WTF is “The Fiscal Cliff”?

If you’ve paid any attention to the news the past couple of weeks, there’s no doubt you’ve heard about the damn “Fiscal Cliff”. So, what is it and should you care?
The gist of the Cliff is a combination of tax increases and cuts in government spending that, in combination, would likely send our economy back into recession.

The Fiscal Cliff:

1. A potential rise in taxes for 90% of Americans – almost every American family will pay an average of $3,500 in additional taxes next year.

If people have to pay more in taxes, they have less to spend. If they spend less, businesses earn less and hire fewer employees, which increases the unemployment rate and decrease growth – not a great idea.

2. Cuts in government spending (a.k.a. sequestration) – budgets for things like unemployment benefits and the national defense budget are set to be trimmed.

Since government spending contributes roughly 20-25% to the US’s economy, deep cuts will directly affect economic growth.

Why isn’t the government doing anything?

While both Democrats and Republicans agree that raising taxes on the 98% of families who make less than $250,000 a year is a bad idea, they can’t agree on what to do with that other 2%. Democrats want the wealthy to “pay their fair share” while Republicans argue that taxing the people who spend and invest the most will stunt growth.

On government spending, Republicans are demanding cuts to things like Medicare, Medicaid and Social Security. Democrats argue that these programs benefit people who need help the most and would rather see cuts to things like defense.

What is likely to happen?

We are likely to see no tax increase for the 98% and a significant increase for those earning $250,000 or more. Government spending will be reduced, with things like long-term unemployment benefits expiring and cuts to the defense budget. These cuts will slow the growth of the economy but the result should be less than feared.

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