Fiscal Cliff is a popular buzzword used to describe the situation that could have occurred in the US at the beginning of 2013 due to increased taxes and reduced spendings caused by the expiration of the previous Acts. It could have pushed the economy further back into recession.
The increased taxes was mainly due to 2 reasons:-
- Bush tax cuts which was to expire in Dec 2012.
- New Taxes related to Obama’s health care which was to kick in from Jan 2013.
Spending cuts was due to the following reason.
In 2011, US legislators reached an agreement to raise its debt ceiling. Under this agreement the Congress had put forward a plan to balance the budget by 2012 failing which automatic spending cuts of 10% would go into effect from 2013. This automatic cut also called Sequestration came into effect from this year.
Effects of fiscal cliff-
Fiscal Deficit would have reduced by 5%.
Increased unemployment, decreased business spending would have plunged the economy into recession.
Therefore on January 2,2013 American Taxpayer Relief Act of 2012 was signed to reduce the effect of Fiscal cliff. Under this most of the Bush tax cuts were retained while tax rates at upper income levels were allowed to increase.
