2. p. 2
US Fiscal Cliff – A combination of expiring tax cuts and across-the-board
government spending cuts scheduled to become effective Dec. 31, 2012
Federal Reserve Chairman Ben Bernanke
coined the term “fiscal cliff” to describe
several big fiscal events set to occur in the
U.S. at the end of this year and in early 2013.
Among them:
• $607 billion of expiring tax cuts, new
taxes, and automatic spending cuts are
set to take effect at the end of 2012
• The expiration of fiscal stimulus
measures, such as the payroll tax cut and
extended unemployment benefits
• Spending cuts scheduled to be
triggered automatically (sequestration)
in January 2013 .
Changes in Specified Revenue Policies ($ billions)
Expiration of income tax and estate and gift tax provisions; indexing the
alternative minimum tax for inflation (Bush-era tax cuts)
221
Expiration of the reduction in the employee’s portion of the payroll tax 95
Other expiring tax provisions 65
Taxes included in the Affordable Health Care Act 18
Changes in Specified Spending Policies ($ billions)
Automatic enforcement procedures specified in the Budget Control Act 65
Expiration of unemployment benefits 26
Reduction in Medicare's payment rates 11
Other changes in revenues and spending 106
Total Impact of Fiscal Cliff in 2013 607
Bush-era tax cuts: Tax cuts passed by
the Congress under George W. Bush in
2001 and 2003, and are scheduled to
expire. Some of these include:
• Child tax credit
• American Opportunity tax credit
• “Payroll Tax Holiday”
• AMT patch
New taxes that will begin in 2013 as a result of the
Affordable Health Care Act include:
• 3.8% Medicare income tax
• 0.09% additional Medicare Hospital Insurance tax
• 2.3% excise tax on medical device manufacturers
• Increased limitation on deductible medical
expenses
Large spending cuts are also set to
begin in 2013:
• Defense/government contracts
• Discretionary income
• Medicare payments
• Extended unemployment
3. p. 3
• Taxes would rise about 20%
• Lowest income tax would rise from 10% to 15%;
highest income tax would rise from 35% to 39.6%
• Phase out of Earned Income Tax Credit
• Child tax credit will fall to $500 per child from
$1000. Refundable portion will also be reduced
• Expiration of the “Payroll tax holiday," a 2% Social
Security tax cut on the first $110,000 in wages,
will mean a tax hike of $1,000 per year
• Tax rate on dividends would jump to ordinary tax
rates of 39.6%
• Under the “sequestration” plan devised in 2011,
cuts totaling $1.2 trillion over 10 years —The cuts
are also evenly split between defense spending
and discretionary domestic spending, which
exempts most spending on entitlements like
Social Security and Medicaid.
• According to the latest projection from the
Centers for Medicare & Medicaid Services, the
Medicare physician pay rates is expected to fall by
27%.
GDP (%y/y) Unemployment (%)
No fiscal cliff 2.5% 8.6
1 Full fiscal cliff -1.0% 10.1
2 75% of cliff -0.1% 9.7
3 Only tax cuts implemented 0.6% 9.4
4 50% of cliff 0.8% 9.3
5 Only spending cuts implemented 1.5% 9.0
6 25% of cliff 1.7% 9.0
US economy in 2013 under
fiscal assumptions
Taxes
Spending
Cuts
Impact
Taxes and Spending Cuts; and overall impact on the US economy
In 2013, taxes are expected go up almost $400 billion and federal spending to go down $160 billion
4. p. 4
Impact
Impact on the global economy
US
fiscal
cliff
• With US output declining, other countries (mainly
high-income and European) are affected via reduced
exports as US imports fall by 5%.
• Weaker global growth contributes to a 6% decline in
oil prices and a 2 and 1% drop in metal and food
commodity prices.
• In the Euro Area where the forecast is for a very
weak growth recovery of 0.3% in 2013, the US fiscal
cliff will push the region back into recession.
• In developing countries, the impact will be
widespread, with 38 countries experiencing a GDP
decline of 0.5% or more, while for 18 countries, the
decline will be at least 0.5% of GDP.
• IMF expects the immediate neighbours of the US,
such as Canada and Mexico, to lose the most from
the fiscal cliff.
• China and several advanced countries would also
suffer up to 25% of the hit taken by US growth.
-0.3
-0.4
-0.4
-0.5
-0.6
-0.7
-0.8 -0.8
-0.9
-1.4
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
GDP Impact – US fiscal cliff
5. p. 5
The fiscal cliff The Jan 2013 deal Status
Bush-era tax cuts ($221bn)
• Retained except for those earning
more than $400,000, who will pay
39.6% tax
• Increase tax to 40% for estates over
$5m
Agreed
Payroll tax holiday ($95bn)
• Allow taxes to rise to 6.2% from
4.2% on first $113,000 earned
Agreed
Other tax provisions ($65bn)
• Extend tax cuts from the 2009
stimulus law until 2018
Agreed
Changes in revenue and
spending, including the
Health Care Act ($124bn)
- Agreed
Defense and non-defense
($65bn)
• To be agreed in March Deferred
Unemployment benefits
($26bn)
• Expansion extended for one year Deferred
Medicare payment rates
($11bn)
• Delayed for one year Deferred
Current scenario
The US government passed a bill to avoid the impacts of the "fiscal cliff"
Obama approved a bill on January 1, to avoid the
threats of the fiscal cliff. The deal has averted
most of the fiscal cliff measures, including :
• Making tax cuts permanent for individuals
earning less than $400,000
• Postponing $65bn of automatic spending cuts
for two months
• Keeping benefits for the long-term
unemployed, worth $26bn, available for
another year
• Postponing for a year an $11bn cut in
Medicare payments
However, the deal also allowed some tax rises to
go ahead:
• The expiry of a payroll tax holiday, expected to
raise $95bn in additional annual revenue
• Allowing the Bush-era income tax cuts for
individuals earning over $400,000 to end, with
the top rate increasing from 35% to 39.6%
• Tax rates on dividends and capital gains
increased from 15% to 23.8%
• Phasing out certain income tax deductions for
individuals earning more than $200,000
Tackling the fiscal cliff