ByBrian Montopoli, Alain Sherter /
CBS News/ November 26, 2012, 6:08 PM
News Analysis
You're going to be hearing the phrase "fiscal cliff" a lot over the next few weeks: The phrase has emerged as a shorthand way to describe the combination of tax hikes and spending cuts set to start kicking in at the end of the year. Lawmakers are now feverishly negotiating over how to keep many of those spending cuts and tax increases from kicking in - to keep from what is often described as "going off the fiscal cliff."
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[h=3]Fiscal cliff: What congress needs to do[/h]
Yet if no deal comes, the nation won't actually be going over a metaphorical cliff. The word cliff implies an all-or-nothing situation - once you go over a cliff you plummet to earth. There's no going back.
But the situation the nation faces is not like that. The so-called "fiscal cliff," in fact, would be more accurately described as a "gradual fiscal slope." Though that admittedly doesn't have quite the same ring to it.
There are two parts to the so-called fiscal cliff. The first is the scheduled expiration of the tax cuts enacted in 2001 and 2003 under President George W. Bush, the payroll tax holiday enacted under President Obama, and a host of other tax breaks. The second is $1.2 trillion in automatic spending cuts to defense and domestic programs that are looming due to a 2011 deal that resulted from House Republicans' reluctance to raise the debt limit.
Now, it's true that if lawmakers fail to work out any sort of deal, there will be severe long-term consequences for the economy: According to the Tax Policy Center, going off the "cliff" would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. Many economists, as well as the nonpartisan Congressional Budget Office, say the combination of spending cuts and tax hikes that are set to take effect would tip the economy into a new recession. The Congressional Budget Office has forecast that implementing all the mandated government spending cuts and tax hikes would reduce real GDP by 0.5 percent in 2013, with growth sinking in the first half of the year before resuming at a modest clip later in the year. The CBO forecasts that inaction would push up the unemployment rate to 9.1 percent by the end of 2013.
Can the U.S. economy endure the fiscal cliff?
But here's the thing: If the nation goes over the cliff - but then lawmakers work out a deal in, say, late January - it will not be nearly as bad as all that suggests. It's true that many of us would see slightly more money coming out of our paychecks at the start of the year, but lawmakers could retroactively reverse the tax hike once they work out a deal. (You'd then effectively get a bonus in your next paycheck.) Since both parties agree that the Bush-era tax cuts should be extended for the vast majority of Americans, it's unlikely that most of us would end up taking a serious hit over the long run.
Play Video
[h=3]Can Congress compromise to avoid fiscal cliff?[/h]
The spending cuts, meanwhile, are phased in gradually - which is why the "slope" metaphor makes more sense than the "cliff" one. It's not as though $1.2 trillion would suddenly disappear from the economy at the end of the year: The cuts, while undeniably significant, are set to be phased in over a decade. In addition, there are budgetary maneuvers that can be taken to at least somewhat soften the blow of both the tax hikes and spending cuts. Certainly, total inaction on the "fiscal cliff" over the long term would likely have a deeply negative impact on the economy. But if a deal comes in January or February, after the deadline - as it well could - the structural damage could be relatively small.
"We're not going to fall off the edge of the earth at the beginning of next year," said Ed Yardeni, president and chief investment strategist for institutional investor advisory Yardeni Research. "When you fall off a cliff you die. So it's a bit of an exaggeration to say that's what we're facing here."
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CBS News/ November 26, 2012, 6:08 PM
News Analysis
You're going to be hearing the phrase "fiscal cliff" a lot over the next few weeks: The phrase has emerged as a shorthand way to describe the combination of tax hikes and spending cuts set to start kicking in at the end of the year. Lawmakers are now feverishly negotiating over how to keep many of those spending cuts and tax increases from kicking in - to keep from what is often described as "going off the fiscal cliff."
[h=3]Fiscal cliff: What congress needs to do[/h]
Yet if no deal comes, the nation won't actually be going over a metaphorical cliff. The word cliff implies an all-or-nothing situation - once you go over a cliff you plummet to earth. There's no going back.
But the situation the nation faces is not like that. The so-called "fiscal cliff," in fact, would be more accurately described as a "gradual fiscal slope." Though that admittedly doesn't have quite the same ring to it.
There are two parts to the so-called fiscal cliff. The first is the scheduled expiration of the tax cuts enacted in 2001 and 2003 under President George W. Bush, the payroll tax holiday enacted under President Obama, and a host of other tax breaks. The second is $1.2 trillion in automatic spending cuts to defense and domestic programs that are looming due to a 2011 deal that resulted from House Republicans' reluctance to raise the debt limit.
Now, it's true that if lawmakers fail to work out any sort of deal, there will be severe long-term consequences for the economy: According to the Tax Policy Center, going off the "cliff" would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. Many economists, as well as the nonpartisan Congressional Budget Office, say the combination of spending cuts and tax hikes that are set to take effect would tip the economy into a new recession. The Congressional Budget Office has forecast that implementing all the mandated government spending cuts and tax hikes would reduce real GDP by 0.5 percent in 2013, with growth sinking in the first half of the year before resuming at a modest clip later in the year. The CBO forecasts that inaction would push up the unemployment rate to 9.1 percent by the end of 2013.
Can the U.S. economy endure the fiscal cliff?
But here's the thing: If the nation goes over the cliff - but then lawmakers work out a deal in, say, late January - it will not be nearly as bad as all that suggests. It's true that many of us would see slightly more money coming out of our paychecks at the start of the year, but lawmakers could retroactively reverse the tax hike once they work out a deal. (You'd then effectively get a bonus in your next paycheck.) Since both parties agree that the Bush-era tax cuts should be extended for the vast majority of Americans, it's unlikely that most of us would end up taking a serious hit over the long run.
[h=3]Can Congress compromise to avoid fiscal cliff?[/h]
The spending cuts, meanwhile, are phased in gradually - which is why the "slope" metaphor makes more sense than the "cliff" one. It's not as though $1.2 trillion would suddenly disappear from the economy at the end of the year: The cuts, while undeniably significant, are set to be phased in over a decade. In addition, there are budgetary maneuvers that can be taken to at least somewhat soften the blow of both the tax hikes and spending cuts. Certainly, total inaction on the "fiscal cliff" over the long term would likely have a deeply negative impact on the economy. But if a deal comes in January or February, after the deadline - as it well could - the structural damage could be relatively small.
"We're not going to fall off the edge of the earth at the beginning of next year," said Ed Yardeni, president and chief investment strategist for institutional investor advisory Yardeni Research. "When you fall off a cliff you die. So it's a bit of an exaggeration to say that's what we're facing here."
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