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Over the Fiscal Cliff: What Awaits Us on the Other Side

By Connie Cass

WASHINGTON (AP) - Efforts to save the nation from going over a year-end "fiscal cliff" were in disarray as lawmakers fled the Capitol for their Christmas break. "God only knows" how a deal can be reached now, House Speaker John Boehner declared.

President Barack Obama, on his way out of town himself, insisted a bargain could still be struck before Dec. 31. "Call me a hopeless optimist," he said.

A look at why it's so hard for Republicans and Democrats to compromise on urgent matters of taxes and spending, and what happens if they fail to meet their deadline:

New Year's Headache

Partly by fate, partly by design, some scary fiscal forces come together at the start of 2013 unless Congress and Obama act to stop them. They include:

- Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and breaks expire at year's end.

- About $110 billion in spending cuts divided equally between the military and most other federal departments. That's about 8 percent of their annual budgets, 9 percent for the Pentagon.

Hitting the national economy with that double whammy of tax increases and spending cuts is what's called going over the "fiscal cliff." If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial market turmoil, economists predict.

What If They Miss the Deadline?

If New Year's Day arrives without a deal, the nation shouldn't plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.

So long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could mostly be held at bay for a few weeks. Then they could be retroactively repealed once a deal was reached.

The big wild card is the stock market and the nation's financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? In what could be a preview, stock prices around the world dropped Friday after House Republican leaders' plan for addressing the fiscal cliff collapsed.

Federal Reserve Chairman Ben Bernanke has warned lawmakers that the economy is already suffering from the uncertainty and they shouldn't risk making it worse by blowing past their deadline.

What If They Never Agree?

If negotiations between Obama and Congress collapse completely, 2013 looks like a rocky year.

Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to a study by the non-partisan Tax Policy Center. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.

At the same time, Americans would feel cuts in government services; some federal workers would be furloughed or laid off, and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.

"The consequences of that would be felt by everybody," Bernanke says.

The Taxes

Much of the disagreement surrounds the George W. Bush-era income tax cuts, and whether those rates should be allowed to rise for the nation's wealthiest taxpayers. Both political parties say they want to protect the middle-class from tax increases.

Several tax breaks begun in 2009 to stimulate the economy by aiding low- and middle-income families are also set to expire Jan. 1. The alternative minimum tax would expand to catch 28 million more taxpayers, with an average increase of $3,700 a year. Taxes on investments would rise, too. More deaths would be covered by the federal estate tax, and the rate climbs from 35 percent to 55 percent. Some corporate tax breaks would end.

The temporary Social Security payroll tax cut also is due to expire. That tax break for most Americans seems likely to end even if a fiscal cliff deal is reached, now that Obama has backed down from his call to prolong it as an economic stimulus.

The Spending

If the nation goes over the fiscal cliff, budget cuts of 8 or 9 percent would hit most of the federal government, touching all sorts of things from agriculture to law enforcement and the military to weather forecasting. A few areas, such as Social Security benefits, Veterans Affairs and some programs for the poor, are exempt.

There's More At Stake

All sorts of stuff could get wrapped up in the fiscal cliff deal-making. A sampling:

- Some 2 million jobless Americans may lose their federal unemployment aid. Obama wants to continue the benefits extension as part of the deal; Republicans say it's too costly.

- Social Security recipients might see their checks grow more slowly. As part of a possible deal, Obama and Republican leaders want to change the way cost-of-living adjustments are calculated, which would mean smaller checks over the years for retirees who get Social Security, veterans' benefits or government pensions.

- The price of milk could double. If Congress doesn't provide a fix for expiring dairy price supports before Jan. 1, milk-drinking families could feel the pinch. One scenario is to attach a farm bill extension to the fiscal cliff legislation - if a compromise is reached in time.

- Millions of taxpayers who want to file their 2012 returns before mid-March will be held up while they wait to see if Congress comes through with a deal to stop the alternative minimum tax from hitting more people.

Call the Whole Thing Off?

In theory, Congress and Obama could just say no to the fiscal cliff, by extending all the tax cuts and overturning the automatic spending reductions in current law. But both Republicans and Democrats agree it's time to take steps to put the nation on a path away from a future of crippling debt.

Indeed, the automatic spending cuts set for January were created as a last-ditch effort to force Congress to deal with the debt problem.

If Washington bypassed the fiscal cliff, the next crisis would be just around the corner, in late February or early March, when the government reaches a $16.4 trillion ceiling on the amount of money it can borrow.

Boehner says Republicans won't go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in the United States.

To avoid that scenario, Obama and Boehner are trying to wrap a debt limit agreement into the fiscal cliff negotiations.

So What's the Holdup?

They're at loggerheads over some big questions.

Obama says any deal must include higher taxes for the wealthiest Americans. Many House Republicans oppose raising anyone's tax rates. Boehner tried to get the House to vote for higher taxes only on incomes above $1 million but dropped the effort when it became clear he didn't have the votes.

Republicans also insist on deeper spending cuts than Democrats want to make. And they want to bring the nation's long-term debt under control by significantly curtailing the growth of Medicare, Medicaid and Social Security - changes that many Democrats oppose.

Obama, meanwhile, wants more temporary economic "stimulus" spending to help speed up a sluggish recovery. Republicans say the nation can't afford it.

It's Not Just Washington

Seems like they could just make nice, shake hands and split their differences, right?

But there's a reason neither side wants to give ground. The two parties represent a divided and inconsistent America. True, Obama just won re-election. But voters also chose a Republican majority in the House.

Republican and Democrats alike say they are doing what the voters back home want.

Neither side has a clear advantage in public opinion. In an Associated Press-GfK poll, 43 percent said they trust the Democrats more to manage the federal budget deficit and 40 percent preferred the Republicans. There's a similar split on who's more trusted with taxes.

About half of Americans support higher taxes for the wealthy, the poll says, and about 10 percent want tax increases all around. Still, almost half say cutting government services, not raising taxes, should be the main focus of lawmakers as they try to balance the budget.

When asked about specific budget cuts being discussed in Washington, few Americans express support for them.

The Countdown

Time for deal-making is short, thanks to the holiday and congressional calendars. Some key dates for averting the fiscal cliff:

- Lawmakers aren't expected to return to the Capitol until after Christmas, leaving less than a week to vote on a compromise before year's end.

- Obama and his family also were leaving town for a Christmas vacation in Hawaii. The president said because the fiscal cliff was still unresolved, he would return to Washington next week.

- If lawmakers reach Dec. 31 without a deal, some economists worry that the financial markets might swoon.

- The current Congress is in session only through noon Eastern time on Jan. 3. After that, a newly elected Congress with 13 new senators and 82 new House members would inherit the problem.

Associated Press writers Jim Kuhnhenn, Alan Fram and Andrew Taylor and Director of Polling Jennifer Agiesta contributed to this report.

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December 29 2012 at 2:05 PM Report abuse +1 rate up rate down Reply

It's really simple. We need to pay for 10 years of warfare that went unfunded. We need to stop drizzling money all over the world to people that hate us. We need to cut our military presence in places like Germany and other WW2 zones that are best left alone. We need to let the world pay it's own way and spend our money at home rebuilding our archaic infrastructure.

December 26 2012 at 7:44 AM Report abuse rate up rate down Reply
1 reply to mrhunter500's comment

I bet you would like us to keep funding your welfare check too dear.

December 26 2012 at 11:26 PM Report abuse +1 rate up rate down Reply

I don't want the "rich" taxed at any rate that isn't fair and equitable. There, I said it.

I want Congress to define what is fair and equitable and I want Congress to define fair and quitalbe in the tax code. I want the President to agree as demonstrated by his signature on the Bill.

Spending as well must be examined and prioritized. Here a few suggestions:

Freeze for three years the federal budget, including salaries and wages, and social security COLA.

Rake n' stack the budget and make the cuts from the bottom up in each Department and Agency.

Cut or redefine under new managment projects and programs that are not performing has advertised or expected,

Attrite federal personnel then hire at a high ratio.

Go after inefficiencies, fraud, and waste with a vengence using the latest in technology for data analytics for all social programs and all federal contracts with anyone or anybody that has a value greater than $1000K and terms and conditions beyond a year.

If Congress and the President stop the empty rhetoric and one-ups-man-ship, then perhaps they'll each have time to do the jobs we elected them to do.

Take a look at the quote from the President on OMB's homepage. Fairness is really what this is about and taxing folks with lots of money (relatively speaking) more than those with less money (relatively speaking) isn't fair; it is a cop out.

December 26 2012 at 7:20 AM Report abuse -1 rate up rate down Reply
1 reply to Mike's comment

Mike .. we need YOU in Washington.....

December 26 2012 at 9:13 AM Report abuse rate up rate down Reply

These people are playing with your livelyhood like it's some kind of a game.

December 26 2012 at 6:03 AM Report abuse rate up rate down Reply

The focus should be about spending not taxes...with out that all the taxes in the world wont make a dent in this debt...Cmon be real...the spending isnt even talked about...its a sidenote...it should be front and center and thats where the medias focus and the arguments should be about...period...think about it we really dont have a tax problem....if they raise taxes on all of us we will still hit the debt ceiling even if they extend it once more...once again averting the issue...shoving it under a rug...but soon the rug wont be there....its freyed and we will get a lower rating from moodys that in turn will be trhe final tally before a worldwide depression a the world decides on gold as the reserve currency. Oh we aint seen nothing yet...but thanks voters I guess you all thought the last 4 yours were so good you voted exactly as you did four years ago...well something is gonna come hoem to roost and it aint good and whoever voted this imbasile in for another 4 years...I hope you lose your shirt to teach you a damn hard lesson....

December 26 2012 at 1:47 AM Report abuse -1 rate up rate down Reply

"John Boener can fix this, Hic-up"

December 26 2012 at 1:07 AM Report abuse rate up rate down Reply
1 reply to norman's comment

Perhaps you might want to be sober when you post dear. Perhaps a few less trips to the liquor store might do you some good doll.

December 26 2012 at 11:29 PM Report abuse rate up rate down Reply

Fair s fair..... We all go over the cliff together and we all pay more taxes !

All for one and one for all.

December 25 2012 at 11:10 PM Report abuse -1 rate up rate down Reply

If the Bush tax cuts were so bad, then why is everyone so worried about them expiring? It is said that if they expire the middle class will be hurt. Well then when they were enacted, the middle class must have been helped, but I thought Bush was only for the RICH? Congerss, which was democratic, during the last years of Bush controlls spending. What has happened with our spending over the last six years? Bush spent a lot of money on wars. How much of that money remained in this country? Money for munitions, equipment, salaries for military folks,etc. Kind of like a stimulis wasn"t it.

December 25 2012 at 9:25 PM Report abuse -1 rate up rate down Reply

. Is it Irony, that we get the leaders we elect, or is that just Karma? Call me Hopeless, Hell I knew that 4 years ago when you were running on Hope.

December 25 2012 at 8:59 PM Report abuse rate up rate down Reply

Listen up Democrats..

In one common telling, the pilgrims who came to Plymouth established a communal system, where all had to pool whatever they hunted or grew on their lands. Because they could not reap the fruits of their labors, no one had any incentive to work, and the system failed — confusion, thievery and famine ensued.

Finally, the governor of the colony, William Bradford, abolished this system and gave each household a parcel of land. With private property to call their own, the Pilgrims were suddenly very industrious and found themselves with more corn than they knew what to do with. So they invited the Indians over to celebrate. (In some other versions, the first Thanksgiving is not a feast but a brief respite from famine. But the moral is always the same: socialism doesn’t work.

December 25 2012 at 6:23 PM Report abuse -2 rate up rate down Reply
1 reply to ragtopdaz's comment

Then it's a good thing the Democrats don't want socialism in America. They support free enterprise, private property and capitalism. We can all agree on something.

December 25 2012 at 6:32 PM Report abuse rate up rate down Reply
2 replies to lawmutt55's comment

So then your saying Obama is a Republican??? So lets spread the wealth doesn't count either??

December 25 2012 at 6:45 PM Report abuse rate up rate down

No, Obama is a Democrat. I'm saying both Republicans and Democrats support the free enterprise capitalistic system. As to "let's spread the wealth, our nation's economy requires infrastructure to allow it to operate. Those who have benefited most from the economy are in the best position to support the system.

December 25 2012 at 8:26 PM Report abuse rate up rate down