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The Impact of the Fiscal Cliff

The White House and Congress leaders have reached an agreement which could prevent the worse effects of the “fiscal cliff”, with the present tax rates continuing for those with earnings less than $400,000, the automatic spending cuts being postponed for two months as federal spendings are accommodated through an increase in revenues and spending cuts and capital gains and dividend tax rates increase to 20 per cent.

America is set to go over the fiscal cliff at midnight, spurning into effect automatic tax rises and spending cuts. The origin of the fiscal cliff lies in 2011, when some Tea Party-dominating Republicans took the decision to not raise the debt peak any higher, as is usually done to domicile increased borrowing for the nation, and instead focus on its reduction by forcing the government to streamline its budget. A deal between the Democrats and the Republicans then gave way to the fiscal cliff, where the debt peak was agreed to be raised in return for budget cuts by the end of 2012.

The fiscal cliff, with no proper deal in sight, will put into effect $ 560bn of tax increases and government spending cuts, expiration of the Bush years’ tax cuts and payroll tax holiday, reduced spending of around $ 110bn for the next 10 years, with cuts in store for several government offices, defence, Medicare, farm subsidies, student loans, national parks and assistance, residents of low-income housing and the long-term unemployed on unemployment benefits. In order to avoid recurring stalemate in Congress for his second term, President Obama also requires a victory over the Republicans.

The negligible silver lining here could be the lowering of the federal budget deficit due to a hike of $ 500 bn in tax earnings but it would also see consumer spending slashed and unemployment rise, possibly creating recession. The main points of disagreements in Congress are over a rise in taxes for the wealthy, those with earnings greater than  $250,000, and the defence to be the primary centre of budget cuts. The Republicans oppose this, rather pressing for an increase in taxes with those earning $1m or more and the highlight of the budget cuts to be reduced welfare spending.



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