What Is The Fiscal Cliff?

Reported by: Aaron Adelson
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Updated: 12/07/2012 6:19 pm
Twitter: https://twitter.com/AAdelsonABC36

In Washington D.C. the nation's political leaders are discussing how to lower the country's debt, but something called the fiscal cliff looms over any talks. 

You may have heard the term, but here's what it is, and how it will affect you.

Without action from Congress, on New Year's Day $500 billion of tax increases and $200 billion in spending cuts take effect.

"I wish that your TV station would tell us, do a news report on how that's going to affect people in Kentucky," requested Ellie Sutter, Lexington.

So here it is, the Tax Policy Center estimates the average American household would lose an extra $2,000 a year to taxes. 

"The taxes that are taken from most people's pay checks to help fund social security went down, for most people, by about 15%.  That will go away," said Ken Troske, UK Economics Professor.

Troske says the spending cuts hit the Department of Defense the hardest.

"They're going to hire fewer people.  They're going to buy less goods, and the Defense Department buys a lot of goods.  So, people who work for companies that primarily supply goods to the Defense Department could be laid off," said Troske.

He says the spending cuts and tax increases will help reduce the deficit, but people are using the cliff metaphor, because it's happening all at once.  So, the Democrats and Republicans are trying to figure out a way to get there gradually.

"Something that doesn't occur on January 1st, 2013, but occurs slowly over time," said Troske.

Meanwhile, Troske says the stalemate is hurting the economy, because nobody knows what will happen in the near future.

"Businesses aren't hiring, people aren't spending," said Troske.

How did we get here?  About one year ago, politicians created the fiscal cliff, hoping it would force a bipartisan deal, but right now we're just hanging on the cliff. 

The government has the rest of the month to make a deal, or we go over the cliff; however the Republicans and Democrats could also undo the fiscal cliff they created, and then nothing would happen on January first. 

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