The Fiscal Cliff

The Fiscal Cliff: An Economical Analysis

When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.

-Frederic Bastiat

Table of Contents

Introduction: 3

Literature Review: 3

The Fiscal Cliff Defined 3

The Bush Tax Cuts 4

Sequestration 5

Payroll Tax Holiday 5

Reduction in Medicare Payment Rates 6

Consequences of Going Over the Fiscal Cliff 6

Economic Theory and Application 7

Keynesian Theory 7

Monetarist Theory 8

Economic Implications and Uncertainty 9

Economy 9

Unemployment 9

Business 9

National Security 10

Tax Rates 10

The Fiscal Cliff Deal 11

Analysis and Conclusion 12

Raise Taxes 13

Lower the Corporate Tax Rate 13

Cut Spending 13

References 15

Appendix 19

Appendix A 20

Appendix B 21

Appendix C 22

Appendix D 24

Appendix E 25

Appendix F 26

Introduction:

Walter Stern first used the term “fiscal cliff” in 1957 in the Housing section of the New York Times to describe New Yorkers over borrowing to purchase their homes. He wrote “To the prospective home owner wondering whether the purchase of a given house will push him over the fiscal cliff, probably the most difficult item to estimate is his future property tax”. Since that time the term has been used to describe many looming fiscal crisis facing government. (Geoghegan 2012)

Most recently the term has been widely used to describe the January 1, 2013 simultaneous actions of tax hikes and reduced government spending. The fear was that this one-two punch would send an already fragile economy back into recession and have a significant negative impact upon unemployment.

Literature Review:

The Fiscal Cliff Defined

To understand the fiscal cliff it is important to understand how we came to the edge. This paper will not explain the events that led to the economic crisis in 2008, but suffice it to say that...