In recent months, you may have heard media commentators talking about a fiscal cliff. You are probably asking, what is this "fiscal cliff" and what does it mean to my family or business? Let me explain. Fiscal cliff is the name being given to several policies affecting our federal spending and tax rates that are set to change or expire on January 1, 2013. These policies, without any change from their current path, will have a dramatic effect on our economy.
What are the policies that make up this fiscal cliff? The first component is mandatory, across-the-board government spending cuts which will take effect on January 1, 2013. These cuts were enacted into law as part of the 2011 Budget Control Act. You may remember the debate over that law as a part of the discussion about raising the national debt limit. Without a change in direction, these cuts will severely and unfairly target our national defense. The second part of the "fiscal cliff" also takes place on January 1, 2013 when the 2001 and 2003 tax cuts expire. These tax cuts include: lower income tax rates, death tax, marriage tax relief and the child tax credit. If these tax cuts expire, everyone who pays taxes will see their rates rise -- families and small businesses. For instance, if you pay 25% in federal taxes now, you'll pay 28% if these expire. The 10% tax rate will disappear. Small businesses--many of which file taxes as individuals--could pay almost 40% in taxes if these cuts expire. The tax burden on each family or business will likely increase by hundreds or thousands of dollars each year.
Together, the spending cuts and tax increases will severely jolt our economy. The non-partisan Congressional Budget Office estimates that the unemployment rate will increase to 9% in less than a year if Congress does not act before the end of 2012. The good news is that we know the cliff is up ahead, and we have the ability to address it on our own terms. In August, the House passed a bill to extend our current tax rates for one year while emphasizing the need for tax reform that simplifies the tax code. We're also working to ensure government spending cuts are targeted to maximize deficit reduction without hurting our national security. This fall, I'll be working to turn our country away from this fiscal cliff, and I'll keep you posted on our progress in this newsletter.