The Fiscal Cliff Essay

4209 words - 17 pages

Running Head: FISCAL CLIFF 1FISCAL CLIFF 2The Fiscal Cliff: An Economical AnalysisWhen plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.-Frederic BastiatIntroduction:Walter Stern first used the term "fiscal cliff" in 1957 in the Housing section of the New York Times to describe New Yorkers over borrowing to purchase their homes. He wrote "To the prospective home owner wondering whether the purchase of a given house will push him over the fiscal cliff, probably the most difficult item to estimate is his future property tax". Since that time the term has been used to describe many looming fiscal crisis facing government. (Geoghegan 2012)Most recently the term has been widely used to describe the January 1, 2013 simultaneous actions of tax hikes and reduced government spending. The fear was that this one-two punch would send an already fragile economy back into recession and have a significant negative impact upon unemployment.Literature Review:The Fiscal Cliff DefinedTo understand the fiscal cliff it is important to understand how we came to the edge. This paper will not explain the events that led to the economic crisis in 2008, but suffice it to say that both the United States and global economy were in the worst economic condition that they had seen in decades. By January of 2013 the US unemployment rate had been above 8% since January of 2010, GDP was growing at an anemic 1-2% per year, and the annual budget deficit was over one trillion dollars. At a time when the economy was in a fragile recovery state, there were four laws that were either set to expire or where going into effect beginning January 1, 2013 that would have a significant negative impact upon the economic recovery. They included the expiration of the Bush tax cuts, sequestration, the end to the Social Security payroll tax credit, and a reduction in the Medicare reimbursement rates.The Bush Tax CutsThe Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003 together form what has become known as the Bust tax cuts. A key provision of the cuts dealt with the Alternative Minimum Tax (AMT). This provision reduced the amount of exemptions to lower their overall tax bill that those in the upper income brackets could deduct. Congress renewed the AMT in the Tax Increase Prevention and Reconciliation Act of 2005. (Reidl 2007)One of the sticking points for both Republicans and Democrats was the affect of the Bush tax cuts on the overall economy and who benefited the most. Both sides wanted tax cuts for the lower and middle class, however the President and the Democrats wanted those in the top brackets to shoulder more of the tax burden while Republicans wanted the tax cuts renewed across the board. Opponents of the cuts argued that they failed to stimulate growth and that they added to...

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