Overview: Fiscal Cliff

The fiscal cliff is a combination of dramatic decrease in government spending and tax increases mandated to take effect in January 2013.

The main causes of the fiscal cliff are:

1) The Budget Control Act of 2011, which forces the US government to cut spending by 1.2 trillion over 10 years from January 1, 2013.

This act was brought about by President Obama in order to settle political debate on The United States debt-ceiling crisis. The debate circled around appropriate level of government spending and its consequential impact on the national debt and debt ceiling. This act resolved the situation by raising the debt ceiling and reducing proposed increases to future government spending, although similar debates for future budgets are not averted.

2) A package of tax reductions will expire, which means that taxes will rise significantly for most Americans.

Bush tax cuts refers to changes to the United States tax code passed originally during the presidency of George W. Bush. They are a series of temporary income tax relief measures enacted by President George W. Bush in 2001 and 2003 that effectively lowered federal income tax rates for everyone, decreased the marriage penalty, lowered capital gains taxes, lowered the tax rate on dividend income, increased the child tax credit from $500 to $1,000 per child, eliminated the phaseout on personal exemptions for higher-income taxpayers and eliminated the phaseout on itemized deductions and eliminated the estate tax. As these measures were put in place for a long time, many were not prepared for the expiration date that was yet to come.

Without congressional action, up to $600 billion of expiring tax cuts, new taxes, and automatic spending cuts are set to take effect at the start of 2013. If they hit all at once, the impact could amount to as much as 4%-5% of GDP. Hence, experts predict that the economy would experience a significant slowdown.