Major pain or doomsday scenario? Dissecting the fiscal cliff

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by MARK WIGGINS / KVUE News and photojournalist JOHN FISHER

Bio | Email | Follow: @MarkW_KVUE

kvue.com

Posted on November 26, 2012 at 7:35 PM

Updated Tuesday, Nov 27 at 8:26 AM

AUSTIN -- The sheer face of the indoor rock wall at Austin's Pure Fitness makes for a fun way to burn off holiday pounds, one grip at a time. At the same time, lawmakers in the nation's capital are struggling with a much more sinister edifice -- the fiscal cliff.

"We can and must get an agreement, otherwise I think first of all, the markets are going to start reacting," Sen. John McCain (R-Arizona) told Fox News Sunday. Sen. Joe Lieberman (I-Connecticut) told CNN's State of the Union, "It's not a done deal, and it's not a certainty."

So what is the fiscal cliff? And what happens if we go over it?

First, the government would reduce spending across the board by $1.2 trillion over the next 10 years. Not exactly a "cut" in the literal sense, federal spending would increase less than inflation, resulting in decreased funding compared to the current budget. The reduced spending would apply to everything from defense spending to entitlement programs like Medicare and Medicaid.

Second, the Bush-era tax rates for all income brackets would automatically expire, meaning a tax increase on everyone. The average married couple making $50,000 per year would pay about $1,800 more in taxes -- an increase of about 23 percent. A single taxpayer making $300,000 per year would pay about $10,500 more, roughly an 11 percent increase.

"It would impact our savings," said Travis County homeowner and married father of two Ron Williams, who calculates he would pay hundreds more a month in taxes. "It would impact our lifestyle."

So could going off the fiscal cliff trigger another recession like the economic crisis of 2008?

"I'm very bothered about the fiscal cliff, but 2008, I don't expect," said University of Texas professor and economist Daniel Hamermesh. "How much effect it will have on the economy, very hard to say. The economy's accellerating right now. There's no question at the very least it will brake it. Whether it stops it, I don't think anybody can honestly answer that."

Although risky, Hamermesh says going over the cliff would help reduce the deficit, if not by much. Hamermesh suggests the threat of going over could spur lawmakers to compromise on tax increases for top earners and reforming the entitlement system, an adjustment he argues is key to long-term deficit reduction.

"These are things that are going to grow over time in spending, which would contribute to more and more of a deficit, and we need to address them. I'd like to see some kind of a grand bargain in which all of these things are addressed," said Hamermesh. "There are a lot of easy things at least economically, but whether we have any hope of any political movement, that's another question."

Hamermesh says there is good news. Though criticised during his election for not leading the nation to a more robust recovery, the economy under President Barack Obama is expanding. Hamermesh says that in itself will help reduce the federal deficit.

"The economic growth has been accellerating and will reduce the deficit substantially," said Hamermesh, with a caveat. "But not sufficient even if we get to four percent unemployment to eliminate it the way it was eliminated at the end of the Clinton years. Therefore something does need to be done. The question is the political will to do it."

Unlike many, Williams is willing to take the hit, at least if it means reducing spending at the federal level in a significant way. Williams argues that spending cuts will hurt no matter what, but they have to begin somewhere.

"My solution would be let the cliff happen," said Williams. "Let's pay the bills that are outstanding. Let's stop the profligate spending. Nobody's going to die, our defense is not going to collapse because we have defense cuts, and we have to address the fact that we're spending exceedingly more than we're making."

"The money's got to come from someplace. So I would rather it was taxed up front, then we cut spending, and then we got on track and figured out how to weather the storm," said Williams, who argues that raising taxes on the wealthiest won't do enough to the deficit to be justified. "I think everbody needs to pay something. I think charging those who pay the most isn't going to solve the problem."

"Believe me, an extra three percentage points is not going to cause people to stop working, stop investing and stop doing things. It just isn't going to happen," offered Hamermesh, pointing out that the gap between average Americans and the wealthiest one percent of income earners has continued to increase even with the recession.

In the immediate wake of the president's reelection and with the next midterm two years away, Hamermesh adds the current political landscape could offer the best shot of passing significant and possibly unpopular legislation.

"We raise taxes, the deficit may go down provided the brake on the economy isn't so great that in fact the amount of tax goes down by a lot. I don't think that would happen. I think if we let the Bush tax cuts expire, tax revenues will go up, but not as much as some people think," said Hamermesh.

Until lawmakers agree on a solution, we're left with a cliffhanger.

WHAT WOULD YOU PAY? CLICK HERE FOR THE FISCAL CLIFF TAX CALCULATOR

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