can someone explain it in simple terms, holding back on the paranoia a little. . .
Something I put together for a friend recently (paranoia free):
The fiscal cliff is a combination of 2 budget related events that are scheduled to occur at the same time.
Part 1:In 2001 and 2003, there were legislative efforts to make significant changes in the areas of the U.S. Internal Revenue Code. These changes would have the effect of significantly reducing revenue for the U.S. There was already in place a rule in the U.S. Senate that allowed Senators to block any budget changes which would significantly increase the federal deficit beyond ten years. To get around this rule (and the Senators who would use it to block the legislation), the changes were written to expire on January 1, 2011. At that time, if no further efforts to extend the law were successful, all the changes to the U.S. Internal Revenue Code would revert back to the way it was (higher taxes, increased revenue).
In 2010, the U.S. was in a period of economic recession. There was a fear that increasing the tax burden on businesses and individuals at that time would only deepen and increase the duration of the recession. Those who sided with President Obama on the matter, wanted to create a new law that would maintain the lower tax burden on those earning less than $250,000 while allowing the changes to revert back to pre-2001 for those earning more. Those who did not side with the President wanted to extend the duration of the lower tax burden for everyone, including those earning more than $250,000. A compromise was worked out that would maintain the post-2001 changes for everyone until January 1, 2013 and would give President and his supporters some other things they wanted that might otherwise have been difficult to get through Congress.
This means that on January 1, 2013, unless the legislators in Congress can come to an agreement on how to deal with the situation, the tax U.S. Internal Revenue Code changes that were made in 2001 and 2003 will expire and most individuals in the U.S. will see an increase in their tax burden in 2013 as compared to the years since 2001. This increase in revenue does not automatically trigger any increase in spending and, while it would significantly reduce the federal deficit, many see it as a significant hindrance to U.S. economic activity, possibly enough to push the country back into another economic recession. President Obama and his supporters are once again asking for an extension of the lower tax burden for those earning less than $250,000 while allowing the tax burden to revert to pre-2001 levels on those earning more than $250,000, suggesting that the increased revenue from those higher earners is necessary to reduce the federal deficit. Those who do not side with the President want instead to extend the lower the tax burden indefinitely for everyone and deal with deficit reduction through spending cuts.
Part 2:The United States has this silly law created in 1917 often referred to as the "debt ceiling". This law does not prevent Congress from creating budgets that increase the national debt, it simply prevents the government from issuing new bonds to cover the costs of that increased spending. The national budget and the debt ceiling are two completely separate processes that happen at different times. Congress can at any time they find it necessary vote to increase the debt ceiling in order to continue to issue bonds to cover the budgeted spending. In 2010 (or early 2011, I can't remember), the U.S. Congress passed a budget that would increase the national debt beyond the debt ceiling in the summer of 2011. The assumption was that the debt ceiling would later be increased as it had been regularly (over 80 times) in the past. At this time there were some members in congress who wanted to significantly reduce spending to reduce the deficit and preferably reduce the debt. Being a minority of the Congress, they didn't get the spending cuts they wanted. Since the debt ceiling places a limit on the ability of the government to pay obligations it has already incurred, these members of congress decided that they could use the potential damage to the country of being incapable of raising additional funds as leverage to get concessions from the majority that they otherwise might not have been able to get. Breaking a filibuster in the Senate requires 60% of Senators to agree, meaning that a 40% minority can prevent a new law from being passed. Essentially a minority of members in Congress held the country's debt ceiling hostage until the majority of members met their demands.
A compromise was eventually reached whereby the debt ceiling would be increased (under the current budget it will need to be increased again in February of 2013) and some spending cuts would be made. In addition as part of the compromise, a law was passed that required the Congress to find another compromise to cut $1.5 trillion. A deadline of December 23, 2011 was placed in the law to find this compromise. To give all parties in Congress an incentive to work out a compromise, if they failed to do so by the deadline then there would be an automatic across-the-board cuts of spending split equally between defense and non-defense programs. These automatic cuts were scheduled to occur on January 1, 2013. Supposedly the idea was to create a financial situation severe enough that all parties involved would be willing to compromise. Congress failed to find a compromise they could all agree to. I suspect that each side thought that they'd fare better after the November 2012 election and figured they'd just wait until December 2012 to use the results of the election as leverage to get what they want.
This means that on January 1, 2013, unless the legislators in Congress can come to an agreement on how to deal with the situation, U.S. government spending will be cut substantially without consideration to the value of the programs receiving the cuts. Many see this decrease in government spending as a significant hindrance to U.S. economic activity, possibly enough to push the country back into another economic recession.
Fiscal Cliff:Given the explanation above, on January 1, 2013 if no further action is taken, federal income tax rates for most people will increase to what they were prior to 2001 and the government will cut spending by well over $1 trillion. While this will have the benefit of significantly reducing the deficit, there are many who believe that pulling that much money out of a fragile economy that is still working its way out of a recent recession could bring about an economic depression worse than the country has ever experienced in the past.
TLDR; In 2010 the government extended the "Bush Tax Cuts" to Jan. 1, 2013. In 2011 the government scheduled over $1 trillion in across-the-board spending cuts to take effect on Jan. 1, 2013. The "Fiscal Cliff" is the idea that the increased taxes and reduced spending would pull too much money out of an economy that is recovering from a recession and could create a severe economic depression. One of the possible benefits of the "Fiscal Cliff" is that, if the economy doesn't completely collapse, it will result in a substantially smaller deficit.
