Many Delawareans and countless Americans have questions about how the "fiscal cliff" is going to affect their family or business. More importantly, I know they have questions about how we got into this mess and what we are going to do to get out of it. I created this section of my website to explain the situation and to share with you my plan to help get our nation’s fiscal house in order.
- What is the "fiscal cliff?"
- How did we get here?
- How would these tax increases and budget cuts affect my family?
- Why are Congress and President Obama trying to avoid going over the fiscal cliff?
- What is President Obama's plan?
- What is Speaker Boehner's plan?
- What is Senator Carper's plan?
- So how do we avoid going over the fiscal cliff?
- What is the "fiscal cliff?"
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Without Congressional action, automatic tax increases and spending cuts will begin to go into effect on January 1, 2013. Both the suddenness and the extent of these changes to government policy relative to previous years have led some economists, business leaders, and politicians to associate this event with driving off a cliff. Others argue that the consequences will be less worrisome, equating the steady changes to tax and spending policy to driving down a more gradual slope.
While there may be disagreement as to whether the economy is headed toward a cliff or a slope, there is broad agreement that failing to adequately confront these challenges will weaken the economy, perhaps even leading to another recession.
return to top - How did we get here?
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The package of tax cuts President George W. Bush signed into law in 2001 and 2003, commonly called the Bush tax cuts, were set to expire on December 31, 2010. However, President Obama and Congress enacted legislation to extend all of the Bush tax cuts, along with a 2 percent payroll tax cut, for another two years through December 31, 2012. If those tax cuts – or a portion of them aren't extended – most Americans will see a tax increase go into effect in 2013.
Additionally, as part of an effort to get our long-term deficit under control, President Obama and Congress came to a bipartisan agreement last year to reduce the deficit by $1.2 trillion. In order to ensure that Congress couldn't avoid making tough decisions, Democrats and Republicans created a "trigger" that would automatically reduce the deficit by $1.2 trillion—through an automatic budget procedure known as "sequestration"—if Congress failed to enact a deficit reduction plan before December 31, 2012. Congress would have no control over how these cuts were apportioned, meaning some vital programs could be chopped even if they are high-priority items.
return to top - How would these tax increases and budget cuts affect my family?
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A typical middle class family of four would see their taxes rise by roughly $2,000 next year. The budget cuts (sequestration) will be evenly divided between defense spending and non-defense domestic spending. While Social Security, Medicaid, veterans' benefits, and Medicare beneficiaries are shielded from the cuts, virtually every federal program— including education, housing, and scientific research—will be impacted.
The combined effects of the tax increases and the spending cuts over the course of the year would endanger millions of jobs and likely lead to an economic recession, according to the non-partisan Congressional Budget Office. return to top - Why are Congress and President Obama trying to avoid going over the fiscal cliff?
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Economists from every political stripe agree that a sharp tax increase on low-income and middle class taxpayers, paired with drastic across-the-board cuts to spending, will shrink the economy and lead to a recession early next year. Millions of jobs will be put at risk. Moreover, the impact on financial markets will threaten the savings of those nearing retirement.
While we must address our nation's massive budget deficits and national debt, Republicans and Democrats both agree that we can get our fiscal house in order while avoiding a self-inflicted recession. Ideally, we could actually put forward a plan that responsibly stabilizes the debt and encourages economic growth.
return to top - What is President Obama's plan?
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President Obama is calling for a balanced approach that reins in our deficits by about $4 trillion over 10 years through a combination of spending cuts, entitlement reforms, and revenue increases. The President's plan also extends the 2 percent payroll tax cut and emergency unemployment insurance for another year and makes investments to improve our nation's crumbling infrastructure.
When it comes to the expiring Bush tax cuts, President Obama wants all Americans to continue to benefit from lower tax rates for taxable income up to $200,000 for individuals and $250,000 for couples. This plan means that 98 percent of American families and 97 percent of American businesses will see no change in their tax rates. Under the President's plan, only the taxable income above $250,000 would be taxed at the tax rates that existed under President Bill Clinton.
return to top - What is Speaker Boehner's plan?
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Speaker Boehner has put forward a framework that is also a combination of spending cuts, entitlement reforms, and changes to the tax code. Unlike the President's proposal, however, the savings are achieved almost exclusively through cuts to Medicare, Medicaid, and Social Security, as well as making even deeper cuts to the non-defense discretionary budget spending caps that Congress agreed to last year. Additionally, Speaker Boehner wants to extend all of the Bush tax cuts and achieves higher revenues by lowering tax rates—including tax rates on high income—and closing tax loopholes.
This isn’t the balanced approach that we need.
return to top - What is Senator Carper's plan?
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I favor the approach put forward by the President's bipartisan National Commission on Fiscal Responsibility and Reform, which was co-chaired by former Senator Alan Simpson (R-WY) and President Clinton’s former Chief of Staff Erskine Bowles. Like President Obama, the Commission proposed reducing the deficit by $4 trillion over the next 10 years. I believe this "grand bargain" approach is our best chance to bring Republicans and Democrats together because it puts everything on the table: discretionary spending, defense spending, entitlement programs, and taxes.
This approach isn't too far off from the President's current proposal. It’s balanced, fair, calls for shared sacrifice, and encourages economic growth. I believe that any plan to reduce the deficit must meet that test.
return to top - So how do we avoid going over the fiscal cliff?
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We need President Obama's leadership in seeking a thoughtful and balanced compromise that helps strengthen our economic recovery. Congressional Republicans must also be willing to compromise, particularly when it comes to the issue of revenues. No one wants to see middle class taxes go up on January 1, including my friends on the other side of the aisle. A responsible agreement to avert the fiscal cliff would also set the stage next year for a much-needed overhaul of the tax code and entitlement reforms.
In the end, Congress and the President must work together to make tough decisions to put our nation on a more responsible financial path moving forward.
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