What is fiscal cliff

She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.

He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer. His background in tax accounting has served as a solid base supporting his current book of business. The fiscal cliff is a combination of five tax increases and two spending cuts that were scheduled to occur on January 1, The economy would have contracted 1. The five tax increases were the December 31, expiration of three tax cuts and a tax credit.

The renewal of those taxes would occur on January 1, , the same day a new tax would begin. First was the expiration of the Bush tax cuts. The second was the expiration of the 2 percent payroll tax holiday enacted by the Obama tax cuts.

On January 1, , workers would have an additional 2 percent Social Security taxes taken out of their paychecks. The third was the end of the alternative minimum tax AMT patch. The AMT was initially set up to capture wealthy tax dodgers. The fourth was the expiration of tax credits expanded by the American Recovery and Reinvestment Act.

These included expansions of the Earned Income Tax Credit, which provides aid to low-income workers. Extensions of the child credit and the American Opportunity tax credit, which helps families pay for college tuition, would also have expired. The fifth was the increase from new Obamacare taxes. That was a 3. The two spending cuts were the expiration of the extended unemployment benefits and sequestration. The sequester would have cut 10 percent on average out of the federal budget.

If the fiscal cliff had occurred, it would have thrown the economy into recession. The rest would have come from the following reductions in federal spending:. Although the economy would have recovered in the second half, the growth would be only 2.

Congress didn't take action on preventing the cliff until the last minute. The uncertainty began slowing economic growth in May Businesses and investors knew Congress wouldn't take action until after the presidential election. The two candidates held widely different philosophies on the best way to reduce the debt.

Democratic incumbent President Obama favored allowing the tax cuts to expire on the wealthy. Republican contender Governor Mitt Romney preferred to keep the tax cuts but reduce non-defense spending. As the closely contested campaign raged on, business leaders waited. We could talk until we're blue in the face about this quiz on words for the color "blue," but we think you should take the quiz and find out if you're a whiz at these colorful terms.

Origin of fiscal cliff First recorded in — Words nearby fiscal cliff First World War , firth , fisc , fiscal , fiscal agent , fiscal cliff , fiscal drag , fiscally , fiscal policy , fiscal year , Fischer.

How to use fiscal cliff in a sentence He rightly references the looming fiscal cliff s that Social Security and Medicare face as their trust funds approach insolvency.

Merry Christmas, Defense Contractors! In , Congress approved a temporary reduction in the Social Security payroll tax. However, that may not have been the end of the impact of the fiscal cliff on Social Security. Social Security has a lot of moving parts, and lawmakers from both sides of the aisle believed that making changes to Social Security, in addition to the lapse of the payroll tax cut, could raise much-needed revenue.

There were principally two bullish arguments regarding the fiscal cliff. First, the Congress will not readily allow it to happen, and second, that maybe it wouldn't be so bad if it did happen.

Taking a very different track, there was also an argument that the cliff itself would be a long-term positive. Few argue that the U.

Although the short-term impact could be severe recession in , the bullish argument would hold that the long-term gains lower deficits, lower debt, better growth prospects, etc. That would all be welcome news, but in order to get there, the nation would face almost certain financial turmoil. Lawmakers met at the White House over this issue. Both sides called the meeting productive, but neither side indicated that a deal was imminent.

Democrats wanted to see more revenue tax increases , especially from the nation's wealthy, as part of any deal. Republicans favored more spending cuts, especially to entitlements like Medicare. While both sides subscribed to different philosophies concerning taxation, each had indicated that they were willing to compromise on many of the more critical issues leading to Jan.

Three hours before the midnight deadline on January 1, the Senate agreed on a deal to avert the fiscal cliff. The key elements of the deal included an increase in the payroll tax by two percentage points to 6. The deal also gave U. Tax Laws. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. It is called fiscal cliff because the spending cuts and tax increases would withdraw that much spending or fiscal stimulus from the economy.

Obama feels the need for stimulus spending to revive economy, while Republicans argue that US can't go on spending borrowed funds. Republicans are not ready to extend the limit unless there are spend cuts to address debt issues.

It warns unemployment could rise to 9. However, some experts have argued that if the US is not able to avoid the cliff then it would be a long term positive.

The immediate repercussions of the US not avoiding fiscal cliff would be volatility in the global financial markets. A flight to safety could also mean further pressure on the already depreciating rupee.

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