Are Americans ready for the fiscal cliff?

We should brace for higher taxes, reduced unemployment benefits, less hiring and pronounced market volatility.

By MSNMoney partner Oct 2, 2012 11:19AM
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By Rick Newman


It's tempting to tune out politics and the 2012 elections. Your time might be better spent getting a jump on holiday shopping. Or knitting a new sweater. Or watching Jersey Shore reruns.

 

But there's one bit of political theater people should be paying attention to, the so-called fiscal cliff. This is the big set of tax hikes and spending cuts that are set to go into effect at the end of the year, unless Congress intervenes. Like much of what goes on in Washington, the drama is unnecessary and perhaps even absurd. But the outcome could zap many Americans in the wallet.

 

A lot of political experts feel that Congress will come up with some kind of last-second deal that averts the worst-case scenario, which would be to do nothing and let all of those tax and spending provisions go into effect at once. That would lop as much as five percent off of GDP and promptly cause a recession. But there's no easy way around the decisions that need to be made, and Congress will probably enact at least a few of the measures set to go into effect. Here's what ordinary Americans ought to be preparing for:

 

A modest tax hike. The expiration of the Bush-era tax cuts, which comes at the end of this year, would represent a huge tax hike on working Americans, so Congress will probably put that off. But another temporary tax cut will probably be allowed to expire on schedule, which means most workers will experience a de facto tax hike starting January 1.

 

The payroll tax cut went into effect (in a slightly different form) in 2009, and it's already been extended for one year beyond its original expiration date. Basically, it cut the amount deducted from a typical paycheck to fund Social Security from 6.2 percent to 4.2 percent. That saved the typical worker about $85 per month, or $1,000 per year. The maximum savings for higher earners was about $2,000 per year. That money will once again be deducted from paychecks if the tax cut lapses, a change that will reduce the take-home pay of about 160 million Americans.

 

Reduced unemployment benefits. Another program that's set to expire—and probably will—is the federal extension of unemployment benefits. This temporary stimulus measure extended the unemployed benefits offered by the states—which typically last for 26 weeks—to as many as 99 weeks. The program is already winding down, and if the federal benefits aren't renewed, people who get laid off in 2013 will qualify only for the basic state program.

 

Skittish employers. CEOs are losing confidence in Washington's ability to handle basic challenges, and they're concerned that Congress could end up hurting the economy rather than helping it. A recent survey of CEOs by the Business Roundtable showed that confidence in the economy has fallen markedly in recent months. Just 58 percent of CEOs expect sales to pick up over the next six months, compared with 81 percent who felt that way earlier this year. And just 29 percent expect their companies to be hiring, down from 42 percent.

 

That means hiring through the end of the year could be even weaker than it has been lately. When hiring is weak, raises tend to be scarce as well. And consumers worried about their paychecks spend less, so it's shaping up as another bleak holiday season for retailers and the workers who depend on them.

 

Federal cuts in jobs and benefits. A few weeks ago, the White House issued a detailed report on where the spending cuts will hit if they go into effect as currently planned. The biggest losers would be defense agencies and contractors, but most federal agencies would face budget cuts of 8 percent or so. The same goes for civic, nonprofit or private programs funded by the government. Those cuts might end up being smaller, or going into effect later, but either way, it seems likely that a lot of people dependent on a government check will have to deal with cutbacks.

 

Pronounced volatility. Wall Street analysts think the time around the end of the year could be similar to August, 2011, which was when a big, needless fight over extending the nation's borrowing limit led to the first-ever downgrade of the U.S. credit rating by Standard & Poor's. The stock market fell by 7 percent and took six months to recover its losses.

 

This time around, even a good outcome could have damaging consequences. Economists and CEOs might be relieved if Congress delays the tax hikes and spending cuts set to go into effect, but Moody's has said it will join S&P in cutting the U.S. credit rating if Congress makes no progress later this year in cutting its annual deficits. Financial markets might yawn, or they might convulse. It would be wise to prepare for both scenarios.


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420Comments
Oct 2, 2012 12:50PM
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Let the fiasco begin. Better sooner than later as this nation is on the Greece / Spain path to fiscal disaster by 2016 if the loon is reelected. The voters who support this weakest, most indecisive president in history fully deserve everything negative, both domestic and foreign, that is guaranteed with another Obama term.   
Oct 2, 2012 3:06PM
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The way i see it, it doesn't matter who we put in office they are all actors in the 1% show and we line up to buy tickects and watch it.  We are constantly blaming Republicans or Democrats and not really concerned on getting to the root of the problem. Yes the rich should be taxed a little higher, and most definitely government programs should be reformed if not cut.  GREED and LAZINESS is what keeps us from moving foward.

Oct 2, 2012 12:58PM
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This Obama Administration has FAILED.  We will have to crash and burn for simple minded Americans to understand that nothing is for free.  This Obamination of our Country and Economy must end !!!
Oct 2, 2012 2:08PM
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The problem in the Federal Gov't is not a revenue problem, it is a spending problem!!! Everyone feels entitled to something, and that inturn costs $$$$. Cut the spending, just like families do, when confronted with too many bills. Shrink the federal government, and fix Social Security permanently, by having a lock box, and tweaking the ages and amounts which will save trillions in the years ahead. Unfortunately we have a rather uneducated populace that has an addiction to the federal government.
Oct 2, 2012 2:06PM
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truth is were in trouble no matter which party wins.  To bad the government is not we the people for the people, thats were we went wrong.  it shouldnt be we for a party...dem. or rep. it should be doing  whats right!!
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  Sorry, folks, but all this chatter and finger-pointing about politics and politicians and the PAST has nothing whatsover to do with the central point and, yes, the important question, of this article! The article is about the USA potentially falling off a financial cliff, and WHAT is likely to happen.  To be sure, it names some politicians past and present (i.e.; expiration of Bush-era tax-cuts, the payroll tax-cut (2009 - Obama??? - reduction in Social Security taxes, etc.) - but in the CONTEXT of things like looming CHANGES in taxation at the Federal level.

 

What is going to HAPPEN is that folks - 160 million+ Americans - are going to PAY MORE TAX starting JAN 2013.  And, for all who seem distracted by inate urges to blame folks and point fingers and shout for "flat tax" and other such stuff - those things are NOT the issue nor the point here!  The issue is about what will happen...

 

That one is very very simple, and I think, quite frightening and significant:  For my family, this may mean a total of about 4800 LESS that we can SPEND or SAVE or INVEST.  Those dollars, which come out of my DISCRETIONARY INCOME, mean that I will NOT be spending 4800 in my local economy, supporting local businesses, nor supporting local HIRING for those businesses.  Or contribute to charity. Ergo, these looming tax-hikes mean there will be less - a LOT less - money available to feed into any of those aspects of the economy.  So, when I already see, for example, local restaurants struggling to get enough paying customers in to support their operations, I can only expect that those places, and their JOBS, will collapse in the next year.  Ditto for all sorts of other businesses which rely heavily on DISCRETIONARY spending.  You see, all the usual bills - the mortgage, food, utilities, insurance, healthcare, etc., will STILL HAVE TO COME FIRST, and as those won't go down in compensation for more tax - outlay, then those higher taxes come from whatever is left - that discretionary money.

 

Pretty simple, really!  And, hey!  I don't need to vent about "Obama did this" or "Bush did that" or whatever - beyond observing that yes, the US SENATE and HOUSE of REPRESENTATIVES did NOTHING to solve this.

Oct 2, 2012 3:54PM
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It would not have mattered who was in office, Bush, Clinton, etc...the meltdown was coming, and had been coming for a long time.  Clinton didn't do anything to stop it because he couldn't stop.  They just kept passing the buck on this until it happened.  Yes, it happened when Bush was in, and that was to bad.  However, Obama has done nothing to improve the situation, he has made it much, much worse. 
Oct 2, 2012 1:18PM
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This economy and this country is sitting like a great big BOIL.  The only way that it can heal is to burst and all of the poison can escape and it can heal from within.  We need to clean house and get rid of all politicians and elect good common citizens to help govern.
Oct 2, 2012 1:40PM
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This is definitely the stupidest generation ever. They have no concept of the dangers of far left politics and think only of their iPhone, drugs and sex. Adios America.
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Budget cuts and raising taxes are fine until they begin to effect each voter-- Like ME !  <LOL>

 

This country is going down the slippery slope to economic armageddon and blame for this mess sets squarely on the American people who voted in these cast of clowns (Republicans & Democrats alike over the past two decades) that are inept at making hard decisions, especially those decisions that may impact whether the politician gets re-elected into their cushy jobs with outrageous salaries and benefits for life.

America can't continue to increase handouts to the rest of the world, its own citizens and its politicians infinitely without collapsing under the weight of these expenses and we are there today. I welcome the fiscal cliff as it will bring light to the day of reckoning... of course politicians will then have another 3 years to explain they had did not create the problem before their next re-election.

Oct 2, 2012 2:52PM
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A vote for Obama is a vote for Socialism.  See how well that worked out in Europe? 
Oct 2, 2012 1:06PM
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This is a government failure as a whole. Congress is as much at fault as the president is. Sequestration was supposed to motivate them to actually do something and find solutions to the problems. Unfortunately, they couldn't pull their heads out of their butts long enough to get the job done.

 

Now it's finger pointing all around still not getting anything done.

Oct 2, 2012 2:57PM
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Fire them all and start over Goverment got us in this mess.
Oct 2, 2012 2:52PM
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The way I see it, it doesn’t matter who we put in office they’re basically actors in the 1% show and we all line up to buy tickets and watch it.  We constantly point fingers blaming Republican and Democrats instead looking at the root of the problem.  The wealthy should be taxed a little more and a lot of government programs should be reformed or even cut!  Greed and laziness is destroying our country.

Oct 2, 2012 3:22PM
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What I would do

            No government sponsored aid to foreign countries.

            No prohibiting individual aid to a foreign country unless the country is an enemy.

            No tax on wages. No tax on investments. Tax on sales only.

            No aid to anyone who is not a citizen.

            To be a citizen in full standing you must be born of two citizens or be born of one citizen on United States land. Being born of one citizen in a foreign country or being born in this country of two non citizens would give you the right of dual citizenship on your 18th birthday; you would not be entitled to any benefits you had not earned.

            No elected or hired employee of the government would be exempt from any law.

            No government employee would be allowed to belong to a union.
Oct 2, 2012 1:14PM
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Just vote Obama in for four more years and we will find out about the fiscal cliff and what 20 trillion in debt looks like.  Obama has increased debt over 5 trillion in 4 years and is on track for doubling the debt if given another term.  We can't afford another 15 million in food stamps and another four years of freebies from Obama.
Oct 2, 2012 1:01PM
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America has become a country of people wanting to hide their heads in the sand. Let the taxes go higher like the Democrats want. The economy is in terrible shape, yet they want more of the same. Well, give it to them. Let's see how they like next year's recession. It will be on them.
Oct 2, 2012 4:00PM
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I blame government for everything!

If this was a TRUE constitutional government and a TRUE free enterprise system they would have there hands in nothing. Yet they control everything and then we ask "why isn't this working?"....well duh?!?

Oct 2, 2012 1:17PM
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The "fiscal cliff" is more like a "step off the curb" compared to the collapse of the dollar that is coming if we do not get our fiscal house in order by the spring of 2013. Vote conservative if you wish to retain life as we know it.
Oct 2, 2012 4:02PM
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I think we should let it happen if it will set our Governments Finances back in order so we don't have to borrow so much money from our enimies.  I also think if all the free government handouts stop, then all these free loaders (leeches) will go back to their own country.  That would be a good thing to happen if you know what I mean.   

I wonder if this one will post, this is the third time I have tried to post this comment..they don't let it go through.  Remember, this site is an Obama site, and they always want our country to be destroyed, and put to its knees in from of the World. 

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