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On the precipice: a guide to the "fiscal cliff"

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Beware the "fiscal cliff."

That's the warning that's been sounded by politicians, the media, and taxpayers since summer, gaining full force the moment President Barack Obama won re-election. While the term has only recently become part of the national vernacular, the build-up to this pivotal economic decision has been building for many years. The Democrats have refused to cut spending entitlements and Obama wants to raise taxes on the top income brackets. The Republicans, led by conservative super-lobbyist Grover Norquist, refuse to raise taxes and are opposed to losing currently implemented tax breaks. Also at stake is the defense budget that Dems want to scale back with the wars in Iraq and Afghanistan ending while Republicans are pushing back on any additional defense cuts.

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The spending cuts would be enforced by the Budget Control Act of 2011-- enacted to resolve partisan gridlock over the debt ceiling -- and the Bush Tax Cuts would expire after being extended by a lame duck Congress with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Washington, in essence, faced these similar issues and punted, putting off the hard decision for another time. Which is now.



All told, the combination of tax increases and spending cuts would save $600 billion, but would also slow the country's economic growth, derailing the recovery or even triggering another recession. All of this will go into effect in January if an agreement between the White House and Congress isn't reached by then. The term "cliff" is a bit misleading because the changes would not be immediately felt by taxpayers but would accrue throughout the year.

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How does this really affect you? How hard would this really hit the American pocketbook? The Tax Policy Center has a great tax payment calculator tool that allows you to figure what your tax burden would be based on a number of scenarios. For instance, in this scenario, with a married couple making $120,000 per year with two kids younger than 17, the tax burden increases just over $4,600 a year - about 5 percent less take-home pay.

This tax calculator is less informative, but offers a quick glimpse at how your tax liability would differ from the 2012 tax year to the 2013 if there is no cliff deal. Here's a look at the interface, which is pretty straight-forward:

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Some believe that rather than trying to reach an agreement where the resolution isn't really satisfactory, we should let the country go off the cliff (so to speak). The reasoning is that allowing that to happen would finally force both sides to come together for a "true" agreement that aims to actually reign in the deficit rather than continuing to stave off any real resolution.


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1 Comment

This article suggests that the only consequence of averting the cliff for most people is how much additional federal income tax they will or will not have to pay, but it is really only "a guide" to one aspect of the problem. Taxes affect the prices we pay for the goods and services we buy. There's no such thing as a free lunch: you pay for government spending one way or the other.

If the article wants to be "a guide to the fiscal cliff" as its headline suggests, lets see the projections for all the unintended consequences of changing the tax rates.

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