Fiscal Cliff

Fiscal Cliff

We Avoided the Fiscal Cliff: What Happened?

On January 1, 2013, Congress passed legislation that allowed the nation to avoid the fiscal cliff, the looming recession that experts predicted would be the result of excessive deficit reduction scheduled to begin in January. More on the fiscal cliff.

We are thankful that Congress:

  • reached an agreement to avoid the fiscal cliff and the recession that would have accompanied the planned deficit reduction;
  • postponed spending cuts until the end of February to allow more time for careful deliberation;
  • raised taxes for the wealthiest households, bringing in sorely needed federal revenue and placing the burden of these new taxes on the people who have most benefited from the economic growth of recent years;
  • extended some tax provisions that benefit middle- and lower-income households including the Bush tax cuts, and the Earned Income Tax Credit and Child Tax Credit; and  
  • extended for another year special unemployment insurance benefits to cover long-term unemployed workers, a very needed and important decision since 40% of the unemployed (over 4 million workers) have been out of work for over 6 months.

More details

We can think of the fiscal cliff agreement as having three components covering spending, taxes, and unemployment insurance. Let’s address each in turn.

Spending.  A major threat to the nation’s economic health was a large spending cut (some $1 trillion over 10 years) scheduled to begin in January, 2013. Congress agreed to postpone these cuts for two months as they reconsider the best way forward.  

Taxes. The deal allowed some tax cuts to expire while preserving others and adding some new tax  provisions.

  • The deal preserved the Bush tax cuts for households with incomes below $450,000 ($400,000 for singles). But the tax cuts were ended for people with incomes above this level who will see their marginal tax rate rise from 35% to 39.6%, the tax rate they paid during the Clinton Administration. These high income households will continue to pay lower tax rates on income below the $400/$450,000 level.
  • Households above $250,000 ($200,000 for singles) will see limits on their deductions and exemptions, raising their taxable income.
  • Taxes on dividends and capital gains from the sale of investments will rise to 20%, up from 15%, although this tax rate is still lower than the rate many people pay on their earnings.
  • The temporary reduction in the Social Security payroll tax that was enacted in 2010 to stimulate the economy was ended; workers will resume paying 6.2% of earnings into Social Security, up from the temporary rate of 4.2%.
  • The estate tax rate will rise from 35% to 40% on estates worth over $5 million, $10 million for married couples. Estates below this level will not be taxed.
  • The expanded Earned Income Tax Credit and Child Tax Credit, which primarily benefit middle- and low-income families, were continued.

Unemployment insurance.  Congress approved another 12 months of extended unemployment insurance benefits for the long-term unemployed, benefiting more than 5 million workers over the year.

Additional Resources

A story from United Church News.

Information from the National Priorities Project.

A graphic from the Washington Post on the tax changes for households at various income levels.

More details than you probably want from the Washington Post's Wonkblog.






Contact Info

Edith Rasell, Ph.D.
Minister for Economic Justice
700 Prospect Ave.
Cleveland, OH 44115