Article by Jacob Wilkowsky (Q19)
I don’t know about you, but I’m not such a huge fan of cliffs. In fact, the cliff is probably my least favorite geographical formation after the hill. The sheer image reeks of danger and conjures up memories of Wile E. Coyote plummeting in a cloud of smoke. That’s why when I first heard about this “fiscal cliff” I started to worry. I knew no cliff could be good news, and decided to do some research.
It turns out the term “fiscal cliff” is just a popularized metaphor for automatic spending cuts and tax increases that were supposed to occur on January 1st, 2013. The result of past legislation- the Collective Budget Agreement of 2011 and Bush-era Tax Cuts-most experts believe the fiscal cliff held the capacity to bring the U.S economy back into a recession. By one account, economists from Barclays Capital estimated the fiscal cliff could have shaved off 2.8 percentage points from GDP in 2013. So first and foremost the fiscal cliff was a threat to economic prosperity. Furthermore, the fiscal cliff also played a minor role in a much larger drama relating to the U.S’s deficit.
Today the U.S deficit is hovering around $16.4 trillion dollars, equivalent to a debt load of $52,000 per American. Increasing at a rate of $3.84 billion dollars per day since September 28th, 2007, the deficit has long been an issue of serious concern for Congress. The accelerating deficit, as is, risks the U.S government defaulting on its obligations, which would be disastrous for the world economy. And since the fiscal cliff encompassed tax and spending policy issues that greatly influenced the deficit, it served as a stark event in a greater story of the U.S deficit. As such, it became a battleground for political parties debating the country’s deficit issue in Congress. So while at its core the fiscal cliff was an economic dilemma, it was also a political drama, subject to competing parties fighting for power.
Gridlock characterized the political conversation on the fiscal cliff. Only in the 11th hour of the fiscal cliff drama were Vice President Joe Biden and Senate Minority Leader Mitch McConnell able to get a deal done to prevent an economic disaster. The deal made on January 1st 2013 by Republicans and Democrats was passed as the American Taxpayer Relief Act of 2012. It addressed the expiring Bush-tax cuts immediately, while delaying $110 billion dollars in spending cuts from the Collective Budget Agreement of 2011 for 2 months.
New tax policy propelled by the American Taxpayer Relief Act of 2012 strongly mirrors that which President Obama campaigned on during the presidential race. Most notably from the legislation, 98% of Americans will enjoy the continuation of Bush-era tax cuts. 2% of the wealthiest Americans making $450,000 or more as couples or $400,000 as individuals saw their taxes raised. Congress also helped out the American middle class by adjusting the alternative minimum tax to inflation, greatly reducing their potential tax liability. Also notably, the estate tax was raised 5% for amounts over $5 million dollars (indexed to inflation). Overall, the American Taxpayer Relief Act of 2012 addressed half of the fiscal cliff, leaving the issue of spending cuts still on the table. These cuts are now schedules to kick in on March 2nd.
So the question remains, “What was the fiscal cliff?” Earlier we defined the fiscal cliff as a metaphor for automatic spending cuts and tax increases, but that definition seems a bit haphazard now. Through the efforts of political pundits, the term seems to have taken a life of its own. The fiscal cliff narrative now reflects much of the tumultuous environment in which it materialized. It serves as a stark reminder of our economic fragility, deficit crisis, and political acrimony. However, while history probably won’t deem the fiscal cliff a shining moment in American politics, at least we were able to get through it and we still have a shot at resolving our nation’s problems again tomorrow.