The "fiscal cliff" isn't a cliff at all

News Analysis

You're going to be hearing the phrase "fiscal cliff" a lot over the next few weeks: The phrase has emerged as a shorthand way to describe the combination of tax hikes and spending cuts set to start kicking in at the end of the year. Lawmakers are now feverishly negotiating over how to keep many of those spending cuts and tax increases from kicking in - to keep from what is often described as "going off the fiscal cliff."

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Fiscal cliff negotiations continue

Yet if no deal comes, the nation won't actually be going over a metaphorical cliff. The word cliff implies an all-or-nothing situation - once you go over a cliff you plummet to earth. There's no going back.

But the situation the nation faces is not like that. The so-called "fiscal cliff," in fact, would be more accurately described as a "gradual fiscal slope." Though that admittedly doesn't have quite the same ring to it.

There are two parts to the so-called fiscal cliff. The first is the scheduled expiration of the tax cuts enacted in 2001 and 2003 under President George W. Bush, the payroll tax holiday enacted under President Obama, and a host of other tax breaks. The second is $1.2 trillion in automatic spending cuts to defense and domestic programs that are looming due to a 2011 deal that resulted from House Republicans' reluctance to raise the debt limit.

Now, it's true that if lawmakers fail to work out any sort of deal, there will be severe long-term consequences for the economy: According to the Tax Policy Center, going off the "cliff" would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. Many economists, as well as the nonpartisan Congressional Budget Office, say the combination of spending cuts and tax hikes that are set to take effect would tip the economy into a new recession. The Congressional Budget Office has forecast that implementing all the mandated government spending cuts and tax hikes would reduce real GDP by 0.5 percent in 2013, with growth sinking in the first half of the year before resuming at a modest clip later in the year. The CBO forecasts that inaction would push up the unemployment rate to 9.1 percent by the end of 2013.

Can the U.S. economy endure the fiscal cliff?

But here's the thing: If the nation goes over the cliff - but then lawmakers work out a deal in, say, late January - it will not be nearly as bad as all that suggests. It's true that many of us would see slightly more money coming out of our paychecks at the start of the year, but lawmakers could retroactively reverse the tax hike once they work out a deal. (You'd then effectively get a bonus in your next paycheck.) Since both parties agree that the Bush-era tax cuts should be extended for the vast majority of Americans, it's unlikely that most of us would end up taking a serious hit over the long run.

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Congress comes back from break to tackle fiscal cliff

The spending cuts, meanwhile, are phased in gradually - which is why the "slope" metaphor makes more sense than the "cliff" one. It's not as though $1.2 trillion would suddenly disappear from the economy at the end of the year: The cuts, while undeniably significant, are set to be phased in over a decade. In addition, there are budgetary maneuvers that can be taken to at least somewhat soften the blow of both the tax hikes and spending cuts. (The Treasury Department could, for instance, freeze paycheck withholding levels.) Certainly, total inaction on the "fiscal cliff" over the long term would likely have a deeply negative impact on the economy. But if a deal comes in January or February, after the deadline - as it well could - the structural damage could be relatively small.

"We're not going to fall off the edge of the earth at the beginning of next year," said Ed Yardeni, president and chief investment strategist for institutional investor advisory Yardeni Research. "When you fall off a cliff you die. So it's a bit of an exaggeration to say that's what we're facing here."

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[Lucky12345678]

The Federal government is just spending too much, tax revenues keep increasing, but spending is out of control: "... In the US for the full fiscal year, total receipts grew 6.4 percent to $2.45 trillion, while outlays fell 1.6 percent to $3.54 trillion, CBO estimated. Individual income tax receipts rose 3.4 percent while corporate income tax collections rose 33.7 percent. Most categories of spending fell, except for Social Security benefits, which rose 5.9 percent, to $762 billion, and Medicare, which rose 3.2 percent to $469 billion after adjusting for offsetting receipts..." Government spending increases the big divide in this country and creates the class warfare democrats love to talk about. As government transfer spending increases the divide between class's increase, just look at what's been happening for the last three years under President Obama! Big government is not the solution, but the cause of our problem...

[BigSioux232]

Going over the fiscal cliff/slope will reduce the budget deficit by $503 billion in 2013, and $682 billion in 2014. It will also let TEMPORARY tax discounts/cuts expire and force a much needed reduction in spending. Time to stop kicking the can down the road and pay the piper. The reason for the stalemate is that the government doesn't want have to admit that they've only delayed the inevitable and mismanaged things to the point where we all need to feel the pain to get our books in order.

[Sccoon]

This is exactly what I wrote in my own blog on December 1.
http://stevecoon.blogspot.com/2012/12/wiston-papers-fiscal-cliff-is-coming.html

[Roberd01]

Plan B was riddled with problems, most prominently was the "promise" to address spending cuts in the next congressional session, this promise will never be fulfilled, given congressional amnesia and historical precedent.

Even going with the sequestration tax rates, unless the spending get reduced to 1996 levels, there will be no deficit reduction. If the House gives up control of the debt ceiling, it's like telling the White House if you max out your credit cards, just apply for a new card and transfer the balance. It is unconsistutional to relinquish that authority, making that the 5th time this president has asked for permission to circumvent the constitution.

[eroteme2]

A fiscal cliff and a fiscal slope only differ in the amount of time it takes to reach bottom.

[eroteme2]

I believe a slope reaches bottom the same as falling off a cliff, it just takes a bit longer. When we talk of the slope we should describe the degree of the slope. It matters.

[nastia_and_andre]

While it's true that the fiscal cliff is not well-named, this rather shortsighted author didn't put the cliff part in the fiscal cliff: the debt ceiling, which is a part of this. Unless of course they don't think a government shutdown is rather severe. But no mention of the debt ceiling? Cmon, man.

[stevehamilton858]

why should the "fiscal cliff" and the debt ceiling be discussed at the same time? they don't have anything to do with each other; there is no nexus. The fiscal cliff is the result of gridlock several months ago during budget talks, where the participants in those discussions kicked the can down the road until after the November elections.

The debt ceiling is an issue related to America's obligation to pay its legal and contractual debts, and the need to borrow more money to avoid defaulting on those obligations.

all the two subjects have in common is that they area big problems facing our country.

[libbieclu]

Agree with the writer. This is a slope not a cliff. However with all the reality TV programs out there, the words "fiscal cliff" carry a bigger disaster type of impact than the word "slope." Politicians can run with the terminology for political posturing.

The real issue is a big misunderstand of government's role in recessionary/depression periods. UNLIKE household budgets, the government's role IS TO spend--hence infra structure projects and other such programs. Those programs get people working and have a positive ripple effect through the economy. As unemployment falls to near normal levels, then the government should start pulling back and reduce spending. We are not there yet.

What we have is a bunch of very misinformed individuals -- including Congressmen and women and organizations such as the Tea Party who believe we should do this now. Riding the cress are the wealthy who have continued to prosper throughout this recessionary period. For whatever their reasons for not wanting the tax cuts to expire, those cuts need to. We also have a lot of wasteful spending. For instance military spending has skyrocketed. Why? Look at the number of contractors employed by the military now as compared to before 1990. It's very lucrative for those companies. Basically they are now doing the jobs of enlisted men and women only for profit. Then there's this whole idea that government jobs should be outsourced. Yet causing other situations whereby middlemen profit. Tax loopholes and credits are still a third issue. Far too many that overall take much needed monies out of government resources to deal with this and other disasters. So in the end, the writer is right.

[Tango57]

What most Americans fail to keep in mind is when we say Government should SPEND, that means you should spend and all other taxpayers. And if this "SPENDING" exceeds out current federal revenue (taxes collected),as it has for many years now, then this "SPENDING" is our children's and grandchildren's futures we are spending. Not only will they have to support their own generations' needs, they will have to continue to pay for us who were too NEEDY and too GREEDY to just reduce our fiscal burden and pay our own way in this world. WE ARE THE GOVERNMENT, WE ARE RESPONSIBLE TO PAY OUR OWN BILLS. WE ARE FAILING IN THAT REPONSIBILITY!!!!!

[cntrygirl3]

I do not see the republicans EVER agreeing to tax cuts for working people if they can't get big cuts for the wealthy. The only reason the working people got anything in the Bush tax cuts was to keep them quiet because they had way more votes which still count. But you are talking the difference between a couple of hundred bucks and a couple of 100,000 or a couple of million bucks. It is time to take a clean sheet of paper to tax reforms with the starting point the tax structure in 2000. I know that means all the tax cuts of the last twelve years gone, but I think you will find the country will be far better off. Then the republicans can hold the democrats on entitlement cuts and the democrats hold the republicans on tax relief. Wow something might actually get done in the house besides repealing Obama care 30 times and the senate might actually vote on something.

BUSH TAX CUTS MUST DIE!!!!!!!!

[wave150]

http://commonsensepolitics.me/