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"Fiscal cliff" primer: Breaking down the plans

(MoneyWatch) With less than two weeks before Congress adjourns for the holidays, the "fiscal cliff" isapproaching fast. President Barack Obama and congressional Republicans have released their respective proposals to avoid the cliff, the automatic government spending cuts and expiring tax cuts scheduled to take effect in January. Here's an overview of the plans:

The Obama Plan

Deficit reduction: Over 10 years, the plan would reduce the U.S. budget gap by $2 trillion. Factoring in the $1 trillion in spending cuts Congress passed in 2011, $1 trillion in savings from ending the wars in Iraq and Afghanistan, and $400 billion from unspecified savings in mandatory spending, the package would shrink the deficit by a total of $4 trillion.


Taxes: Revenue from tax hikes would rise $1.6 trillion in two phases over the next decade. Starting in 2013, the plan would allow the Bush 2001 and 2003 tax cuts to expire for individuals who make more than $200,000 and joint filers who earn more than $250,000. The two top tax brackets would rise from 33 and 35 percent to 36 percent ($217,450-$388,350) and 39.6 percent (over $388,350), respectively. Tax rates on capital gains would increase from 15 percent to 23.8 percent (20 percent, plus 3.8 percent from a surtax related to the Affordable Health Care Act). The top rate on dividends would rise from 15 percent to 43.4 percent (39.6 percent plus the 3.8 percent ACA surtax), and the plan would reinstate limits on personal exemptions and deductions.

Spending cuts: A total of $600 billion, of which approximately $350 billion would come from Medicare, Medicaid and other federal health care programs. The cuts would begin in a year in order to give the economy additional time to heal.


Other measures: To boost economic growth, the Obama plan also calls for $200 billion in new spending. Those items could include a one-year extension of the payroll tax cut and of long-term unemployment benefits. Other measures could include a fund for infrastructure projects and extending a tax deduction that lets businesses accelerate depreciation on equipment purchases.

AMT/"Doc-Fix": The plan would apply a new AMT patch and extend the "doc fix," which would avoid a 27 percent cut in Medicare reimbursement to doctors and extend corporate tax credits for research and development.

Debt ceiling: Remember that darned debt ceiling? The summer 2011 debate between lawmakers about raising the debt ceiling triggered a series of events that led to across-the-board spending cuts (also called "sequestration"). The U.S. will likely reach the $16.4 trillion debt ceiling by mid-February. In order to avoid another messy political fight, Obama's plan puts forward a new idea -- removing the requirement that Congress pass future debt ceiling increases.

Boehner on Obama plan: "The White House has to get serious."

The Republican plan:

Deficit reduction: Over 10 years, the plan would reduce the deficit by $2.2 trillion. That amount jumps to $4.6 trillion when you include the $1 trillion in spending cuts Congress passed in 2011, $800 billion in savings from ending the wars in Iraq and Afghanistan, and $600 billion in interest savings.


Taxes: Extends all of the expiring tax cuts on income, capital gains, estates and dividends for one year. Then the plan would raise $800 billion in tax revenue over 10 years by ending certain tax breaks, rather than by increasing tax rates or relying on economic growth. It would also change how the government calculates the rate of inflation, which would diminish annual increases in tax brackets.

Spending cuts: The plan would reduce entitlement spending in Medicare and Medicaid by $900 billion and other spending by $300 billion. The change to the inflation calculation would slow increases in Social Security benefits.

AMT/"Doc-Fix": No mention.

Obama on the Republican plan: In an interview on Bloomberg Television, Obama described the GOP proposal as "out of balance."

Key questions

Which taxes are scheduled to rise? The Bush-era tax cuts are set to expire, which will bring taxes back to 2001 levels. Obama's 2 percent payroll tax cut holiday will end, and a series of other temporary tax cuts for businesses that the President enacted will also expire. These include the enhanced dependent care credit; enhanced child credit; enhanced adoption credit; a portion of the enhanced earned-income credit (the temporary increase of the credit for families with three or more children, and the temporary increase in income limits required to qualify for the credit are both due to expire in 2013); repeal of the personal exemption phase-out; repeal of the limit on itemized deductions; enhanced student loan interest deduction; and the exemption for mortgage debt forgiveness.


Additionally, the following tax cuts have already expired, but they are up for renewal in 2013: AMT adjustment, deduction for state and local sales taxes, IRA charitable donation provision for taxpayers 70 1/2 and older, and the educator's classroom deduction.

Where will the spending cuts occur? Mostly from the U.S. Defense Department budget, as well as "discretionary" programs, or those that don't have earmarked funds, which will absorb 8 percent of the cuts. That means that there could be cuts in everything from infrastructure and schools to public health and homeland security.

Will Medicare be cut? The government-run health care program for seniors would face a 2 percent cut in Medicare payments to providers and insurance plans, which amounts to a reduction of $11 billion next year.

What programs won't be cut? Social Security, Medicaid, supplemental security income, refundable tax credits, the children's health insurance program, the food stamp program and veterans' benefits. The White House has also said military personnel would be exempt from the cuts.

How would the fiscal cliff affect the economy? The Congressional Budget Office has said that the U.S. economy would slide into a "significant recession" as a result of the tax increases and spending cuts. CBO estimates that the economy would shrink by 2.9 percent in the first half of 2013 and by 0.5 percent for the whole year. That would raise the nation's unemployment rate from the current 7.9 percent to 9.1 percent, the office estimates.

Who coined the term "fiscal cliff"? In the first week of February, Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee. During the question and answer session, Bernanke said, "Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."

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