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Avoiding The Fiscal Cliff

President Obama was re-elected on the basis of a "balanced approach" to deficit reduction. Republicans continue to resist any form of tax increase needed to prevent massive tax increases and spending cuts. The two sides have one month to figure things out, or America could see another Great Recession.

Image by George Cassutto
Copyright 2012
Used with Permission

Congress has exactly one month to act before the nation encounters what has come to be called “the fiscal cliff,” though “fiscal slope” my be a more accurate description of what will happen on January 1, 2013. On that date, according to the self-imposed agreement composed by the Supercommittee on correcting the budget deficit, massive tax increases will be imposed on all wage-earners along with across-the-board spending cuts that will impact the defense budget the most along with non-security discretionary spending.

The result of failing to act before this “sequestration” action goes into effect will be wide-ranging. Married couple with two children over the next year will experience a tax hike of over $2,000. Millions of middle class workers will see their taxes go up as they will be caught by the Alternative Minimum Tax. Moreover, thousands of defense contractors and others employed by the federal government will either lose their jobs permanently or be laid off, states will no longer receive grants in aid for education and infrastructure projects, and the federal government will restrict unemployment benefits for those currently depending on them as they look for a job in the wake of the Great Recession. The impact on the economy will be severe, with the possibility of $10 billion less in consumer spending, a reduction of 2% in GDP, essentially placing the US into a sequel of the Great Recession of 2008.

Why won’t Congress and the President come up with a deal with will achieve deficit reduction, economic growth, and the prevention of tax increases that would be detrimental to consumer confidence? President Obama’s campaign, and presumably the mandate he was given by the electorate that brought him back for a second term, has called for a “balanced approach” to deficit reduction. He wants to raise taxes on the 2% of Americans who earn more than $250,000, effectively raising their marginal tax rate by 4%, back to the levels of the Clinton years, before the Bush tax cuts sent the federal deficit into record levels. Hard line Republicans have rejected this modest proposal, holding fast to their no-tax-increase pledge brought to the Republican House by lobbyist Grover Norquist. Some have backed off the pledge, saying they could agree to “revenue enhancements” that avoid raising tax rates but that close loopholes and deduction for the wealthiest Americans. President Obama says that’s not good enough, insisting on tax hikes on the wealthy he thinks are needed to close the federal deficit and begin paying down national debt without taking away from necessary investments such as education and research, Democratic sacred cows he believes are needed for economic growth.

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