Fiscal Cliff

The fiscal cliff, essentially, is the "expiration" of tax cuts and simultaneous major, across-the-board spending cuts. Bush tax cuts, the payroll tax, unemployment benefits, and a host of other tax breaks are set to expire on Dec. 31st. The sequester will take effect the very next day. Spending will be reduced significantly and taxes will be increased if an alternative deficit-reduction deal is not agreed upon by the end of 2012. The middle class and small businesses would take the brunt of the impact of the fiscal cliff.

Many economists say that the increased taxes and spending cuts would just be too much deficit reduction when the economy is already in such a weakened state. The Congressional Budget Office predicts that a short recession would ensue if the fiscal cliff becomes reality, slipping the economy further backward. Jobs will be lost, middle class families and individuals will face higher taxes, and small businesses will struggle with the increases, further stressing the already-impaired companies. The fiscal cliff is far from the best case scenario and is feared by economists, congressmen, and ordinary American citizens alike.

The sequester, which is another key component in the fiscal cliff, is a package of automatic spending cuts. These cuts, which are projected to total $1.2 trillion, are set to take effect at the first of the year and end in 2021. The cuts are evenly split between defense spending (with spending on wars exempt) and domestic spending (with spending on social security and medicaid exempt). Many defense specialists warned that the cuts would leave the military "hollowed out." Democratic legislators have similarly warned about the impact the cuts will have on important domestic social programs. The sequester has already been agreed upon, but will not take effect until Jan. 1st, 2013. The supercommittee failed to agree upon an alternative $1.2 trillion deficit-reduction plan by November 23rd, 2011, therefore triggering the sequester. It can still be avoided if Congress passes an alternative budget deal to reduce deficit. This is highly unlikely, as the deadline is rapidly approaching and little to no progress is being made in Congress.