By: DailyForex.com
The USA is on a countdown to a fiscal catastrophe which will expire with the old year. Unless a compromise can be reached which is acceptable to Democrat and Republican alike, an automatic process of mandatory spending cuts and tax increases will be triggered on New Year’s Day. Neither party wishes to see this happen, but they have fundamentally different beliefs on what would constitute acceptable changes to taxation and public spending which would need to be put in place to avoid it. If the automatic cuts do drop in, middle class Americans are likely to face an additional $2200 in taxes next year. Ironically, this tax break was brought in under Republican President George Bush, but they will expire at the end of 2012.
President Obama has gone to Michigan to canvas the support of car workers for his plans to tax the rich as a means to avoid the plunge over the fiscal cliff – asking blue collar and manual labourers if they’d like to see the rich paying more tax is preaching to the choir. Taxing the rich is a universally popular approach with all segments of society except, of course, amongst the rich and powerful themselves. Whilst the rich will always be a minority group, they represent a very powerful lobby.
The Republicans want to achieve the necessary financial cuts by reining in public spending – rather than by taxing the rich who (traditionally) are seen as their supporters. They have indicated that they might support the closing of tax loopholes and limiting tax deductions. Such a move could net $800 billion over time, it is claimed. For their part, President Obama has made it clear that Democrats are willing to “make some tough spending cuts on things that we don't need".
If agreement cannot be reached, then the automatic programme will cut $600 billion from the US economy. This will almost certainly send the US into recession and would harm the global recovery. Much is at stake and there is little time for serious negotiations which place the good of the US economy above partisan considerations.