Monday, November 26, 2012

The ‘fiscal cliff’ explained in charts

There has been a lot of talk about the “fiscal cliff.” But what is it? How will it affect your pocketbook? These charts address these questions and will help you understand why lawmakers want to reach a deal on taxes and spending to prevent us from falling off the cliff.
What is the "fiscal cliff"? The term is wonk-speak for a series of major tax hikes and spending cuts that will go into effect if Congress doesn’t act. The cuts and tax breaks will affect wealthier Americans differently than lower-income Americans.

Chart courtesy of Tax Policy Center

The Tax Policy Center has calculated that the fiscal cliff will raise taxes on 90 percent of Americans, raising the average tax rate 5 percentage points. The tax hike would be largely progressive, with the tax rate increasing more on high-income Americans than lower-income taxpayers. The lowest 20 percent would see their tax rates increase by 3.7 percentage points, while the top 1 percent would see a 7.2 percentage point increase, the center's study explains.

Chart courtesy of Tax Policy Center
As you can see in this chart, the biggest component of the "fiscal cliff" is the George W. Bush tax cuts, followed by the payroll tax cut. The payroll tax break is set to expire in December, and the Bush tax cuts Jan. 1. This means new and higher tax rates would take effect in 2013.

Dylan Matthews for The Washington Post. Data from Congressional Budget Office

The Tax Policy Center also  estimates that it would raise the tax bill for a middle-income family by $755. But what’s arguably more important is what will happen to marginal tax rates, or the rates applied to additional income, as this chart shows.
Dylan Matthews for The Washington Post. Data from Tax Policy Center

The "fiscal cliff" also threatens the economic recovery. The Congressional Budget Office estimates that the total effect of these provisions is a 3.9 percent reduction in the growth rate of gross domestic product next year — enough to plunge the country back into recession. What’s more, the mere anticipation of this change will reduce GDP growth by 0.5 percent this year, according to the CBO. However, this change is not evenly distributed between the cliff’s components, as this helpful chart from the Committee for a Responsible Federal Budget shows.

Chart courtesy of Committee for a Responsible Federal Budget

If lawmakers fail to reach a deal to avoid the cliff, then the sequester or series of spending cuts will take place. One federal agency that would be affected is FEMA. The White House estimates that the agency would lose about $878 million, largely from programs that provide direct relief to disaster victims. Here’s a look at how the sequester would hit some of FEMA’s major programs.

Sarah Kliff for The Washington Post

On Nov. 8, the Congressional Budget Office released a report giving its most detailed look at how the expiration of the Bush-era tax cuts would affect the economy. Apparently, it would do little harm, numbers show. Letting the high-income Bush tax cuts lapse, for example, generates $42 billion in revenue for 2013 but causes a 0.1 percent drop in GDP, hardly hurting the economic indicator.

Dylan Matthews for The Washington Post.

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