What You Need To Know About The Looming Fiscal Cliff

January 1, 2013 will be the start of a new year that brings increased taxes and spending cuts. Ben Bernanke first used the term "fiscal cliff" when appearing before Congress in February of 2011. Many people seem to throw the term around without really knowing what they are talking about. Here are some quick specifics about the fiscal cliff:

To end the debt ceiling crisis in the summer of 2011, Congress passed and President Obama signed the Budget Control Act on August 2, 2011. The bill was signed into law the day before the purported crisis was supposed to hit, on August 3rd, which would have resulted in the U.S. credit going into default. 

Sequestration, which will cause $1.2 trillion in spending cuts, was a tactic pushed by the Obama administration when the Budget Control Act was being drafted as an incentive for Congress to find other ways to cut spending and/or raise taxes. A sequestration is a legal procedure that triggers automatic spending cuts. Congress never agreed on spending cuts, so the sequester will trigger defense cuts in 2013. 

The fiscal cliff also brings a $494 billion tax increase to Americans, which will cost the average American household an additional $3,800 just next year, according to the Heritage Foundation. This $494 billion tax increase is the largest ever to hit Americans in one year. 

The 2001 and 2003 Bush tax cuts are coming to an end, which accounts for almost 34% of the tax increases taking effect next year; the Alternative Minimum Tax will hit more of the middle class next year.The Heritage Foundation calls these collective tax increases "Taxmageddon."

The payroll tax cut will expire next year, which will result in a 2% tax increase for workers. This tax increase accounts for 25% of all the tax increases taking effect next year. 

The rest of the tax increases come from Obamacare. Those making over $250,000 will incur a 3.8% hospital insurance surtax; this is one of the several Obamacare taxes taking effect next year.
Estate taxes will be raised, affecting smaller estates.

Earlier this month, the Congressional Budget Office reported that if Congress extends the tax cuts, 1.8 million jobs could be created.

This fiscal cliff and uncertainty could all have been averted if the Senate had followed the law and passed a budget. Congress needs to abandon these ad hoc measures to handle impending fiscal doom and control spending long-term by making a budget resolution.

To read more about the fiscal cliff, read the Taxmageddon factsheet and Fiscal Cliff: What Congress Should Do from the Heritage Foundation.

Geithner Calls For Eliminating the Debt Ceiling Entirely

While the rest of Washington is anxious about the coming fiscal cliff, CNSNews reported Treasury Secretary Timothy Geithner telling Bloomberg TV that Congress should raise the debt limit "to infinity." Geithner argued that in order for American credit not to be threatened with default, Congress should eliminate the debt ceiling entirely. To get rid of the debt ceiling to avoid default is not solving the problem of American credit decline but rather skirting the real issue of unsustainable spending--and even making it worse by allowing Congress to ignore any limits on spending.

The debt ceiling was increased in August 2011 by $2.4 trillion, and as of last week the Treasury Department still had $154.3 billion left in borrowing power, which means another debt ceiling crisis at the end of the year unless Congress decides to raise the debt ceiling again. Last week Senate Majority Leader Harry Reid, (D-Nev.) promised that when it comes to the debt ceiling, "If it has to be raised, we'll raise it."