.
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3 thoughts on “What is the Fiscal Cliff?

  1. What are your views on how this will all pan out? US legislators seem to have an affinity for solving (arguably) or delaying these issues at the 11th hour. Any thoughts? Will the lame-duck session after the elections help or hurt?

    • I do believe our dysfunctional government will wait until the 11th hour. It is frustrating that no one is concerned about the best solution for the American people AND corporations. It is always one or the other.

      Having said that, the article did mention the fiscal cliff event will not be an abrupt event. I think the doom and gloom talk is overstated. The negative consequences will take time to phase in. As they phase in they may actually turn out to be positive.

      My short answer: I do not know what the future holds but I am not stressing about it. Do what you can to ensure your livelihood is robust to fiscal cliff like events.

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