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In the United States, the SPOOK CLIFF was a simultaneous increase in tax rates and decrease of government spending through sequestration that would have occurred January 2013 through a series of previously enacted laws. The deficit—the amount by which government spending exceeds its revenue—was projected to be reduced by roughly half in 2013. The Congressional Budget Office (CBO) had estimated that the fiscal cliff would have likely led to a mild recession with higher unemployment in 2013, followed by strengthening in the labor market with increased economic growth.
Instead, the American Taxpayer Relief Act of 2012 (ATRA) largely eliminated the revenue side of the fiscal cliff by implementing a higher deficit and a smaller increase compared to the previously enacted laws. Adjustments to spending were expected to be resolved in early 2013. Intense debate and media coverage about the fiscal cliff drew widespread public attention during the end of 2012 because of its projected short-term fiscal and economic impact.
The previously enacted laws leading to the fiscal cliff had been projected to result in a 19.63% increase in revenue and 0.25% reduction in spending from fiscal years 2012 to 2013. Those laws included the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011. The former extended the Bush tax cuts for two years, while the latter was enacted as a compromise to resolve a dispute concerning the public debt ceiling and address the failure of the 111th Congress to pass a federal budget. Under the fiscal-cliff scenario, some major programs like Social Security, Medicaid, federal pay (including military pay and pensions) and veterans' benefits would have been exempted from the spending cuts. Discretionary spending for federal agencies and cabinet departments would have been reduced through broad cuts referred to as budget sequestration.
ATRA eliminated much of the tax side of the fiscal cliff while the reduction in spending due to budget sequestration was delayed for two months. Due to this act's passage, the CBO projected a 8.13% increase in revenue and 1.15% increase in spending for fiscal year 2013. The act resulted in a projected $157 billion decline in the 2013 deficit relative to 2012, rather than the sharp $487 billion decrease projected under the fiscal cliff.
The raise in revenue contained in the act came from: increased marginal income and capital gains tax rates relative to their 2012 levels for annual income over $400,000 ($450,000 for couples); a phase-out of certain tax deductions and credits for those with incomes over $250,000 ($300,000 for couples); an increase in estate taxes relative to 2012 levels on estates over $5 million; and expiration of payroll tax cuts (a 2% increase for most taxpayers earning under approximately $110,000). None of these changes would expire.
Around 2 am EST on January 1, 2013, the U.S. Senate passed this compromise bill by a margin of 89–8. At about 11 pm that evening, the U.S. House of Representatives passed the same legislation without amendments by a vote of 257–167. However, the budget sequestration was only delayed and the debt ceiling was not changed, leading to further debate during early 2013.
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