U.S. News: The U.S Economy Approaches Possible Fiscal Cliff

Updated August 5, 2020 | Infoplease Staff

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    The U.S Economy Approaches Possible Fiscal Cliff

    by Jennie Wood

    After President Obama's re-election, the focus in Washington turned to the Federal Budget and the approaching "fiscal cliff." During the lame duck session, Congress was faced with figuring out how to increase revenue and maintain funding for important programs despite mandated spending cuts and the Dec. 31 expiration of both the extended Bush-era tax cuts and stimulus measures that were enacted 2010. The Congressional Budget Office predicted that the economy would fall back into recession if $500 billion in spending was taken out of a still struggling economy at the same time the stimulus measures expired.

    Because the 2012 general election resulted in Democrats maintaining control of the Senate and Republicans retaining a majority in the House, earlier arguments over how to resolve the federal budget impasse remerged. The Obama administration and Democrats proposed ending the Bush tax cuts for people who earned more than $250,000 a year, while Republicans wanted to keep those tax cuts, protect the large defense budget, and make deep cuts to domestic spending.

    On November 29, 2012, Treasury Secretary Timothy F. Geithner presented Obama's plan in a meeting with Speaker of the House John Boehner. Obama's proposal called for a $1.6 million tax increase over ten years. These tax increases would be for higher-income earners (those earning more than $250,000) and increases to the estate tax. His proposal also called for refinancing of under water home mortgages, an end to Congressional control over statutory borrowing limits, and $50 billion for immediate stimulus spending. If Republicans agreed to his proposal, Obama would in return work to save $400 billion from Medicare and other domestic programs, but with no guarantees. Republicans reacted to Obama's proposal with very strong resistance.

    As 2012 drew to a close, budget analysts weighed in and said that the effects of the impasse ahead would not be as extreme as predicted and called it more of a "fiscal slope" than a "fiscal cliff." Meanwhile, several members of Congress from both political parties expressed hope that once again a major confrontation over the federal budget and tax cuts could be avoided. However, negotiations still came down to the wire.

    Finally, on December 30, Republicans in the Senate backed off on their demand that the deal had to include new inflation calculations for Social Security and other programs. Republican Senate leader Mitch McConnell worked with Vice President Joe Biden into the late hours of the night finalizing a deal. In the early hours of January 1, 2013, the Senate approved a deal that would raise tax rates from 35 to 39.6 percent for those earning more than $400,000. The deal would also temporarily suspend across-the-board spending cuts. Later that night, the House also passed the legislation. The House's vote ended the long dramatic showdown over the fiscal cliff with only a few hours left of the 112th Congress.

    More information on the U.S. Economy:

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