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The "fiscal cliff" refers to December 31, 2012, the date of the expected implementation of government spending reductions and expiration of a large number of tax cuts, many of which were the tax cuts enacted under George W. Bush and extended by President Obama. In a report released in May 2012, the "Congressional Budget Office (CBO) In addition to the government spending reductions and tax cuts, increases in costs from the "Patient Protection and Affordable Care Act were slated to take effect, as well. The CBO predicted that these policy changes could lead to reduced economic growth, significant enough to be considered a recession, although the 2013 deficit would be cut roughly in half and the debt trajectory over the next decade would be significantly improved.
The increase in tax rates that was due to occur had been described by Republicans including House Speaker "John Boehner, House Majority Leader "Eric Cantor and Senate Republican Leader "Mitch McConnell as the largest in U.S. history, although the U.S. would be returning to Clinton-era tax rates. According to the Associated Press, the increase would be the second largest after the tax increase of 1942, if population growth, increased pay and the size of the economy are taken into account.
Based on figures from the CBO and "Joint Committee on Taxation, federal taxes would have increased by a total of $423 billion in 2013, if the tax cuts had been allowed to expire. The non-partisan "Tax Policy Center estimated that for 83% of households in the U.S., there would be an average tax increase of $3,701 and "The Heritage Foundation stated that those impacted by the tax cut expiry are primarily in the middle- and low-income groups, with its research finding that families would experience an average tax increase of $4,138.
According to the "Center on Budget and Policy Priorities, the expiration of the Bush income tax rates (i.e., returning to Clinton-era rates) would have affected higher income families more than lower income families. The Bush tax cuts reduced income taxes for those earning over $1 million by $110,000 per year on average during the 2004-2012 period. The tax cuts made the tax system less progressive. From 2004 through 2012, the tax cuts increased the after-tax income of the highest-income taxpayers by a far larger percentage than they did for middle- and low-income taxpayers. During 2010 for example, the tax cuts increased the after-tax income of people making over $1 million by more than 7.3%, but increased the after-tax income of the middle 20% of households by just 2.8%
A report from the CBO concluded that extending the tax cuts and spending policies would lead to federal debt increasing from 73% in 2012 to over 90% of U.S. gross domestic product by 2022, but that the "debt-to-GDP ratio would decline to 61% in 2022 if the tax cuts expired and scheduled spending cuts took place. The CBO concluded that
The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course. Policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches. In fact, the current laws that underlie CBO's baseline projections provide for significant changes of those kinds in coming years; many other approaches to constraining future deficits are possible as well.
CBO's term "alternative scenario" refers to extending the tax cuts and preventing scheduled automatic spending cuts, while "baseline scenario" refers to allowing the tax cuts to expire and the spending cuts to take place, as provided for by laws in effect in June 2012.
The expiration of the tax rate cuts was opposed by Republicans including those on the "House Ways and Means Committee, which attempted to produce a bill providing for a one-year extension that would ensure that federal tax rates for all income levels, capital gains, dividends and estate taxes would remain the same. The bill would have also retained tax credits including the child tax credit but would propose ending the current payroll-tax cut. The Democratic-majority Senate was in favor of extending the tax cuts only on that portion of household income below $250,000 per year.
The American Taxpayer Relief Act of 2012
On January 1, 2013, the Bush Tax Cuts expired. However, on January 2, 2013, President Obama signed the "American Taxpayer Relief Act of 2012, which reinstated many of the tax cuts, effective retroactively to January 1. The 2012 Act did not repeal the increase in the highest marginal income tax rate (from 35% to 39.6%) which had been imposed on January 1 as a result of the expiration of the Bush Tax Cuts.
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Under President Bush's plan, an average family of four's inflation-adjusted disposable income would increase by $4,544 in fiscal year (FY) 2011, and the national debt would effectively be paid off by FY 2010.
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