How Did America Get To The Fiscal Cliff?

U.S. politicians will return to Capitol Hill on Tuesday in Washington D.C. to address the simmering budget battle related to the “fiscal cliff” that has garnered immediate attention in global markets following the end of the U.S. presidential election last Tuesday.

Republicans on Capitol Hill are beginning to lay out their new plans behind the scenes for how they will respond to President Obama and his liberal policies for another four years with a much weaker hand at the bargaining table than in 2010 when Republicans gained momentum following a surging national Tea Party movement that handed Republicans a majority in Congress, leading them to focus their attention on cutting entitlement spending, repealing Obamacare, and thwarting any effort to repeal the Bush tax cuts.

Today the Republican Party is engaging in some “soul searching” after losing a second U.S. presidential election, resulting in an 8 year Republican absence inside the White House and another minority in the Senate. 

With a now dormant Tea Party movement that appears to be mostly out of touch with Main Street U.S.A, many  Congressional Republicans, who previously rose on the coattails of the Republican Tea Party movement, are now faced with reality of receiving more criticism from their own constituents if they fail to work out a deal with President Obama and the Democrats in Senate before the looming January 2nd fiscal cliff deadline.

Many of them will face another reelection campaign within their own districts in only 2 years.

The Democrats on Capitol Hill can gain a huge source of tax revenue by doing nothing at all with the Bush tax cuts and simply wait and watch them expire.

Democrats hold the majority in the Senate and can easily shoot down any Republican led proposals in Congress to extend the Bush tax cuts for the rich, protect capital gains from facing higher taxation, and prevent a cut to defense spending.

In 2010, President Obama and Republicans worked in a bipartisan manner and reached a deal that extended the Bush tax cuts until January 2012 to support a weakened U.S. economy.

But if today’s Congress doesn’t act before the end of 2012, then $607 billion in automatic spending cuts and tax increases are scheduled to take effect.

Major domestic programs, like Social Security, federal pensions and veterans’ benefits, are exempted from the spending cuts.

However, spending for federal agencies and cabinet departments, including defense spending, would be reduced through budget sequestration (automatic across-the-board cuts) and will be split evenly between defense and domestic spending, beginning on January 2, 2013.

Impact On U.S. Economy For Allowing Bush Tax Cuts To Expire In 2013

According to the Congressional Budget Office (CBO), the deficit will shrink to an estimated $641 billion in fiscal year 2013 (or 4.0 percent of GDP), almost $500 billion less than the shortfall in 2012.

But here is the bad news about the U.S. economy: “Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.”

Bush Tax Cuts Revisited

Brought to life in 1999, the Bush tax cuts were meant as a gift, a sharing of the surplus from the fruits of the 1990’s under President Clinton’s disciplined fiscal budget during his second term.

Republican George W. Bush argued and later won the debate for giving the surplus back to all Americans in the form of across the board tax cuts for all income levels. 

Before the Bush tax cuts, the highest marginal income tax rate was 39.6 percent. After the Bush cuts, the highest rate was 35 percent.

President Obama is seeking to have Bush tax cuts expire for Americans whose income on individuals exceeds $200,000 and with married couples reaches above $250,000, moving the top tax rate back to 39.6 percent from 35 percent.

Growing Deficits Under President Bush and President Obama

Under the presidency of George W. Bush, the gross public debt increased from $5.7 trillion in January 2001 to $10.7 trillion by December 2008, due to decreasing tax rates (Bush tax cuts) and two unpaid wars (Iraq and Afghanistan), according to United States Department of the Treasury, Bureau of the Public Debt (December 2010) “The debt to the penny and who holds it”.

Under President Obama, the U.S. deficit expanded from 10.7 trillion in 2008 to 16.2 trillion in November 2012, due in large part to decreased tax revenue (Bush tax cuts), a recession in the late 2000’s, and stimulus spending.







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