What Happens If We Go Over the Fiscal Cliff?

Naureen Khan

As President Obama and lawmakers try a last-ditch attempt to keep the country from plunging over the so-called fiscal cliff, some economists say the toxic cocktail of spending cuts and tax increases, slated to begin taking effect in the New Year, has the potential to knock the country into another recession.

National Journal has a refresher course on exactly what going over the cliff would mean over the next year and in the long term.


  • Bye-bye Bush-era tax cuts. The reductions known collectively as the Bush-era tax cuts—a major point of contention in cliff negotiations—will expire on Dec. 31, meaning that tax rates would rise for every income bracket in 2013, including low- and middle-income Americans.
  • AMT for about 30 million more people. The alternative minimum tax cut, designed to apply largely to only affluent taxpayers, would apply to 30 million more taxpayers next year because Congress will have failed to pass an inflation adjustment, as it usually does.
  • No more payroll-tax holiday. The 2-percent reduction in payroll taxes—from 6.2 percent to 4.2 percent—will also end on Dec. 31. The holiday, championed by the Obama administration in 2010, increased the average worker’s take-home pay by about $1,000 a year—money that they’ll have to live without in 2013.
  • Other miscellaneous changes. A slew of tax cuts for individuals and businesses—like the Earned Income Tax Credit, a form of aid for low-income workers that was expanded under the provisions of the 2009 stimulus, and the Research and Experimentation Credit for businesses—are also set to time out on Dec. 31, as well as a number of corporate tax breaks that total $109 billion.
  • Taken together, about 90 percent of American households would see their tax bills rise in 2013, by $3,446 on average, according to the Tax Policy Center.

Spending Cuts

  • Big, bad sequestration. $1.2 trillion of automatic spending cuts, slated to go into effect over the course of nine years, will kick in beginning on Jan. 2 if lawmakers can’t come up with an alternate budget deal, as mandated by the Budget Control Act of 2011. For 2013, that means $109 billion in cuts, half from the national defense budget and half from nondefense spending. Certain social safety-net programs, like Social Security, veterans benefits, Medicaid, the Children’s Health Insurance Program, and the Supplemental Nutrition Assistance Program (otherwise known as food stamps) are exempt from the cuts, but plenty of other federal programs will feel the pain. That includes everything from Pell Grants to Head Start to federal disaster relief to the salaries of federal workers.
  • Unemployment insurance runs out. Eligibility for unemployment benefits was expanded in the midst of the Great Recession and has been extended regularly during the recovery, but come the new year, many jobless Americans who have already exhausted state benefits will stop receiving federal payments as well.  
  • No more 'doc fix.' Medicare payments to doctors would be reduced by 27 percent, or about $11 billion, because Congress will not have acted to keep the cuts from going into effect, as mandated by another mid-1990s deficit-reduction measure.


What happens next in Washington?

Some have termed the fiscal cliff more of a "slope," because many of the tax provisions will not take effect until Americans file their income taxes and because it will also take some time for the effects of the spending cuts to be felt. That gives lawmakers slightly more wiggle room—as in the country could fall off the cliff, and Congress would feel an added urgency to iron out a deal when it reconvenes in January, with Americans already beginning to feel its effects. Congress could also punt, voting to override the sequester and extend the Bush tax cuts and the payroll-tax holiday, while vowing to take up the big deficit-reduction and tax-reform debate at a later date—although we’ve all seen how that plan has played out in the past.