As Congress and the president head into unknown political territory, how can both sides explain the fiscal cliff to everyday citizens? It may be time to go back to the lesson of Big Bird.
The popular Sesame Street character became a teaching point about government spending last month, when Mitt Romney said he was in favor of cutting taxpayer funds for public broadcasting, even if Big Bird had to change careers.
Big Bird’s supporters, including President Barack Obama, said the subsidies for public broadcasting were needed and not imposing on the budget.
The Corporation for Public Broadcasting is funded by Congress, according to law, and it contributes funds to Big Bird’s employers. Unless that law is repealed, Big Bird is safe from the unemployment line—or from being pushed over the fiscal cliff. (Plus, Sesame Workshop relies more on funding from licensed product sales, sponsorships, and donations.)
But who wants to explain the Alternative Minimum Tax to a seven-foot-tall bird, and why he may face a huge tax hike? Or not have a tax-refund check next year? He won’t be happy.
While Big Bird’s agent will probably deal with his client’s wrath, everyday taxpayers will feel just like Big Bird next year if Congress and President Obama can’t reach a financial deal by January. They’ll be facing large tax increases, too, and have a lot of questions.
So explaining the fiscal cliff, its tax hikes, and spending cuts to taxpayers will take a lot of skill in the next few weeks.
In short, the fiscal cliff is an idea developed last year, when Congress couldn’t agree on spending and tax measures as part of talks about the debt ceiling.
The debt ceiling is basically the borrowing limit on the nation’s credit card. If the debt ceiling wasn’t raised, the government couldn’t borrow enough to operate.
A compromise was reached that allowed the federal government to keep running, without the steep budget cuts, if the best and brightest congressional leaders met as a “super committee” and compromised. They had until November 2011 to reach a deal as a group.
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If the two sides didn’t reach a compromise, the fiscal cliff was the penalty. The law said that across-the-board spending cuts would be mandatory, to slice the annual deficit in half. The reasoning went that the fiscal cliff was so awful that it would guarantee that the congressional leaders had to agree.
Instead, the super committee failed to reach a deal, and the country is now two months away from a possible economic crisis.
The Congressional Budget Office now says a short-term recession is likely if the fiscal cliff measures go into place in January 2013. Gross domestic product would fall, unemployment would rise, and almost everyone pays more in taxes.
The good news is that the government would have a better handle on managing its debt crisis, which would in turn lead to better economic growth rates and lower employment in the upcoming decade.
The sobering news from the CBO is that the fiscal cliff is part of a new reality.
“A wide gap exists between the future cost of the services that the public has become accustomed to receiving from the federal government—especially in the form of benefits for older people—and the tax revenues that the public has been sending to the government to pay for those services. Because the federal budget is on an unsustainable path under current policies, those policies will need to be changed in significant ways,” it reports.
The immediate problem has to do with the expiration of every tax cut on the books since 2001 and a huge $1.2 trillion spending cut triggered by the fiscal cliff. All this takes place starting in January.
For example, the change in the Alternative Minimum Tax policy could see tax increases for 26 million Americans.
The Washington Post says that taxpayers would get an extra $3,700 tacked on to their federal tax bill next year, which would have the effect of wiping out their tax-refund checks.
The spending cuts will come from the defense budget and numerous social programs.
Even if a stop-gap deal is reached in December, the bigger battle next year will be over another huge issue that lacks glamor: reforming the federal tax code.
In 2010, there was about $1 trillion in money tied up in tax expenditures, which are tax credits that go to families and tax deductions that go to all taxpayers. That was more money than was spent on Social Security and defense budgets, by 30 percent each.
It was the tax-reform issue which sunk the super committee that met last year to avert the fiscal cliff.
Closing the loopholes in the tax code and changing tax rates could go a long way toward narrowing the budget deficit, but it's also a political time bomb, since numerous social and economic groups would be affected.
Scott Bomboy is the editor-in-chief of the National Constitution Center.