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Q&A as 'fiscal cliff' nears

Dec 7, 2012 - By Michael Muskal, Los Angeles Times

LOS ANGELES -- Republicans and Democrats are wrestling with a variety of riddles that have come to be known as the fiscal cliff, a double whammy of tax increases and spending cuts that come due at the start of the new year. Here is a primer to unraveling the knotty political and economic threads.

Question: What exactly is the fiscal cliff?

Answer: The term refers to the combination of forced cuts and tax increases, worth more than $500 billion. The best-known parts are the expiration of the George W. Bush-era tax cuts and the automatic across-the-board cuts to federal spending.

Q: If that's all that is involved, what is all of the talk of deficits, debt ceilings and other taxes have to do with the cliff?

A: The roots of the current deadline are in the Budget Control Act of 2011, a product of the political gridlock that was so much of the backdrop to President Barack Obama's first term. Congress had to increase the debt limit so that that the government could continue to borrow money but conservatives balked unless the increase was coupled with spending cuts. When the dust cleared, caps were placed on some spending, the debt limit had been increased by $2.1 trillion and a so-called "supercommittee" of Congress had been charged to find spending cuts worth $1.2 trillion over 10 years.

Q: Were $1.2 trillion of spending cuts found?

A: No. Thus what was designed as a corset to force lawmakers to cut spending fat became instead, a straight-jacket. Because the supercommittee couldn't reach agreement, automatic spending cuts will be triggered beginning Jan. 2, 2013 -- a practice known in congressional parlance as sequestration. Most analysts agree that defense would take a hit of about 9.4 percent. Civilian spending would lose about 8.2 percent, including a 2 percent cut to Medicare providers and additional cuts to programs such as Head Start.

Q: That's the spending portion of the cliff, what about taxes?

A: The part of the tax package that has gotten the most publicity has been the Bush-era tax cuts. Tax cuts were approved in 2001 and 2003 that brought down tax rates for everybody and those cuts expire Dec. 31 unless Washington acts. The White House estimates that a middle-class family of four would pay another $2,200 a year.

Q: Is it just the income tax rate at stake?

A: No. There are a range of tax policies that expire at the same time. For example, the tax extenders, including some business tax breaks and limits on the alternative minimum tax, also expire. About 4 million pay the AMT, but unless Congress acts, that number could jump to around 28 million, according to the Tax Policy Center. That could add $3,700 a year in taxes to many payers' bills.

Also scheduled to end is the holiday on the payroll tax. As part of the federal stimulus efforts, the payroll tax temporarily dropped from 6.2 percent to 4.2 percent. If that is not extended, the typical worker will have to pay another $1,000 a year in taxes.

Q: Are there other issues?

A: There are always more issues waiting to be resolved. For example, the emergency unemployment benefits that have allowed out-of-work people to get money beyond the usual 26 weeks (or 39 weeks in high unemployment states), expire at the end of this year. There is also another increase in the federal debt limit needed in February. While not part of the fiscal cliff, the issues are among those on the table.

Q: Now that we see where it comes from and some of its complexity, how do the parties want to solve the fiscal cliff?

A: Each side -- Democrats and Republicans -- has put out its initial proposal.

Obama's proposal, about $1.6 trillion over 10 years, is based on the idea of increasing the share of the revenue paid by the wealthy, individuals earning more than $200,000 a year and couples who annually earn more than $250,000. It would allow tax rates for the wealthy to rise to what they were before the Bush-era cuts, worth about $442 billion. It would also include changes to the value of some deductions, end breaks on capital gains and dividends and raise taxes on estates and gifts.

Republicans have taken a different route, insisting that all of the expiring tax rates, including those for the rich, be extended. They seek to raise $800 billion over 10 years through curtailing tax breaks. By changing the way the inflation formula is computed, Republicans are also seeking to slow spending increases in programs such as Medicare and Social Security. The GOP proposal also calls for $600 billion in cuts to health care programs, including an increase in the eligibility age for Medicare and more means testing to shrink health benefits for the more affluent elderly. Obama has proposed $400 billion in Medicare and other savings.

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