Fiscal Cliff 2016 Forecast, Explained

What is Fiscal Cliff?

Over the past couple of years, you’ve doubtlessly heard the phrase “Fiscal Cliff” in the news. And while you may have a basic understanding, you still may ask yourself, “What is the fiscal cliff?” Because even though a fiscal cliff deal was reached, there is still concern that there could be a fiscal cliff in 2014.

The effects of the fiscal cliff were first felt in January of 2013, when a series of expiring tax cuts and government spending cuts first came into effect on December 31, 2012. The economy was still in the early stages of recovery at that point and there was concern that the two events might cause a “perfect storm” that would negatively impact the economy, causing it to spiral back into a recession. This would have caused consumers to lose confidence, unemployment rates would have skyrocketed again, and it would have cut the incomes of American citizens.

Another of the effects of the fiscal cliff was thought to be more benign; it would have caused a significant reduction of the federal budget deficit. It was widely believed that if President Barack Obama and Congress had not acted, America would have gone over the fiscal cliff. Had this occurred, tax increases, the likes of which the U.S. haven’t seen in over 60 years, would have been inevitable.

Had America gone over the fiscal cliff, these tax increases would have varied anywhere from 15% to 39.5%, depending on household income. Due to concerns about the fiscal cliff, tax rates for most American households went up to $2,000 annually. Another potential effect of the fiscal cliff included up to 3.4 million jobs being lost, pushing the unemployment rate to 9.1%.

It is believed that the Bush-era tax cuts were one of the main effects of the fiscal cliff. The Budget Control Act of 2011 was enacted in an attempt to reach a compromise in the 111th Congress’ failure to pass a budget and a dispute regarding the debt ceiling in the U.S.

One of the effects of the fiscal cliff would have seen a cut to the spending for federal agencies. The American Taxpayer Relief Act of 2012 took care of the tax side of the fiscal cliff. These tax increases were incremental, resulting in a $157.0-billion decline in the federal deficit compared to 2012.

The deal to avert a going over the fiscal cliff was reached at the last minute on January 1, 2013. Under the deal to avert the fiscal cliff, tax increases for individuals who make $400,000 will see an increase of 39.5%. Meanwhile, households that make between $50,000 and $200,000 can expect to see an increase, with tax rates for these individuals going up by up to $1635.

Even though a fiscal cliff deal has been reached, America is not out of the woods yet. With a new round of budget negotiations scheduled to take place on February 7, 2014, America may face another fiscal cliff this year.


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