President Barack Obama continues to govern, but he has yet to overcome many critical issues going into his next term.
One of those issues is the fiscal cliff and the repercussions that could happen if nothing is done before Jan. 1, 2013.
Penn State economics professor Russell Cooper said the fiscal cliff is due to a congregation of House and Senate members in the summer of 2011 who could not agree on how to decrease spending in the United States.
Beginning in 2013, the government wants to cut $1 trillion over 10 years by $100 billion each year, Cooper said.
This large cut will be split between defense spending and non-defense spending, Cooper said. About $600 billion of those spending areas will be a combination of spending reduction and income tax increases, he said.
Roughly $100 billion in cuts will be from spending reductions under the Budget Control Act of 2011, Cooper said. The act increased the debt ceiling to allow for more spending.
What is supposed to happen next year is a simultaneous reduction in fiscal spending and an increase in taxes, while the economy contracts, Cooper said. Experts say if the fiscal cliff occurs as badly as predicted, then the U.S. may find itself in a recession once again, he added.
However, Cooper said some people argue that going over the cliff could, in some sense, be good for the economy rather than a bad thing.
“There is so much uncertainty now about the U.S.’s ability to meet future debt payment requirements,” Cooper said.
He said America could use this situation to display a sense of confidence by taking proper action.
The cliff and students
Adrienne Kearney, a Penn State economics professor, said the possibility of the fiscal cliff may have already affected unemployment. She said unemployment in America is still high and employers haven’t been hiring because of the uncertainty about whether or not the cliff will occur.
“If income taxes go up and government spending goes down, aggregate demands for goods and services will drop,” she said.
Kearney said until businesses know if the cliff will happen or not, they are hesitant to hire those who remain unemployed — college students alike.
Kearney said that if people have to pay higher taxes, they will have less money to spend on goods and services. One the flip side, firms are afraid to hire new workers and expand businesses because they don’t know how the cliff will affect demand, she said.
“The cliff will cut government spending quite dramatically and could drive down the U.S. economy into recession, or a decline of output or rising unemployment,” Kearney said.
Tax cuts and the cliff
Penn State political science professor David Lowery said the fiscal cliff concerns three aspects: the Bush-era tax cuts, spending cuts and the debt ceiling.
The Bush tax cuts were first enacted in 2001 and the only way the government would allow it to pass is if they attached to it a “sunset provision,” similar to an expiration date, Lowery said. The tax cuts were set to expire in 10 years — on Jan. 1, 2013 — and the tax rates will revert back what they were from the Bill Clinton era, he said.
Assuming the Bush tax cuts won’t be further extended on Jan. 1, 2013, the maximum tax rate will be increased from 35 percent to 39.6 percent for married couples making more than $388,350 a year, according to the Horne CPAs and Business Advisors website, an accounting and business advisory firm.
Another part of the cliff deals with Congress’ battle with the debt ceiling, Lowery said. Congress was supposed to organize a super committee that would propose major spending cuts and get the spending cuts passed by the House and the Senate, Lowery said.
However, Congress failed to do this and the country is now facing significant cuts across the board, Lowery said.
Lowery said the debt ceiling — or how much debt the country will allow itself to have — has to increase, or else America will not be able to keep borrowing money.
The current debt ceiling is $16.39 trillion and America’s current debt is $16.16 trillion.
Penn State Political Science Association President Michael Mahon said that America’s debt is no longer sustainable and taxing citizens will not be the best solution.
“We need to figure out how we’re going to get our financial house in order for the U.S. economy to remain strong,” Mahon (junior- political science and economics) said.
The Associated Press contributed to this report.
