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Could 'fiscal cliff' push US into recession? Four questions answered

Congress’s most trusted budgetkeepers – the nonpartisan Congressional Budget Office (CBO) – warned in a report Tuesday that if Congress does not deal with a raft of fiscal measures by Dec. 31, some $560 billion in drastic budget cuts and tax hikes will result.

On one hand, that would cut the US federal deficit in half. On the other, it “probably” would send the US into recession, the report says. So what is the fiscal cliff and what is Congress doing about it? 

- Staff writer

In this file photo, President Obama signs the bill that extended the Bush-era tax cuts and other benefits two years – until Dec. 31, 2012. The tax cuts are one part of the 'fiscal cliff.' (Jim Young/REUTERS/File)

1. What is the fiscal cliff?

The fiscal cliff is Washington shorthand for the huge number of significant provisions that will either expire or take effect at midnight on Dec. 31 if Congress does nothing. The implications both for the US budget and for American taxpayers would be massive. They include:

  • Bush tax cuts, AMT, and more ($221 billion): Unless Congress acts, the Bush tax cuts will expire, as will estate- and gift-tax provisions that cut many Americans’ tax bills. In addition, Congress needs to “patch” the Alternative Minimum Tax – as it does every year – if it is to avoid hitting many middle-class Americans with a tax originally designed to target only the wealthiest. 
  • Payroll tax ($95 billion): Unable to come to a long-term deal in February, Congress agreed to extend a 2 percentage point cut in the Social Security payroll tax to Dec. 31.
  • Extended unemployment benefits ($26 billion): As part of the same February deal, Congress agreed to continue some extended unemployment benefits though the end of 2012, as well.  
  • Sequester ($76 billion): As part of the deal to raise the debt ceiling last summer, Congress agreed on automatic cuts to defense on social spending. Both parties say they hate this sequester, which would take effect Jan. 1, but neither has found a way forward that is acceptable to the other side. 
  • Other ($83 billion): A hodgepodge of other provisions include businesses being able to expense investment property ($65 billion). There is also a new tax on unearned income for Americans making more than $250,000 per year ($18 billion) – instituted to help pay for President Obama’s health-care reform law. 

If you’re counting, that all adds up to $607 billion, but the CBO estimates that the government will take in $47 billion less than projected due to the shock all these taxes and spending cuts will have on the economy.

Voilà, $560 billion.
 


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