Fiscal Cliff Deal, its Factual Details and Critical Appraisal including

ImplicationsBy

Sadaf Mehmood ShaikhPA&AS

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Sequence of Presentation:

Fiscal cliff; what it actually is? A background Going over the cliff (failure to reach the

deal) Fiscal cliff deal – Details Critical Appraisal and implications Conclusion References Acknowledgements

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Fiscal Cliff; What it actually is?

The term describes the conundrum that U.S. government would have faced at the end of 2012, when the terms of Budget Control Act of 2011 were scheduled to go into effect.

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A background ( 1/3 ):

Series of contentious disagreements between the Democrats and the Republicans resulting in: Failure to reach deal on $1.2 trillion in

targeted budget savings leading to spending cuts

Downgrade in the US credit ratings (due to debt ceiling fight of August 2011) by Standard and Poor’s

Meanwhile US debt soars to an unsustainable path

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A background ( 2/3 ):

3 Options for US lawmakers: They could have let the policies

scheduled for the beginning of 2013 go into effect. Plus Side: reduced deficit

They could have cancelled some or all of the scheduled tax increases and spending cuts. Flip Side: growing debt

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A background ( 3/3 ):

To take the middle course

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Going over the cliff (failure to reach the deal) ( 1/3 ):

End of last year’s temporary payroll tax cuts, hence 2% increase for workers (from 4.2% to 6.2%)

End of certain tax breaks for businesses

Shifts in Alternative Minimum Tax Roll back of the Bush Tax Cuts from

2001-2003

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Going over the cliff (failure to reach the deal)( 2/3 ):

Beginning of taxes related to President Obama’s health care law

Implications: Higher taxes and spending cuts leading

to reduction in deficit by an estimated $560 billion

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Going over the cliff (failure to reach the deal) ( 3/3 ):

CBO (Congressional Budget Office) estimated possible reduction in GDP and increase in unemployment by 4% and 1% respectively, in 2013

NAM (National Association of Manufacturers) predicted 13% reduction in GDP and 11% increase in unemployment by 2015

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Fiscal Cliff Deal – Factual Details ( 1/3 ):

3 hours before the deadline on January 1, 2013, the US Senate agreed to a deal to avert fiscal cliff and increase the revenue estimated to $620 billion over 10 years.What does the deal contain?

Income Tax Rates: Increased from 35% to 39.6% for

individuals earning more than $400,000 and couples earning more than $450, 000.

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Fiscal Cliff Deal – Factual Details ( 2/3 ):

Estate Tax: Increased from 35% to 40%

Alternative Minimum Tax Adjusted for inflation

Unemployment Benefits Extended for a year

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Fiscal Cliff Deal – Factual Details ( 3/3 ):

Obama tax credits: Child care, tuition and research and

development taxes renewal

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Critical Appraisal / Implications ( 1/3 ):

The deal was cut on eleventh hour on December 31st 2012, despite having ample time of 507 days (since the August, 2011, the debt ceiling agreement)

While the package provides some short-term certainty, it leaves a range of big issues unaddressed.

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Critical Appraisal / Implications ( 2/3 ):

The deal addressed only the tax, and postponed the discussion of spending cuts for another two months.

On long term basis, the deal did little to address the country’s debt load of $16.4 trillion

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Critical Appraisal / Implications ( 3/3 ):

The deal leaves Obama breaking his promise of taxing 2% of wealthiest Americans having income above $200,000

Even though a deal was made to prevent major tax spike , in fact 77% of Americans will pay higher taxes in 2013

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Conclusion:

In short, the fiscal cliff deal continues to let Americans enjoy relatively higher levels of government service at low levels of taxation. The only way that is possible is through heavy borrowing, which future generations will inherit.

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References:

http://www.cfr.org/economics/fiscal-cliff

http://www.economist.com/news/leaders/21569024-troubling-similarities-between-fiscal-mismanagement-washington-and-mess

http://www.forbes.com/sites/beltway/2013/01/03/the-bottom-line-what-the-fiscal-cliff-deal-really-means-for-taxes-and-spending/

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Thank you

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