There’s been a lot of talk lately about what’s known as the “fiscal cliff,” and a lot of Americans may be wondering what exactly that is, or how exactly they would be affected. Well, if there’s one thing you can count on it’s that most taxpayers in this country will be affected if a number of laws remain unchanged after December 31.
Essentially, the fiscal cliff is a package of tax increases and spending cuts that would take effect in January unless Congress passes a budget deal before then. Going over the cliff would result in a slowdown in economic growth due to a reduction in spending by consumers and the government. Economists say the results could be devastating, possibly sending the economy into recession during the first part of next year.
How would you be affected if Congress fails to act? About 90% of Americans would see their taxes increase, according to the Tax Policy Institute. Middle income families would have to pay an average of about $2,000 more in taxes next year. For most American households, the biggest increases would come from the expiration of the temporary cut in Social Security taxes and the expiration of the 2001 and 2003 Bush tax cuts. Low income households would be hit hard by the expiration of tax credits that were created or expanded by the 2009 stimulus.
Not only would your taxes be affected, but possibly your job. The fiscal cliff would cause up to 3.4 million jobs to be lost, according to the Congressional Budget Office. The unemployment rate could hit 9.1%, up from the current rate of 7.9%, and Wall Street could get pummeled. When measured as a percentage of the economy, the tax increases would be the worst to hit Americans in 60 years, and that means not only individuals would suffer; small businesses would also get hit pretty hard.
The hope is for the White House and Congress to reach a deal before the end of the year in order to avoid both the tax increases and spending cuts. What’s delaying that deal is lawmakers’ inability to agree on how to change the laws and how to go about balancing the budget -- where to cut spending, cut or increase taxes, etc. President Obama said last week that he’s willing to compromise with Republican leaders. But he said he’d veto any bill that would extend tax cuts for individuals with an income above $250,000. At the same time, Republican House Speaker John Boehner argues that higher tax rates on upper-income Americans would slow job growth, because that’s more money out of their pockets and business owners would hire fewer workers. Republicans’ general goals are to reduce tax rates, rein in government benefits and eliminate budget loopholes for special-interest groups. For the most part, Democrats don’t agree.
HLN Money Expert Clark Howard says the possibility of the fiscal cliff is already changing the employment landscape because it could be devastating to the livelihood of small businesses in America.
“We have a clock ticking,” Clark said, “and at the end of this year, we’re going to have massive tax increases and spending cuts all come in concert unless the Republicans and the Democrats and the President learn to sit down in the same room, be civil with each other and make a deal,” Clark said. “So if I own a business, I’m in total fear about what happens to my sales and profits.”
The fear that lawmakers won’t reach a deal and the thought of what could happen is enough to have already slowed hiring. Some companies worried about getting hit said they’re delaying bringing in new employees.
“Businesses are in terror,” Clark said. “Capitalists hate uncertainty, and the House is still where it was before the election, the Senate and the President the same. And so the question is, how are they ever going to learn to talk to each other and make a deal on the budget?”
Spending cuts would have a significant impact on doctors who accept Medicare, which would most likely cause many of them to change their plans, giving Medicare recipients fewer options for care. The cuts would also hit people who get unemployment aid, and with the job market as lousy as it is, that puts a lot of people in a pretty tough spot.
“I hope they don’t kick the can down the road,” Clark said. “What I hope happens is that with Wall Street talking so loud and probably moving forward as well, that it’ll create a sense of urgency on the part of the White House and the Congress to cut a real deal with real teeth that will address the current and long-term deficit of the country. If they do that, it will create a new level of business confidence.”