Snapshot: What Will Happen if the U.S. Goes Over the Cliff
The "fiscal cliff" is only days away and efforts to avert it are making little progress, with some U.S. lawmakers predicting the tax increases and federal spending cuts involved will start taking hold in January, unless a deal comes together very quickly.
If these jolts to the economy are allowed to occur, a recession could follow, economists have forecast.
Consumer spending power suddenly would be reduced if the nation tumbles over the "cliff." The U.S. government's annual tax take would rise by $500 billion, significantly lowering the federal budget deficit, but at a high economic price.
On average, each U.S. household's tax bill would rise by $3,500; for middle-income households, by almost $2,000, according to the Tax Policy Center, a non-partisan think tank.
Here are the key tax increases, spending cuts and other issues that have come to be known as the "fiscal cliff":
TAX MEASURES
* Income tax rates. On Dec. 31, low ordinary income tax rates enacted on a "temporary" basis in 2001 under former Republican President George W. Bush are set to expire.
President Barack Obama, his fellow Democrats and Republicans in Congress agreed at the end of 2010 to extend these rates for two years, but only a few days remain on that timetable.
If Congress and Obama do nothing by Dec. 31, taxes will rise for most Americans. Rates will go up to 15, 28, 31, 36 and 39.6 percent from the present 10, 15, 25, 28, 33 and 35 percent.
Obama and the Democrats want to prevent this by extending the Bush tax rates again, but only for income below $200,000 per individual, or $250,000 per family. For income above that level, they seek a return to the higher, pre-Bush tax rates.
Republicans are divided. Some who oppose tax increases of any kind want the Bush tax rates to be extended at all income levels. Others, including House of Representatives Speaker John Boehner, have supported letting rates rise, but only on incomes above $1 million - a much higher level than Democrats support.
Obama proposed a compromise level of $400,000, but this was spurned by Republicans. Boehner spent several days last week trying to pass a measure in the House, which he leads, with the $1-million threshold. But he lacked the votes and gave up.
Afterward, Boehner said Obama and the Democratic-controlled Senate must work out a compromise. The Senate has returned from its holiday break. The Republican-controlled House has not but is expected to return late on Sunday.
* Investment income tax rates. Bush and Congress in 2003 cut taxes on capital gains and dividends, most of which go to high-income taxpayers. These cuts are set to expire at year-end too.
If no action is taken, the long-term capital gains tax rate will rise to 20 percent from 15 percent for the top four tax brackets. At the bottom, they will rise to 10 percent from zero.
Obama wants to let the capital gains rate rise to 20 percent from 15 percent for income above the $200,000/$250,000 level. Taxes on gains below that would still top out at 15 percent.
Without action from Congress, the dividend tax rate will rise to the ordinary income tax rates for each tax bracket. That would be as high as 39.6 percent for top earners, up from 15 percent now for dividends on qualified, long-term investments.
Obama wants to keep the 15 percent qualified dividend rate cap for most people, but let it rise on income above the $200,000/$250,000 threshold, to 36 percent or 39.6 percent.
* Personal exemption phase-out and itemized deduction limit. These caps on personal exemptions and itemized deductions will return in 2013 if Congress does not intervene. Both apply to upper-income taxpayers and would limit their ability to lower their tax bills. The caps were eliminated in stages by Bush. But the expiration of his tax cuts means the caps would come back.
* Obama healthcare tax. Regardless of what happens with the fiscal cliff, investment income above $200,000/$250,000 will be subject to a new 3.8 percent tax under Obama's healthcare law.
* Alternative minimum tax. The AMT - which prevents upper income taxpayers from slashing their tax bills too much through tax breaks - expired at the end of 2011. That has not had an impact yet because 2012 tax returns have not been filed. The tax is not indexed for inflation. So it is routinely "patched" to prevent tens of millions of upper-middle-class taxpayers from having to start paying it. Both Republicans and Democrats support doing another patch, but have not approved one. The Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix.
* Tax breaks. Dozens of individual and business tax breaks expired at the end of 2011, including the research and development credit. There is wide support for extending them again, but businesses will be watching for any faltering.
* Payroll tax. A cut in the payroll tax was extended earlier this year, in an effort to boost the economy. The current 4.2 percent rate paid by about 160 million workers, down from the previous 6.2 percent rate, expires on Dec. 31. Some Democrats, including Obama, back extending the tax cut. The powerful AARP seniors' lobby opposes renewing the cut, fearing the Social Security system that it helps fund will be undermined.
* Estate tax. The estate tax, which applies to assets passed onto heirs, currently stands at 35 percent, after an exemption level of $5 million. With no action, the tax will rise to 55 percent, after excluding the first $1 million of value. Obama wants to raise the tax to 45 percent, with a $3.5 million exemption, but some high-profile Democrats have come out in support of keeping the current tax and exemption levels. Many Republicans want a repeal of what they call the "death tax."
BUDGET MEASURES
* Automatic spending cuts. In a deal last year to raise the U.S. debt ceiling, Obama and Congress agreed to $1.2 trillion in across-the-board spending cuts if lawmakers failed to reach a deficit-cutting deal by Jan. 2. They failed. Now lawmakers fear the cuts, known as a "sequester," could harm the economy. Obama has proposed delaying the cuts for a year.
* Unemployment benefits. Millions of people have been exhausting their government jobless benefits during the economic downturn. Congress has extended the benefits several times. Another deadline comes at year-end. Many Republicans want the extensions to stop, saying they discourage job-hunting. Obama has proposed extending the benefits.
* "Doc fix." Because of an outdated formula in the law, government payments to doctors who treat patients on Medicare, the U.S. health program for the elderly and disabled, are routinely underestimated. If Congress doesn't fix the situation by the end of the year, the doctors face a double-digit cut to their payments, which could lead them to drop Medicare patients.
DEBT CEILING
The Treasury Department on Dec. 26 announced the first in a series of measures to delay by two months or so the day when the government will exceed its legal borrowing authority. Without action, Treasury said the $16.4 trillion debt ceiling would be reached on Dec. 31. Obama wants it raised under a deal to avoid the cliff and he wants new power to raise it himself.