G-20 Leaders Urge U.S. to Avoid 'Fiscal Cliff'
November 7, 2012
Leaders of the G-20 nations urged American leaders to act swiftly to avoid the looming "fiscal cliff" due to take effect on January 1.
The "cliff," a double-whammy of higher taxes and $600 billion spending cuts, is to due to hit on the first day of 2013 unless Congress and the President do something about it.
The European Central Bank, still knee-deep in the euro crisis, warned that the American economy's going off the "cliff" could start another recession. The Bank of Japan echoed those concerns. G-20 delegates were meeting in Mexico City.
The comments came in the wake of an International Monetary Fund forecast for global growth in 2013 of just 3.6 percent.
Meanwhile, the U.S. Speaker of the House, Republican John Boehner, and Senate Majority Leader, Democrat Harry Reid, have begun discussions aimed at heading off the fiscal crisis. Both major political parties have agreed on the need for a bipartisan solution. One of the key points of contention is the disagreement over tax increases, with Democrats insisting on higher taxes for individuals earning more than $250,000 a year and Republicans insisting on the opposite. This disagreement was at the heart of the presidential campaign, after which President Barack Obama was re-elected.
The Budget Control Act of 2011, which averted a government shutdown in the wake of fierce disagreement on whether to raise the country's debt ceiling, stipulates that budget cuts to nearly 1,000 government programs, including Medicare and the defense budget, will automatically go into effect unless changed by an act of Congress. Other cuts would include budgets for public health, homeland security, and school infrastructure. Social Security, Medicaid, children's health insurance, food stamps, and veterans' benefits are exempt.
In addition, temporary payroll tax cuts and some tax breaks for businesses will expire. The result would be to bring income tax levels back to where they were in 2001. (This would be the end of the so-called "Bush tax cuts.")
In addition, the end of the "Bush tax cuts" would affect nearly 80 percent of Americans and result in an average increase of $3,700 in taxes for the average U.S. household, according to the Tax Policy Center. That increase would be relative because the tax rates would be reverting to 2001 levels. The top two tax brackets would rise from 33 percent to 36 percent and from 35 percent to 39.6 percent. In addition, the estate tax would effectively rise, meaning more money for the government but less money for those wealthy enough to own a $5 million estate.
Another consequence would be major changes to the Earned Income Tax Credit, a refundable credit that benefits low-to-middle wage singles and married couples.
The result would be an overall reduction in the national deficit of $560 billion but would also cut gross domestic product by nearly 4 percentage points, which many analysts say would be enough to plunge the country back into recession.
All of these are incentives for Congress and the newly re-elected President to make a deal, something that the Joint Committee on Deficit Reduction (a bipartisan "supercommittee") could not do. The supercommittee, formed in the wake of the debt ceiling crisis of 2011, was tasked with finding ways to cut government spending by $1.2 trillion by 2021. No agreement was reached, and the cuts became automatic. The "fiscal cliff" is the first stage in those automatic cuts.