In the context of government, the word “fiscal” means “of or relating to government revenue, especially taxes.”
Mamta Badkar reports for Business Insider, May 17, 2012, that investors and analysts everywhere are warning of the fiscal cliff that is approaching at the end of 2012 that could significantly hit the American economy. Unless Congress acts, more than $600 billion in tax and spending provisions will change at the end of the year. And this will impose fiscal restraint at a time when the U.S. economy is growing very gradually.
The “fiscal cliff” refers to a number of different policies that are set to change at around the same time, most on January 1, 2013. Together, they will amount to significant fiscal tightening that will hurt the economy:
1. The 2001 and 2003 tax cuts are going to expire:
This includes the current schedule of marginal tax rates, expanded credits and deductions for middle income households. Most Democrats and Republicans are in favor of extending the middle-income tax provisions, while most Republicans are in favor of extending the upper-income provisions.
2. The Alternative Minimum Tax (AMT) will hit more people:
The AMT was enacted to prevent individuals and households with high income from using deductions and tax breaks that enabled them to pay little or no taxes. The AMT establishes a minimum tax — generally 28% — on income above a certain exemption amount. This amount is not indexed for inflation but is usually increased every year or two by Congress. Failing to extend the AMT relief would result in $132 billion in additional tax liabilities, most of which would come due in the second quarter of 2013.
3. Payroll tax cut will expire:
Congress lowered the Social Security payroll tax on employee wages from 6.2% to 4.2% starting January 2011, and then extended it through the end of 2012. Payroll taxes will increase by about $120 billion in 2013, if the tax cuts expire.
4. The Sequester will slash domestic and defense spending:
The super committee’s failure to reach an agreement last year meant that spending cuts will take effect January 2, 2013, unless Congress acts sooner. This would reduce spending by $86 billion in CY2013 (calendar year), mostly through cuts to discretionary spending and roughly half of this would fall on defense spending.
5. Unemployment benefits will run out:
Emergency unemployment compensation (EUC) and extended benefits (EB) pay benefits of about $3.7 billion per month to about 3.1 million jobless workers who have used up the 26 weeks of benefits. Under current law, EUC and EB are both set to half payments after the end of the year 2012. Over the next several months about 700,000 individuals are likely to lose eligibility. Expiration would cut payments to individuals by about $34 billion in CY2013, compared with 2012.
6. Around the same time the debt limit will be breached again:
The statutory limit on public debt is $16.394 trillion, which is expected to be reached in November of December 2012.
7. Other miscellaneous year-end issues that need to be resolved, two important ones are:
- Doc fix: This prevents a scheduled cut of more than 25% to Medicare physician payments from taking effect.
- Tax enders: A collection of mostly corporate tax preferences, such as the R&D tax credit that are temporary but are extended so frequently that most corporate taxpayers have come to expect further extension.