Following the re-election of President Obama last week, Washington’s current priority is tackling the oncoming fiscal cliff that could possibly put the United States back into a recession.
The United States faces $1.2 trillion in tax increases and spending cuts if Congress cannot find a way to decrease the deficit that totaled over $1 trillion in fiscal year 2012. Issues at hand are the debt ceiling, reductions in defense and non-defense spending, the Bush-era tax cuts and more. If nothing is done to prevent the fiscal cliff, it will lead to the highest increase of the deficit in one year since 1969.
Currently, visible effects stemming from the fears of the oncoming fiscal cliff take their place in the stock market. Last week, The New York Times reported that Standard & Poor’s 500 stock index fell 17 points, or 1.2 percent, the lowest level since early August. Many investors are worried about the effects of the fiscal cliff and the likelihood of the United States entering a recession in early 2013
Failure to compromise means automatic cuts in spending. Ten percent of every defense program will be cut, translating to $55 billion overall. The same amount of money will be taken from education and the Transportation Security Administration. More worrisome, however, is that the Bush-era tax cuts are set to expire Dec. 31. While they were originally meant to do so two years ago, Obama agreed to extend them on the condition that Republicans in Congress agreed to extend unemployment benefits. If the Bush-era tax cuts expire without a compromise on their replacement, income tax rates will increase exponentially, the child tax credit will be cut in half and the American Opportunity Tax Credit, a tax credit for college students, will expire.
In response to worries over the fiscal cliff, Obama said that he does not want to raise taxes on middle-income families, seniors and students, but explained that he believes that the wealthiest Americans should have to pay more in taxes than they do currently. He has also said that he will provide tax credits to businesses that create jobs and provide education for people looking to expand upon skills that can gain them employment.
Meanwhile, Republicans in Congress have a different plan to avert the oncoming financial crisis. They remain completely opposed to raising the taxes on wealthy Americans to percentages as high as the Clinton-era tax rates. Speaker of the House John Boehner (R-OH) has declared that raising taxes would “destroy 700,000 American jobs,” according to The Washington Post, because the tax increase would likely affect small business owners above many other Americans.
Last week, the Congressional Budget Office reported that if a compromise over the fiscal cliff is not reached, the economy will fall into a recession, and the unemployment percentage is likely to reach 9.1 percent by next autumn, if not before. They also report that the spending cuts and tax increases would cut the deficit by $503 billion over the course of the next year, but that it would cost the nation millions of jobs. However, if the Bush-era tax rates were extended, the nation’s gross domestic product would expand by 2.2 percent. Additionally, if Obama’s desire for the extension of unemployment benefits is met, the GDP will continue to expand to almost three percent.
While a long deadlock in Congress is not expected, it would be better to see a bipartisan compromise reached long before the deadline.