Wednesday, January 2, 2013

How Did We Get to A Fiscal Cliff in the First Place? Part 2 of 3 on the Fiscal Cliff

By User:Stannered (Image:Question mark alternate.png) [Public domain], via Wikimedia Commons
As we look at the deal made by Congress late last night, including what the deal covers and what it does not, it is important to know how we got to the fiscal cliff in the first place.

  • Debt Ceiling: The debt ceiling originally came about to prevent Congress from having to pass a new bill every time the Treasury Department wanted to float a bond.  In 1917, the first debt ceiling was created so that bonds could be issued up to that ceiling.  The limit has been increased many times over the years, most recently in 2011. However, in order to pass the higher debt ceiling, Congress also had to agree to spending cuts to be made by the end of 2011.  When the Congressional Super Committee could not come to an agreement, an automatic sequestration beginning January 1, 2013, came into effect.
    STATUS: The deal made on January 1, 2013, does not increase the debt ceiling. However, on December 21, 2012, Treasury Secretary Tim Geithner announced that federal borrowing had reached the ceiling set in 2011 and would need to be increased again within two months.
  • Sequestration: Under the sequestration required by the 2011 budget deal, cuts would be made to discretionary and non-discretionary programs with a projected deficit reduction of $917 billion over ten years. The exact cuts were to be made in appropriations bills, and were not released in detail before the deal was made.
    STATUS: The deal made on January 1, 2013, postpones sequestration for two months, making a decision due roughly at the same time as a decision must be made on the debt ceiling. However, only half of the original amount of cuts will need to take effect, with the other debt reduction expected to happen through "voluntary transfers of traditional IRAs to Roth IRAs."
  • Bush Tax Cuts: On the same day sequestration was set to take effect, the so-called Bush Tax Cuts were scheduled to end. These cuts, put into the tax code by President George W. Bush in 2001 and 2003, lowered federal income tax rates and capital gains taxes (among others) while increasing the Child Tax Credit. Although the cuts were meant to be temporary, they were extended until January 1, 2013.
    STATUS: The deal made on January 1, 2013 did address the Bush Tax Cuts by making some cuts permanent while increasing other tax rates.  For more information, please see our earlier post.

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