'Fiscal Cliff': Everything You Need to Know About the January Deadline

There's all this talk going on right now about a fiscal cliff. Some say that the sky is falling. Some say the term is overloaded and the situation is not as dire as everyone is making it out to be. Some even claim it’s all a bunch of bologna.

First things first, what really is this fiscal cliff? Basically, come January, Bush era tax cuts expire, and so far there is no agreement on replacing them with new tax cuts, or even a way of cushioning the blow for the American taxpayers and subsequently the sluggish American economy.

So what’s all the fuss and commotion about then? It’s just a return to taxes that Americans were paying a decade ago anyways, right? Yes, but the economy is in a much different state today than it was then. On top of those expirations, Obama will have to slash spending in January, as per the agreement reached with the Republicans to raise the debt ceiling.

So what does all this mean? The U.S. brings in approximately $2.3 trillion in revenue every year, and spends $3.6 trillion. That means that the U.S. spends 64% more than what it’s bringing in. Hold on; let’s put that in perspective.

Let’s say you earn $30,000 a year. If you were to spend 64% more than what you made, you would be spending approximately $49,000. Sure, you could probably manage to pull that off in a year and financially survive, that’s what credit cards and loans are for, right? But if the numbers remained the same for the second year, you would be $38,000 in debt. A third year with the same spending habits would mean you would be in debt by $57,000. Take into account interest rates, and your debt easily more than doubles your net income. Not only is this hypothetical financial situation a bad one, but on a countrywide basis, it is a financial disaster. Theoretically, a person with the exemplified spending habits could get lucky; he/she could eventually inherit wealth or property, and pay off their debts, but very few people should ever make such a financial gamble.

On a federal level however, it is safe to say the U.S. will not find $1.3 trillion laying around to cover one year’s worth of deficit, let alone $20 trillion for all the debt. It’s not as easy as less shopping mall visits, or buying groceries at a cheaper store; it means drastic austerity measures that everyone would feel.

Regardless of your political views, left, right or something else, there needs to be a cut in spending. The spending cut is already well planned out by Obama, $109 billion per year for 10 years; half in defense spending and a huge chunk out of Medicare. But what about the taxes?

Conventional wisdom leaves you to think that an increase in taxation results in an equal increase in revenue. While this can be true in the short run, it is far from a sure thing, and the U.S. government has no room to gamble. An increase in income taxes, meaning less real income for Americans, coupled with reduced government programs, means ultimately Americans will need more money for spending but will in fact have less than before to do so. Such a scenario is a breeding ground for under the table work, and a demand for a black market. Both of which would actually mean tax increases would not equal out in revenue.

As for taxing the rich, they would merely take advantage of the many tax loopholes, resulting in tax avoidance (tax avoidance is legal, tax evasion is illegal). It is also worth asking, “When was the last time a poor person hired me?” The rich certainly play a role in making the economy function. Likewise, increasing taxes on corporations encourages them to outsource jobs and altogether look for business in countries with less taxation.

Overall, while something seriously needs to be done about the American economy, spending cuts being one for sure, the taxation issue is what everyone should be paying attention to. An increase in taxation does not mean an equal increase in revenue, but does guarantee an increase in tax evasion, and people looking to invest elsewhere with lower tax rates. Ronald Reagan’s “Reaganomics” deserves an honorable mention. When the U.S. was slipping into a recession in the late 1970s and early '80s, he cut spending but also reduced taxation, giving the economy more breathing room for what would become the longest economic growth period in American history. The recession of 1920-21 was treated in a strikingly similar fashion, with the time span listed telling you everything you need to know. The Great Depression however, which resulted in unprecedented bailouts and government spending, lasted from 1930 to the late 1930s/early 1940s. One doesn't need a degree in economics to understand that similar economic crises have occurred before, and to compare the government’s reaction and the subsequent result.