Name :- Sahil Shah Roll No :- PG-11-108 Subject :- Assignment on Fiscal Cliff (Internal Assessment) Institute :- IES MCRC

What is Fiscal Cliff?

In the United States, the fiscal cliff was the sharp decline in the budget deficit that could have occurred at the beginning in 2013 due to increased taxes and reduced spending as required by previously enacted laws. The Congressional Budget Office (CBO) had estimated that the fiscal cliff would have likely led to a mild recession with higher unemployment in 2013. The deficit- the amount by which government spending exceeds its revenue was projected to be reduced by roughly half in 2013. Among the changes that were set to take place at midnight on December 31, 2012 were : The end of last years temporary payroll tax cuts (resulting in a 2% tax increase for workers), The end of certain tax breaks for businesses, Shifts in the alternative minimum tax that would take a larger bite, A rollback of the "bush tax cuts" from 2001-2003, and the beginning of taxes related to president Obamas health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 - a total of $1.2 trillion over ten years - were scheduled to go into effect. According to Barron's, over 1,000 government programs - including the defense budget and Medicare were in line for "deep, automatic cuts." of the two, the tax increases were seen as the larger burden for the economy.

The Fiscal Cliff Deal

Three hours before the midnight deadline on January 1, the Senate agreed to a deal to avert the fiscal cliff. The Senate version passed two hours after the deadline, and the House of Representatives approved the deal 21 hours later. The government technically went "over the cliff," since the final details weren't hashed out until after the beginning of the New Year, but the changes incorporated in the deal were backdated to January 1.The American Taxpayer Relief Act of 2012 was signed into law by President Barack Obama 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. The key elements of the deal are: An increase in the payroll tax by two percentage points to 6.2% for income up to $113,700, and a reversal of the Bush tax cuts for individuals making more than $400,000 and couples making over $450,000 (which entails the top rate reverting from 35% to 39.5%). Investment income is also affected, with an increase in the tax on investment income from 15% to 23.8% for filers in the top income bracket and a 3.8% surtax on investment income for individuals earning more than $200,000 and couples making more than $250,000. The deal also gives U.S. taxpayers greater certainty regarding the alternative minimum tax, and a number of popular tax breaks - such as the exemption for interest on municipal bonds remain in place.

The Congressional Budget Office estimates that current plan includes $330.3 in new spending during the next ten years, and it will increase the deficit by $3.9 trillion in that time period despite raising taxes on 77.1% of U.S. households. Bloomberg reports, "More than 80 percent of households with incomes between $50,000 and $200,000 would pay higher taxes. Among the households facing higher taxes, the average increase would be $1,635.

Effects
The effect on discretionary spending will be significant if the sequestration is not avoided. Cuts totalling $110 billion per year will be applied from 2013 to 2022, split evenly ($55 billion each) between defense and non-defense discretionary spending.

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.

Also, it's important to keep in mind that higher taxes were the most important element of the cliff, and taxes are in fact going up as part of the deal. While the problem is therefore "solved" in the sense that the deadline has passed, a portion of the concerns related to the cliff indeed came to fruition. And on a longer-term basis, the cliff deal did little to address the country's debt load - which currently stands at $16.4 trillion and counting.