Although that would not immediately trigger another recession -- the spending cuts are structured to phase in over a decade, while the tax hikes could be reversed legislatively in Washington -- the measures would likely slow economic growth, with millions of Americans feeling the pinch. Here's a look at what people can expect:
How much would falling off the fiscal cliff cost individuals in taxes? According to the Tax Policy Center, a nonpartisan research group, going off the cliff would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. The reason is that Bush-era tax cuts are set to expire, which will bring the tax system back to 2001 levels. Also set to lapse are a 2 percent payroll tax cut and a series of other temporary tax cuts for businesses that Mr. Obama enacted. These include the enhanced dependent care credit, enhanced child credit, enhanced adoption credit, enhanced earned-income credit, repeal of personal exemption phase-out, repeal of limit on itemized deductions, enhanced student loan interest deduction, and an exemption for mortgage debt forgiveness.
Unemployed workers. Unless lawmakers agree to an extension, federal long-term jobless benefits would expire for millions of unemployed Americans. During the recession caused by the 2008 housing crash, Congress passed a temporary supplement to state-based unemployment insurance programs, which usually pay benefits for six months. If the measure is not extended into 2013, more than 40 percent of the nearly 5 million Americans who have been unemployed for more than six months will lose benefits at year's end.
Low- to middle-income earners. People at these income levels would lose the Earned Income Tax Credit, along with a temporary cut in payroll taxes. For the past two tax years, employee contributions to the Social Security program was 4.2 percent, down from the usual rate of 6.2 percent (this comes on the FICA line item of a paystub) on earnings of up to $110,100 in 2012 and up to $113,700 in 2013. That 2 percent rise in payroll taxes would result in 160 million American wage earners seeing their tax bills increase by an average of $1,000.
The Internal Revenue Service has delayed releasing income tax withholding tables for 2013. That suggests employers are planning to withhold income taxes at the 2012 rates, at least for the first couple of pay periods of the new year. If Washington leaders fail to arrange a deal by the middle of January, employers will have to increase withholding to make up the difference.
- Annual income of $20,000 to $30,000: $1,064 average tax increase
- Annual income of $40,000 to $50,000: $1,729 average tax increase
Upper middle-income earners. People earning more than $50,000 would face an increase in the tax rate on capital gains to 20 percent, from 15 percent. Dividends, which are currently taxed at a 15 percent rate, would also be taxed as ordinary income, with the top rate rising to 39.6 percent.
- Annual income of $50,000 to $75,000: $2,399 average tax increase
- Annual income of $75,000 to $100,000: $3,688 average tax increase
- Annual income of $100,000 to $200,000: $6,662 average tax increase
High-income earners. Singles who make over $200,000 and married couples who earn over $250,000 would see their tax brackets rise from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively. In addition to the capital gain and dividend rates, the Affordable Care Act applies a new surtax of 3.8 percent on capital gains for wealthy Americans, pushing the top capital gains rate up to 23.8 percent. Finally, the estate tax exemption is set to drop back to $1 million dollars, with the rate increasing from 35 to 55 percent.
- Annual income of $200,000 to $500,000: $14,643 average tax increase
- Annual income of $500,000 to $1 million: $38,969 average tax increase
- Annual income of more than $1 million: $254,637 average tax increase
None of these numbers include the Alternative Minimum Tax (AMT), which was created in 1969 to ensure that wealthy taxpayers pay a minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent.
The problem with the AMT is that it now ensnares not only the wealthiest Americans, but 4 million to 5 million taxpayers with annual incomes between $200,000 and $1 million. Congress has yet to approve a new inflation "patch" that would allow millions to escape AMT (the last patch expired in December). If a new one is not enacted, the AMT will hit 31 million taxpayers this year, reaching into the middle class.
What government programs would be affected by spending cuts? About $1.2 trillion in federal spending cuts are scheduled to kick in next year, or roughly $110 billion a year for 10 years. Those reductions would be divided equally between the Pentagon and "discretionary" programs, or those that don't have earmarked funds. That means that there could be cuts in everything from infrastructure to schools, to public health and homeland security.
Will Medicare be cut? The government-run health care program for seniors would face a 2 percent cut in Medicare payments to providers and insurance plans, which amounts to a reduction of $11 billion next year.
What programs would not be cut? Social Security, Medicaid, supplemental security income, refundable tax credits, the children's health insurance program, the food stamp program and veterans' benefits are excluded from the cuts scheduled under the cliff. The White House has also said that military personnel would be exempt from the cuts.