Congress Scrambles to Deal with Approaching “Fiscal Cliff”

Democrats and Republicans can't agree on how to avoid expiring tax cuts and automatic spending reductions

Less than six months from now, a rare confluence of economic events will bring America to what is known as the “fiscal cliff” – a year-end reckoning in which a broad series of tax cuts expire and massive government spending cuts go into effect.

Just about everyone agrees that allowing the country to tumble over the precipice will be very bad for the struggling economy. But the debate over how to deal with it is heating up, and the consequences will have a direct effect on Americans’ wallets.

The provisions would eliminate an estimated $500 billion from the economy in 2013. Ben Bernanke, who runs the Federal Reserve, warned Congress this week that failing to act could derail the sluggish recovery. The Congressional Budget Office warns that doing nothing would send the country back into recession.

At the same time, doing the opposite – to allow the tax cuts (on individuals and businesses) to continue, and to renege on the spending cuts – would just compound the problem by letting the nation’s budget deficit balloon.

That’s where politics comes in.

The fiscal cliff is an event of Congress’ own making. Lawmakers have previously voted to extend the tax cuts – income tax relief originally passed when George W. Bush was president, and an easing of payroll taxes. The spending cuts -- $27 billion from defense and non-defense budgets, and another $12 billion from Medicare – were part of lawmakers’ 2011 deal to end a showdown over the nation’s debt ceiling. (For a more detailed explanation, check out this post from the Washington Post's Wonkblog.)

As usual, Democrat and Republicans can’t agree on a plan to get out of this mess. Democrats have threatened to let the deadline pass unless Republicans agree to make the rich pay more taxes. Republicans have refused to increase taxes on anyone. Democrats are now considering an end-run around the GOP opposition by letting all the tax cuts expire and then proposing a new tax cut for middle-income Americans.

The solution likely lies in some kind of deal that softens the impact of the tax-cut expirations and the spending reductions. That’s what President Obama says he’d like. His preference is to avoid the spending cuts and extend tax cuts for the non-wealthy.

But instead of negotiating, Republicans and Democrats in Congress are digging in.

Democrats continue to threaten to let the fiscal cliff come unless the tax cuts expire for the wealthiest Americans. Sen. Mitch McConnell, Republican of Kentucky, accused Democrats of waging an “ideological crusade.”

It's safe to assume that nothing will get resolved until after the November elections, leaving Congress a few precious weeks before the plunge.

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