This article first appeared in the St. Louis Beacon, Nov. 5, 2012 - An important topic that has gotten little attention from the major national candidates is the “fiscal cliff” that the country appears to be hurtling toward. The term, fiscal cliff, is shorthand for the dilemma that the federal government faces at the end of this year when the 2011 Budget Control Act is scheduled to take effect allowing tax rates to soar and government spending to be slashed.
At the end of 2012, unless the president and Congress act to stop it, the provisions of the Budget Control Act of 2011 will end the 2011 payroll tax cuts as well as certain business tax breaks and the 2001-03 tax cuts; it also returns the alternative minimum tax to its higher 2000 threshold and allows the new taxes to support Obamacare to go into effect.
To compound matters, the spending cuts that were part of the 2011 debt ceiling deal will also begin automatically on Jan. 1, 2013 if nothing is done. These cuts will affect moe than 1,000 federal programs including defense, education and Medicare, and will have devastating effects on public services.
As a result of these changes, income tax rates at the low end will jump by 50 percent -- to 15 from 10 percent. At the high end, the tax rate will climb to 39.6 percent from 35. Tax rates in all the in-between brackets will also increase. Taxes on capital gains will also rise if the 2011 Budget Control Act goes into effect.
No one will be spared if the federal government plunges over the fiscal cliff, not even the working poor. Beginning Jan. 1, 2013, the fiscal cliff provisions roll back the temporary 2 percent payroll tax cut that the president and Congress agreed to in 2011.
All told, estimates of the total amount of the increase in taxes are as high as $6 trillion over 10 years, according to the Congressional Budget Office. But what makes the fiscal cliff particularly troublesome is the looming prospect of deep budget cuts in essential services.
According to the New York Times, defense spending would be slashed by 9.4 percent. Most nondefense programs would face cuts of “only” 8.2 percent. Medicare, however, would have a 2 percent cut. The only programs that would be exempt from large automatic cuts would be Social Security, veterans’ benefits, military personnel, Medicaid and the Children’s Health Insurance Program.
The general consensus among most experts, including economists and the nonpartisan Congressional Budget Office, is that -- if the broad tax increases and across-the-board spending cuts are allowed to take effect -- this would more than likely hurl the U.S. back into recession. Just taking into account the nearly $600 billion in tax increases and spending cuts for 2013 alone, the impact of falling off the fiscal cliff exceeds next year’s projected growth of GDP. The spending cuts, according to some predictions, could result in the loss of 1 million jobs in 2013 and 2014. If nothing is done, the Congressional Budget Office projects that unemployment would rise to 9.1 percent by the end of 2013.
Could it be that both political parties are willing to risk a return of recession just to score a political point? The silence may be attributed to both sides probably recognizing that some sort of deal is inevitable no matter who wins in November. But that is a huge gamble to take.
Robert Cropf is a professor of political science at St. Louis University.