If the media has it right, Americans shouldn’t be worrying about Mayan predictions this December. Instead, we should be fretting over the looming “Taxmageddon.” At the end of 2012, the economy will metaphorically go up in flames if Republicans and Democrats can’t come to a decision about impending tax increases and spending cuts.
As of now, the American economy verges on the edge of a fiscal cliff and a possible plummet back into recession. At the beginning of 2013, tax hikes and spending cuts will begin going into effect in an attempt to reduce the U.S. deficit, which will total over $1 trillion at the start of 2013 for the fifth year in a row. But Republicans and Democrats have been up in arms about the provisions of the Budget Control Act of 2011. If the provisions go into effect, around $600 billion would suddenly appear through a mixture of tax hikes and spending cuts. Taxes would increase for middle-class workers and small businesses, and defense spending would be slashed. Medicare too would suffer. These measures were designed to force a recalcitrant congress to play ball.
If this emergency deficit reduction plan goes into effect because congress can’t come to a decision, your paycheck will be taking a hit. Once the changes begin, workers can expect to see a 2% tax increase – and the rich aren’t getting another break this time around. The Budget Control Act also marks the end of the Bush-era tax cuts, which gave a break to the wealthiest households in the United States.
But is all of that extra tax revenue worth the economic shock that might happen if the fiscal cliff crisis occurs? According to economists, no.
The facts show that the current federal deficit has been shrinking at a faster rate than any other post-WWII deficit. However, the government wants to see the deficit cut even more. If all the provisions of the Budget Control Act go into effect, the deficit will decrease – but the Congressional Budget Office predicts that we’ll enter a recession. Unemployment is projected to increase to a little over 9%. The CBO stresses that if a deal can be made to avoid the fiscal cliff (and the tax hikes and budget cuts that come along with it), the federal deficit will be $503 billion higher than expected in 2013, but unemployment would decrease by 400,000.
So what matters more – reducing America’s debt or creating more American jobs?
The decision rests in the hands of our elected government officials, the ones who are supposed to have our best interests in mind. On November 16, Congressional leaders of both parties sat down with President Obama to negotiate the beginnings of a deal that should halt America’s plunge into further economic troubles. Of course, many skeptics question how constructive these meetings were. If a deal is going to happen, it has to happen soon. But what will be the results?
Whether or not our leaders come to an agreement, the American economy most likely will be in for a tumble down a slippery slope rather than a freefall over the edge. Many of the fiscal changes brought about by the Budget Control Act wouldn’t do immediate damage at the beginning 2013. Rather, many of the initial tax hikes could be retroactively lowered – taxes could ultimately be even lower than before. Also, the initial budget cuts won’t have any impact for a few months.
So how about some good news? Although the media has named this fiscal cliff “Taxmageddon,” Americans are more hopeful about the future than is commonly reported. Surveys show that consumer confidence has actually been increasing, and credit card purchases have been on the rise. While some businesses have voiced strong concerns over the fiscal cliff and the possibility of layoffs and wage cuts, their unease over the impending tax hikes hasn’t made much of an impact in the consumer market. So if you haven’t yet made the time for a good freakout about the fiscal cliff, hold off. The American economy isn’t about to commit suicide just yet.