What is the Fiscal Cliff? - News and Weather For The Quad Cities -

What is the Fiscal Cliff?

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What is the fiscal cliff? For the average person the fiscal cliff is 2 things, a tax increase and spending cuts for numerous federal agencies. When those 2 things are combined there are major implications for the economy.

"The combined increase in taxes, which would take away from out ability to buy goods," says TV6 Financial Analyst Jim Victor, "Along with a cut in federal spending, would be enough to drive this economy into a recession."

At the stroke of midnight on New Year's Eve the Bush tax cuts will expire and higher taxes will kick in. For example, more then half of all married couples with 2 children would owe an addition $4000 in taxes a year. The 2011 temporary payroll tax cut would also expire and most workers would see a 2% tax increase.

"The tax increase would take money out of your pocket. It's money that would be spent in the economy and losing that money would create a recession," adds Victor, "Then Federal spending on important programs would be reduced and those programs also help drive the economy."

Federal programs that would experience significant cuts are defense, education, Medicare, Social Security and extended unemployment benefits.  Up to a thousand government programs would have to make cuts.

"When you reduce the ability of this economy to grow by $400-million it surely cuts output. It could cut output by as much as 4% in an economy that is only growing 2% now," says Victor.

There is a way to prevent a fiscal cliff from happening.

"We can avoid the fiscal cliff situation by having Congress decide that they need real and genuine tax reform."

The challenge is how implement tax reform without hurting the economy.

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