Hopes are beginning to wane that lawmakers in Washington will be able to hammer out a last-minute compromise to avert the cliff. In the meantime, the rhetoric is heating up as Republicans and Democrats engage in a war of words – each trying to blame the other for the impending fall.
However, this possibility is much more than a political battle as all Americans will feel the impact if a compromise is not reached before the first of January. Taxes will rise, unemployment benefits will suddenly end for many, employee contributinos to Social Security will rise along with an array of other negative changes.
Federal Reserve Chairman Ben Bernanke has warned that the resulting spending cuts and tax increases will create an undue stress on an already weak economy and could be enough to plunge the United States back into a recession.
Even if America does fall over the cliff next week, most experts are hopeful that some compromise can be found later in January when Congress returns to session and that some retroactive fixes could be applied before Americans are hit with the worst of the effects.
So what exactly will tumbling over the cliff mean for you and your pocketbook? Here are a few of the immediate effects you will see beginning next week.
Income Tax Rates Will Increase: All individuals earning taxable levels of income will see their tax rates increased as current tax cuts will expire if no compromise is reached.
* Americans earning the lowest 20 percent of the taxable income scale will see an average of about $400 more in taxes this year.
* Americans in middle-income households will see an average of about $2000 more in taxes.
* Americans earning the top 20 of taxable income will see increases of about $14,000 a year.
* The top one percent of earners will see an average of about $120,000 in taxes this year.
Payroll Tax Rates Will Increase: The employees share of Social Security witholdings from paychecks will increase.
Mandated employee deductions for Social Security has been lowered two percent the last two years from 6.2 percent to 4.2 percent. If a compromise is not reached the next few days, that temporary reduction will go away immediately decreasing individuals’ paychecks by two percentage points off the top.
Unemployment Benefits Will Cease For Many Americans: 2.1 million unemployed Americans will lose their federally funded unemployment benefits.
These benefits were created in 2008 as a response to the deepening recession. State benefits for the unemployed are exhausted after 26 weeks and the federally funded system was created to kick in once those state benefits end. While unemployement is dropping, nearly 5 milion people have been unemployed for longer than 26 weeks.
Alternative Minimum Tax: As many as 30 million additional taxpayers could become subject to the Alternative Minimum Tax.
The Alternative Minimum Tax was created so that wealthy taxpayers would have to pay a minimum level of taxes not matter how they sheltered or structured income earning. However, when put into place, the system failed to take inflation into account. So Congress has needed to pass temporary “patches” or corrections to account for inflation to insure that lower-level income households were protected from having to meet those mininum standards.
If a compromise on the fiscal cliff is not achieved, then those patches will expire subjecting millions of families to those minimum tax levels.
On Christmas day the New York Times ran a good summary of possible consequences of falling over the fiscal cliff which includes some good news:
Some hits — like a two percentage point increase in payroll taxes and the end of unemployment benefits for more than two million jobless Americans — would be felt right away. But other effects, like tens of billions in automatic spending cuts, to include both military and other programs, would be spread out between now and the end of the 2013 fiscal year in September. These could quickly be reversed if a compromise is found.
Similarly, the expiration of Bush-era tax cuts on Jan. 1 would not have a major impact on consumers if Congress quickly agreed to extend them for all but the wealthiest Americans in early 2013, as is widely expected.
Other probable changes, like a jump in taxes on capital gains and dividends, would most likely be felt over a broader period rather than as an immediate blow to the economy.
So, the world will not come to an end if America does fall off the fiscal cliff next week. And there are a variety of possible outcomes and corrections that could minimize damage.
The question remains: what if anything is Congress and the Obama administration willing to do to avert such a disaster?