What is the Fiscal Cliff?

You’re hearing about it everywhere, from the nightly news to your co-workers. But with a lot of voices from a lot of different directions, you might still be wondering: What is the Fiscal Cliff?

Like many things related to government and taxes, the complete answer to this question could fill a book. But for now, here are three ways to look at it.

The simple answer: The fiscal cliff is the nickname for what will happen at midnight on January 1st if no deal is reached before the close of 2012, when an anticipated $500 billion in tax increases will go into affect along with $200 billion in spending cuts.

The slightly more complicated answer: The fact that these two events (tax increases and spending cuts) are happening in tandem is due to an earlier act of Congress, which essentially created this fiscal cliff as an incentive to work together to come up with a better plan. Republicans don’t want to see taxes go up and Democrats don’t want to see spending go down.

Though economists and legislators don’t agree on how bad the consequences will be, most do agree that there will be some amount of negative consequences that it would be best to avoid. The tax increases would mean everyone would be paying more across the board, which is bad for low-income Americans. It will also prevent the economy from growing, as there is no element of stimulus, including by way of investing.

The bottom line: The fiscal cliff would reduce the American deficit, which seems like it could be a good thing. However, experts agree that it would do so too quickly and too harshly, which could cause an economic crisis like the one we’ve seen in Europe.

That means that right now politicians are trying to find a middle ground that would both prevent the country from going over the fiscal cliff without giving up too much of what they believe is necessary in the process.

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