This report provides a brief overview of the major tax and spending policy changes set to take effect under current law at the end of 2012 or early in 2013. Collectively, these policies have been referred to by some as the "fiscal cliff." Major Fiscal Policy Changes

A variety of revenue and spending provisions are set to expire around the end of calendar year 2012, including the Bush tax cuts and other related tax provisions, extended emergency unemployment benefits, the Social Security payroll tax reduction, the "doc fix," and other tax extenders. If Congress and the President allow all of these measures to expire as scheduled under current law and let the spending cuts under the Budget Control Act (BCA) take effect (see discussion below), the budget deficits beginning in FY2013 will gradually fall as a percentage of gross domestic product (GDP) and are projected to remain at sustainable levels through FY2022. Under current law, the budget deficit is estimated to fall $502 billion between FY2012 and FY2013 (see Table 1 ) as a result of fiscal policy changes set to take place at the end of 2012 and early in 2013. This estimated deficit reduction assumes that current law will be implemented as scheduled. If, however, Congress changes the trajectory of these policies by increasing spending (i.e., by eliminating the BCA automatic spending cuts) or decreasing revenue (i.e., by extending a portion of the Bush tax cuts), these policies would increase the deficit relative to the baseline. Also included in the Bush tax cuts were provisions that reduced tax rates on long-term capital gains and dividends; reduced and ultimately repealed limitations for personal exemptions (PEP) and itemized deductions (Pease); and expanded certain tax credits, including the Earned Income Tax Credit (EITC), child tax credit, adoption tax credit, and dependent care tax credit. The Bush tax cuts also contained provisions to reduce the marriage tax penalty, as well as modified various education-related tax incentives. Extending current estate tax provisions would increase the budget deficit, relative to current law. CBO estimates that allowing the two-percentage-point payroll tax reduction to expire would reduce the budget deficit by $95 billion between FY2012 and FY2013 (see Table 1 ). Tax Extenders

A number of temporary tax provisions expired at the end of 2011, and more are scheduled to expire at the end of 2012. 112-25 ). P.L. Allowing for a reduction in Medicare payment rates for physicians would reduce the budget deficit by $11 billion between FY2012 and FY2013. However, making significant changes to spending or revenue policies at this time may be harmful to the ongoing economic recovery. There are also timing issues associated with various tax and spending policies scheduled to take effect under current law that have potential implications on the economy. Thus, the timing associated with various tax and spending policies scheduled to change under current law at the end of 2012 or early in 2013 has important consequences for the expected economic effects of individual policy choices. He stated that the spending and tax policies set to take effect in 2013 could endanger the recovery and recommended that Congress work to implement a credible medium-term plan for deficit reduction.
This report provides a brief overview of the major tax and spending policy changes set to take effect under current law at the end of 2012 or early in 2013. Collectively, these policies have been referred to by some as the "fiscal cliff." Extending current revenue policies (e.g., extending the Bush tax cuts) and changing current spending policies (e.g., not allowing the BCA sequester to take effect) would increase the projected budget deficit relative to current law. The Congressional Budget Office (CBO) estimates that if current law remains in place, the budget deficit will fall by $502 billion between FY2012 and FY2013.
Revenue provisions that are set to expire at the end of 2012 include the "Bush tax cuts," as well as provisions related to the estate tax and the Alternative Minimum Tax (AMT). Collectively, the Bush tax cuts reduced income taxes by reducing tax rates, reduced the marriage penalty, repealed limitations on personal exemptions and itemized deductions (PEP and Pease, respectively), expanded refundable credits, and modified education tax incentives. The Bush tax cuts also reduced estate tax liabilities by increasing the amount of an estate exempt from taxation and by lowering the tax rate. The two-percentage-point reduction in the Social Security payroll tax is also set to expire at the end of 2012 and a number of temporary tax provisions (also known as "tax extenders") expired at the end of 2011 with more scheduled to expire at the end of 2012. Under current law, these provisions are collectively estimated to reduce the budget deficit by nearly $400 billion between FY2012 and FY2013.
There are a variety of spending policies set to change at the end of 2012 or early in 2013. These include the federal share of extended benefit payments for unemployment and the authorization for temporary emergency unemployment benefits. Payments to physicians under Medicare are scheduled to be reduced by 27% in 2013 under the Sustainable Growth Rate (SGR) system. Automatic spending cuts enacted as part of the Budget Control Act of 2011 (BCA; P.L. 112-25) are scheduled to reduce spending beginning in FY2013. Under current law, these policy changes are collectively estimated to reduce the budget deficit by over $100 billion between FY2012 and FY2013.
In making fiscal policy choices, Congress will have to weigh the benefits of deficit reduction against the potential implications of fiscal policy choices for the ongoing economic recovery. Maintaining current revenue and spending policies will add to the deficit, while increasing revenues and reducing spending, as under current law, could slow economic growth. Thus, deficit reduction measures must be balanced against concerns that spending cuts or tax increases could dampen an already weak economic recovery. CBO has concluded that allowing current law fiscal policies to take effect will dampen short-term economic growth, but accelerate long-term economic growth. Conversely, CBO has concluded that postponing the fiscal restraint would accelerate short-term economic growth, but dampen long-term economic growth. In that context, several policy observers have recommended implementing a credible medium-term plan that balances economic considerations with deficit reduction.