What is the fiscal cliff?
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The fiscal cliff is a combination of tax increases and government spending cuts that will occur automatically on Jan. 1, 2013, if Congress and the White House do not agree on a way to avert it. The situation arose because Congress could not agree on a deficit reduction plan last year.
Among other things, if there is no agreement, the highest marginal income tax rate would revert to 39.5% from the current 35%; the temporary FICA payroll tax reduction would expire and increase the rate to 6.2% from 4.2%; and taxes on estates, capital gains and dividends would increase. At the same time, federal spending would be cut.
The Congressional Budget Office projects that the combination of higher taxes and reduced spending in the name of deficit reduction would dramatically slow economic growth in 2013 to 0.5% from a projected 4.4% and could lead to another recession.
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