The “fiscal cliff” is coming. It’s a man-made disaster that’s ready to explode. But what exactly does it entail?
The fiscal cliff is a combination of tax increases and spending cuts that start to take effect January 1. President Obama and Congress will need to act quickly to avoid at least some parts of the fiscal cliff.
Heritage Foundation experts Romina Boccia, James Sherk, Katie Tubb offer more detail and specific recommendations on the four main parts of the fiscal cliff:
1. Taxmageddon tax increases
Starting January 1, Americans will face a $494 billion tax increase, the highest ever in one year. The average American household would see its taxes rise by $4,100 in 2013 alone. Uncertainty about the law continues to hurt the economy as businesses and individuals are afraid to invest or hire.
Heritage Recommendation: Free the American people from uncertainty and economic devastation by extending the current tax rates. In addition, lawmakers should stop the new Obamacare taxes, especially the tax on non-wage income.
2. Sequestration spending cuts
Sequestration is a procedure of automatic spending cuts built into last year’s debt limit deal. Congress’s failure to enact spending cuts legislatively triggered automatic budget cuts, which total $1.2 trillion over nine years. The cuts are set to start on January 2.
Sequestration disproportionately affects the military. If defense sequestration is not stopped, it will delay investment in new equipment, force cutbacks on repairs, lead to declines in military research and development, and require reductions in base services.
Heritage Recommendation: Prevent the $150 billion in cuts in defense for 2013, and cut spending from other programs.
3. The ‘Doc Fix’ to Medicare
Unless Congress agrees on another short term solution before the end of the year, physicians will receive a 27 percent decrease in pay for Medicare patients they see. This could leave millions of seniors without care.
Heritage Recommendation: In the short run, stop the immediate cuts to Medicare. Then fix Medicare with a long term solution that controls the program’s runaway costs through competition and consumer choice.
4. Emergency unemployment benefits
Congress is also considering extensions to unemployment benefits. In 2010, Congress created temporary federal benefits that allow unemployed workers to receive income support up to 99 weeks. Extending benefits for too long of a time encourages those benefiting from the system to postpone job searches.
Heritage Recommendation: If Congress chooses to extend benefits past six months, they must reduce the extended unemployment benefits to 52 or 60 weeks and pay for it by reducing spending on less valuable programs. As the labor market improves, Congress should continue to reduce these benefits.
How do you think Congress should deal with the fiscal cliff?