Talk of the upcoming “fiscal cliff” has been picking up lately, so let’s examine what is actually happening here.

The “fiscal cliff” is about $600 billion in tax increases and spending cuts that come about on January 1, 2013. On the tax side, the most significant policies are the income tax cuts enacted in 2001 and 2003, and the payroll tax cut that has been in place for the last two years. The spending cut comes mainly from the “sequester,” with a smaller effect from the expiration of expanded unemployment benefits.

When Congress raised the debt limit last year, the bill it passed included over $2 trillion over ten years in projected spending cuts, from capping annual spending bills and a flat $109 billion per year cut in spending known as the “sequester” that would take effect if a deficit reduction “super committee” failed to agree on $1.2 trillion in savings. The super committee failed, so now the sequester is scheduled to cut spending at the start of 2013, applied equally to defense and domestic spending.

Courtesy of research from Goldman, here’s a glimpse of the impact on taxes if nothing is done before the year is over. The increase is pretty significant.

It’s been a busy year of doing nothing for Congress, but we will have a very politically active fall season coming up.

A handful of major players in the game will be the key determinants of future political policy.

Finally, this handy breakdown of the policies and their implications are nicely outlined. It’s clear that the “Bush tax cuts” of 2001 and 2003 carry the most weight, and would have the greatest impact if they are not extended.

 

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