The Fiscal Cliff and You

December 18, 2012

eHow Money

Newspaper headlines across the United States have reverberated with the drama as the country slides inexorably toward the Jan. 1 fiscal cliff. That’s when a double whammy of major tax increases and federal spending cuts will strike the country if not forestalled.

“Fiscal cliff stalemate spurs anxiety in states,” warned several newspapers across the country on Dec. 10. “As ‘fiscal cliff’ looms, voter angst is palpable,” they cautioned the next day. The nonpartisan Congressional Budget Office has said that failing to resolve the tax hike and spending cut collision would push the unemployment rate back over above 9 percent.

Some economists, however, say they believe the “cliff” could more closely resemble a “slope.” They say they think the country will feel the effect of the spending cuts and tax increases gradually instead of all at once. And lawmakers could reach compromises soon after that fateful date, further lessening the blow.

But as of mid-December 2012, no agreement had been reached.

So the questions remain: Just what is the fiscal cliff? If no agreement is reached to avert it, how will it affect Americans? And is there anything citizens can do to prepare for it?

Income taxes have been a major source of confrontation between the president and congressional Republicans. The Republicans insist on extending Bush’s tax cuts for everyone, while President Obama wants to leave out the wealthiest 2 percent.

Additionally, tax rates on capital gains and dividends would almost double, said Maclyn Clouse, a professor of finance at the University of Denver’s Daniels College of Business.

Clouse said he believes most of the spending cuts won’t be immediately noticeable. Cuts to defense spending, for example, “will not affect what I do on Jan. 2 or Jan. 3,” he said.

However, Clouse noted, many federal programs of all sizes could eventually be affected. He pointed to an Associated Press story raising the possibility that a program providing home heating oil to needy New England residents could fall victim to the fiscal cliff.

As is the case with taxes, Congress could restore some of the spending reductions after the deadline.

Clouse said there is some sentiment among financial experts the government should let the country dive over the cliff.

“We’re going to have to do these things (tax increases and spending cuts) at some point in time if we’re ever going to get this deficit under control,” he said. “Maybe in that sense it’s not that bad. We don’t seem to have the political agreement to do some of these things voluntarily.”