[ by Howard Haykin ]

The term 'Fiscal Cliff,' coined by Fed Chairman Ben Bernanke during a Congressional hearing in February 2012, refers to a specific point in time - midnight on 12/31/12 - when a major provision of the Budget Control Act of 2011 ("BCA") is scheduled to go into effect.  Chairman Bernanke was describing "a massive fiscal cliff of large spending cuts and tax increases" that are set to take effect January 1, 2013.   President Obama signed the Act into law ended an August 2011 Congressional stalemate over whether the government debt ceiling should be raised or left untouched.  

Since February, the term 'fiscal cliff' has taken on legendary status, reaching millions of Americans in most walks of life.  Without a doubt, the term is viewed as sinister - a harbinger of potentially dire economic consequence,  Yet, one would be hard-pressed to find many people who actually understand what is supposed to happen.

So What Does The 'Fiscal Cliff' Trigger For The Economy and How Bad Can It Get?   The Act was a compromise between Democrats and Republicans on economic policies while temporarily increasing the debt ceiling - what the government could borrow from itself to pay its bills.  The crucial part of the Act provided for a 'Supercommittee ' of Congressional Democrats and Republicans to produce bipartisan legislation by late November 2012 that would decrease the U.S. deficit by $1.2 trillion over the next 10 years. 

If no deal was reached by 12/31/12, the Committee agreed to implement by law massive government spending cuts as well as tax increases or a return to tax levels from previous years.     ~~These are the elements that make up the 'fiscal cliff.'~~

What laws from the Budget Control Act will go into place?   Among the list are:

• the end of 2011's temporary payroll tax cuts - i.e., a 2% tax increase for most workers.
• an end to several tax breaks for businesses.
• changes in the AMT that could result in more people having to pay -  the income range currently is between $45K and $200K.
• tax increases for higher income individuals to help pay for the Affordable Health Care Act - i.e., ObamaCare.
• spending cuts will take place in more than 1,000 government programs, including cuts in the defense budget and in Medicare - through 2022.

Some programs are exempt from the BCA, namely:  Social Security, federal pensions and veterans' benefits.

What is the impact of the tax increases and budget cuts?   Higher taxes and spending cuts are anticipated to reduce the U.S. budget deficit by ~$560 billion, although the Congressional Budget Office predicts that policies from the BCA would cut gross domestic product by 4% in 2013, which many analysts say would likely send the U.S. economy into a recession, if not a depression, as the financial markets would likely go into a tailspin while businesses and consumers both cut back on spending.

For further details, go to:   [ CNBC, 10/22/12 ].