The Fiscal Cliff was set to occur on January 1, 2013 when a large amount of tax increases and spending cuts were to begin. If this occurred it could have triggered another American recession. A deal was made outlining important changes to taxes and spending which appeased both Republicans and Democrats to some extent.
Americans do not give any of the key players high marks for their handling of the fiscal cliff budget negotiations, although they are most charitable in their ratings of President Obama.
18% of Americans believe that leaders should stick to their principles and beliefs on tax increases and spending cuts, while seven in 10 say leaders should compromise their principles and beliefs in order to get an agreement.
The phase out of personal exemptions will be reinstated with a starting income threshold for those making $250,000.
Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated "bonus" depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
-- Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation
to prevent nearly 30 million middle- and upper-middle-income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts will be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
Estate tax: Estates will be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
The deal delays the sequester, a series of automatic cuts in federal spending, for two months.
Under sequestration, if the deficit exceeded a set of fixed deficit targets, automatic spending cuts kicked in. Theoretically, cuts should be across-the-board and equal, but Congress often exempts certain programs, which means other programs are hurt. However, sequestration rarely occurs since Congress raises the spending caps.
This dates back to August 2011 when Obama and the Congress fought over raising the debt ceiling, which is the amount of money the U.S. can borrow. Normally Congress raises the ceiling without much fanfare. In 2011, Tea Party-backed Republicans said they would not agree to raise the debt ceiling unless the U.S. started to look at its spending. A bitter fight ensued – gold prices rose to their all-time high of $1,921 an ounce that September – and the U.S. came close to not paying its obligation. The deal that was struck allowed the debt ceiling to rise in exchange for a plan to cut the national deficit. If there was no plan, then sequestration would kick in.
On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts (see table 1) are scheduled to take effect. That’s equal to about four percent of GDP, which is, according to the Congressional Budget Office, more than enough to throw us into a recession