Over the fiscal cliff: Soft or hard landing?

Published on NewsOK Modified: January 1, 2013 at 7:25 am •  Published: January 1, 2013
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WASHINGTON (AP) — The Senate on Tuesday approved a bill to prevent the nation from going over a Jan. 1 "fiscal cliff." The legislation is now in the hands of the House, which is expected to vote on it Tuesday or Wednesday; if the House approves, it would go to the White House for President Barack Obama's signature.

A look at why it's so hard for Republicans and Democrats to compromise on urgent matters of taxes and spending, and what happens if they fail:

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NEW YEAR'S HEADACHE

Partly by fate, partly by design, some scary fiscal forces are coming together at the start of 2013 unless Congress and Obama act to stop them. They include:

— Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and breaks expired at year's end. The bulk of those are increases the Senate-passed bill is designed to avert.

— About $110 billion in spending cuts divided equally between the military and most other federal departments. That's about 8 percent of their annual budgets, 9 percent for the Pentagon.

Hitting the national economy with that double whammy of tax increases and spending cuts is what's called going over the "fiscal cliff." If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial market turmoil, economists predict. Which makes the pending House vote so crucial.

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WHAT IF THEY MISS THE DEADLINE?

Even if the House rejects the Senate bill, the nation shouldn't plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.

So long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could mostly be held at bay for a few weeks. Then they could be repealed retroactively once a deal was reached.

The big wild cards are the stock market and the nation's financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? The stock market shot higher Monday as investors bet that Republicans and Democrats would reach an 11th-hour compromise.

Federal Reserve Chairman Ben Bernanke has warned lawmakers that the economy is already suffering from the uncertainty and they shouldn't risk making it worse.

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WHAT IF THEY NEVER AGREE?

If the legislation dies in the House, 2013 looks like a rocky year.

Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to a study by the nonpartisan Tax Policy Center. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.

At the same time, Americans would feel cuts in government services; some federal workers would be furloughed or laid off and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.

"The consequences of that would be felt by everybody," Bernanke says.

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THE TAXES

Much of the disagreement surrounds the George W. Bush-era income tax cuts, and whether those rates should be allowed to rise for the nation's wealthiest taxpayers. Both political parties say they want to protect the middle class from tax increases.

Several tax breaks begun in 2009 to stimulate the economy by aiding low- and middle-income families were also set to expire Jan. 1. The alternative minimum tax would expand to catch 28 million more taxpayers, with an average increase of $3,700 a year. Taxes on investments would rise, too. More deaths would be covered by the federal estate tax, and the rate climbs from 35 percent to 55 percent. Some corporate tax breaks would end.

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