The U.S. economy has reached a point where if the government does not come to an agreement on how to reduce the deficit by December 31, 2012, the consequences could lead to another recession. Going over the fiscal cliff would involve an increase in taxes on all societal levels including businesses. Essentially, it involves the enacting of the Budget Control Act of 2011, which was signed by President Obama on August 2, 2011.
According to Tax Policy Center, some of the provisions under this act include a conclusion to the temporary Bush-era tax cuts, an influx of taxes coming from Obama’s Affordable Care Act (ACA), the end of the earned income credit, and a rise in taxes on 401(K) or other types of retirement plans.
If the White House and Congress, particularly the Republicans in the House, do not come to an agreement by the end of this year, several things may occur starting January 1, 2013. The Tax Policy Center’s report reveals that in 2013 taxes will increase by $500 billion, which amounts to about $3,500 per family. The middle class could see their taxes rise to around $2000, while upper income families will be taxed at greater levels as a result of new taxes brought about by Obama’s health care law.
A report by the Congressional Budget Office (CBO) estimates that if the U.S. were to go off the fiscal cliff with all of the tax increases being implemented and budget cuts, the economy will contract causing employment to fall creating an unemployment rate that could go back to 9.1 percent. Ernst & Young also came out with a report detailing the impact of raising taxes on the top income earners in the country. Their findings revealed that if such an action were to take place, employment would fall by 0.5 percent, which would cause a loss of about 710,000 jobs and decreasing salaries. The report also cautions that if the revenue received from the higher taxes is used towards entitlement spending, it could cause further harm to the economy and further increase unemployment.
So far, the White House and the House, are at a standstill as far as coming to an agreement. A second round of talks have recently occurred between President Obama and House Speaker John Boehner, but the two have yet to agree on terms that both parties would accept. While Obama’s current proposal involves increasing taxes on the top 2 percent, he has not addressed spending cuts or entitlement reform. Boehner has not signaled any concession to raising taxes on high income individuals, but has stressed to the president that cuts to entitlements and spending need to take place.
Whether an agreement will be reached before the end of the year is still unknown. However, it is clear that going over the cliff could cause damage to the economy, which could take years to recover from. As a result, the U.S. could very likely go into another recession, which is something the country simply cannot afford.