Like HowStuffWorks on Facebook!

How the Fiscal Cliff Works


How to Avoid the Fiscal Cliff
U.S. Congressional Budget Office director Doug Elmendorf testifies before the Senate Budget Committee while presenting the CBO's policy options for increasing economic growth and employment. Will Congress listen?
U.S. Congressional Budget Office director Doug Elmendorf testifies before the Senate Budget Committee while presenting the CBO's policy options for increasing economic growth and employment. Will Congress listen?
hip Somodevilla/Getty Images

How does America avoid falling off the fiscal cliff? Easy -- Congress and the White House need to reach a sensible compromise on tax increases and spending cuts to reduce the deficit. On second thought, maybe it's mission impossible. This is exactly what the two sides were trying to do during the debt ceiling debacle of 2011, and the best solution they could come up with was creating the fiscal cliff. Will they be spooked enough by their own scare tactic to forge a bipartisan solution?

The first challenge is figuring out what to do about those Bush-era tax cuts set to expire at the end of the year. President Obama will have to address this even before his second inauguration on Jan. 20, 2013.

Obama's plan relies on a combination of increased tax revenue and budget cuts to lower the deficit. Under Obama's tax plan, the current tax rates would remain the same for all households earning less than $250,000. Joint filers earning more than $250,000 a year would see their rates increase from 33 to 36 percent. Households earning more than $390,050 would experience a rate increase from 36 to 39 percent [source: Tax Policy Center]. Another significant change would be taxing investment income, currently a flat 15 percent, at the same rate as earned income. The corporate tax rate, however, would be lowered.

Experts agree that it's unlikely that politicians will let America slip over the fiscal cliff. Another recession is political poison for both parties, no matter who is in the White House. If the debt ceiling debate was any indication, the squabbling and dealmaking will go right down to the wire, with both sides blaming the other for any deficiencies in the final deal. Happy 2013, America!


More to Explore