The PPT is based on the US Fiscal Cliff deal, a the popular term to describe the expiry of tax breaks and introduction of spending cuts leading to conundrum that the US economy faced at the end of 2012

1. US FISCAL CLIFF DEAL :
A SOLUTION OR A PROBLEM
Naman Rastogi [B.Com. (H) 2nd Yr.]
Rachita Bhattacharya [Eco. (H) 3rd Yr.]

2. OBJECTIVE
A little tour of the US Fiscal cliff
o How did it all begin ?
o Why the deal was dragged into the eleventh hour ?
o Why tax breaks for Hollywood film and Rum makers and end of payroll taxes
hitting the poor ?
IS IT A FAIR GAMBLE ???
CLAUSES
PROVISIONS
What are ?
Why so ?
IMPLICATIONS
Positive side ?
Negative side ?
SUGGESTIONS
Improvements ?
Alternatives ?

3. Fiscal Cliff: What is This Wacky New
Word and Where Did it Come From?
 “Under current law, on January 2, 2013, there’s going to
be a massive fiscal cliff of large spending cuts and tax
increases”
-Ben Bernanke (Federal Chief)

4. CODIFICATION
 The Budget Control Act:
19th Aug 2011
o Deficit Reduction
o Debt Ceiling
 Lame Duck Session:
13th Nov 2012
o 113th Congress
o Leftover legislations
 Rounds of Fiscal
Provisions:
o 1st round- 31st Dec
2012
o 2nd round- 1st Jan
2013

5. THE CLAUSES OF THE FISCAL BILL
THE END OF LAST YEAR’S PAYROLL
TAX CUTS
THE END AND RENEWAL OF CERTAIN
TAX BREAKS FOR BUSINESSES
SHIFTS IN AMT EXEMPTION SLABS
SEQUESTRATION
THE BEGINNING OF OBAMA HEALTH
CARE LAW

6. THE END OF LAST YEAR’S
PAYROLL TAX CUTS
 Hike in payroll taxes in form of social security tax from
4.2% to 6.2% from March 2013.
 Target is the 87% of American Population whose income
is less than $110,100.

7. WHO GETS A FAIR SHAKE ?
PARTICULARS Mr. X Mr. Y
Earnings $4 million $40000
Percentage of earning
exposed to payroll tax
2.7% 100%
Payroll Tax $170202 $2480

8. THE LAFFER CURVE
• ARITHMETIC EFFECT
• ECONOMIC EFFECT
o Non-shaded region
o Prohibitive region
• MULTIPLIER EFFECT

9. IMPLICATION
SUGGESTIONS
:
 Cap on incremental
taxes to avoid
reaching prohibitive
region.
 Interchanging
payroll tax cuts with
reduction wasteful
expenditure.
Large Tax base;
Negative multi.
over AD
Reduction
in GDP
Slow
growth
rate

10. • Increased tax rates over income.
• Increased tax rates over dividends and
capital gains.
• Increase in estate tax.
UNFAVOURABLE TAX BREAKS

11. Tax on CG &
Dividend
Singles
>$400,000
Earlier-15%
Present-20%
Couples
>$450,000
Tax on
Income
Singles
>$400,000
Earlier-35%
Present-39.6%
Couples
>$450,000
ESTATES OLD TAX RATES NEW TAX RATES
>$5 million 35% 40%

12. FAVOURABLE TAX BREAKS
• More than 50 tax
breaks were renewed
through 2013.
• Attracting intense
lobbying and
campaign donations
from businesses and
trade groups.
• Help prosper and
create jobs.
PARTICULAR TYPE COST
R&D Tax credit $14.3 b
FI Exemption $11.2 b
Companies Write off $5 b
Restaurants Write off $4.5 b
Rum Rebates $222 m
Railroad Track Tax credit $331 m
Companies Deduction $314 m
Movie production Write off $248 m
Miscellaneous Other $39.8 b
TOTAL $76 b

13. UNEQUAL LAWS FOR UNEQUAL PEOPLE IS EQUALITY
What do you infer
?
 Federal tax targets
high income group
 State and local
taxes bite the
lower income group

14. IMPLICATION
SUGGESTION
S:
• Minimize favorable tax
breaks.
• Hike in payroll taxes
must be substituted by
unfavorable tax
breaks.
• Estate tax snapped
back to 55%
High Income
Group
Low Income
Group

15. SHIFTS IN THE AMT EXEMPTION
• Calculate both regular income tax and the AMT and pay
the larger of the two.
• Tax deductions itemized in ‘Schedule A’ removed.
• Limits medical & dental expenses and home mortgaged
interest deductions.
• Indexed to inflation.

16. PROVISIONS OF AMT
STATUS SINGLE COUPLE
TAX RATE-Low 26% 26%
TAX RATE-High 28% 28%
HIGH RATE STARTS $1,75,000 $1,75,000
EXEMPTION IN 2012 <$48450 <$74450
EXEMPTION 2013 onwards <$33750 <$45000
HIGHLIGHTS:
o Target Population: Singles– above $33,750 (earlier-$48,450)
Couples– above $45,000 (earlier-$74,450)
o Tax rate: 26%; Y <= $175,000 and
28%; Y > $175,000.

17. COMPARING AMT (explained for singles)
BEFORE (2012) AFTER (2013 onwards)
Mr. X(single)
Taxable Income = $45,780
(<48,450; Exempted from AMT)
Tax as per AMT rates :
N/A
Tax as per federal tax rates :
=8700*0.10+26650*0.15+10430*0.25
=$7,475
Mr. X had a tax liability of $7575
Mr. X (single)
Taxable Income = $45,780
(>$33750; Not exempted from AMT)
Tax as per AMT rates :
=0.26*45780
=$11,903
Tax as per federal tax rates :
=8925*0.10+27325*0.15+9530*0.25
=$7,374
Mr. X has a tax liability of $11903

18. IMPLICATION
AMT
2013
Upper middle
class income
taxpayers included
Removed
uncertainty
about
taxation
Restricts new
entry onto
AMT in future
SUGGESTIONS:
• The decrease in the
AMT slabs seem
unjustified for middle
class income group.
• Measures must be
taken to impose taxes
especially for the high
income group.

19. SEQUESTRATION
 Sequestration is the process whereby the difference between
budget resolution cap and amount actually appropriated is
sequestered by treasury and not handed over to agencies as
appropriated by Congress.
 Sequestration is proposed for defense and non-defense
sector.
 The BCA 2011 established the Joint Selection Committee to
produce deficit reduction legislation by at least $1.2 trillion
over the coming 10 years.
 On the failure of JSC to propose and Congress to enact
sequestration along with other tax laws would be triggered.

20. 9.4
10
8.2
7.6
2
0
2
4
6
8
10
12
Defence Descritionary
Funding
Defence mandatory
Funding
Non-Defence
discretionary funding
Non-Defence
mandatory funding
Medicare
Sequester Cuts (%)

21. MECHANICS OF SEQUESTRATION
HIGHLIGHTS:
 $1.2 trillion to be reduced in 10 years
 $54.7 billion reduction in both defense and non-defense budgets
annually.
CALCULATION OF TOTAL ANNUAL REDUCTION BY FUNCTIONS (in
billion of dollars)
Joint Committee Saving Target 1200
Deduct debt service savings
(18%)
(216)
Net reductions 984
Divide by 9 to calculate annual
reduction
109.3
Split 50-50 between defence and
non-defence functions
54.7

22. Discretionary Spending Caps Under the Budget Control Act
(Budget authority in billions of current dollars)
2013 2014 2015 2016 2017 2018 2019 2020 2021
Defense Category 546 556 566 577 590 603 616 630 644
Nondefense Category 501 510 520 530 541 553 566 578 590
Total Cap 1,047 1,066 1,086 1,107 1,131 1,156 1,182 1,208 1,234
KEY POINTS:
2013 spending caps:
o Defense- $546 b
o Non- Defense- $501 b

23. DEFENCE SECTOR
REDUCTION
• Uniform Reduction of
10.3%.
LAYOFF
• 108,000 DoD civil
employees, 10% defense
contractor workforce
• Gradual downfall
REVENUE
REDUCTION
• Capacity to fund
upcoming projects
reduced.
• Affects DoD’s ability to
award new contracts.

24. NON DEFENSE SECTOR
EDUCATION
• Lose $2.7 billion for
critical education
programs.
• 80,000 fewer children
receive child care
subsidies.
HEALTH
• 659,476 fewer people
tested for HIV.
• 48,845 fewer women
screened for cancer.
• 211,958 fewer children
vaccinated.
• 4,677 fewer people to
substance abuse
treatment programs
EMPLOYMENT
• 1.6 million fewer workers
receive jobs, training ,
education and employment
service.
• 268,000 jobs would be laid
off

25. IMPLICATION
 Current unemployment rate= 8%
o With sequestration can you imagine the rise in the
unemployment rate?
 Priority Sectors targeted
o Social security shaken
o Education, health care, employment will be slashed or
rather would be burdensome.
Sequestration is delayed, more focus is given on
balanced spending cuts and revenue increase through
taxation

26. OBAMA HEALTH CARE LAW
 All Americans to purchase a private health care plan or pay a 1% - 2.5% tax.
Americans who cannot afford will either qualify for Medicare/Medicaid or get
assistance in the form of tax credits or from HIX.
 New public program available who do not have access to an employer
plan/Medicaid/SCHIP/Medicare.
 National Health Insurance Exchange operational from 1st Jan 2014 which would
be a government-run marketing organization that would sell insurance plans
directly.
 An employer has the “Pay or Play” provision.
 Mandating the families to cover all children through private/public health insurance
plan.
 Expanding eligibility for government programs; like Medicaid and SCHIP and
allowing flexibility in embracing state health reform initiatives.

27. WHO BEARS THE COST ?
 Reduction in the deduction of medical expenses from cost
exceeding 7.5% to cost exceeding 10 % of adjusted gross
income.
 Increase of 2.3% of tax on gross sales of medical device
makers.
 The FSA accounts to face an annual cap of $2500.
 Surtaxing top CG to 23.8% (from 20%) and top divided rate
to 43.6% (from 39.6%).

28. IMPLICATION
 Increasing the sharing of
health care risk would
increase affordability and
adequate coverage.
 Save $2500/ family i.e. 8% of
health expenditure.
 Small, scrappy co. have
already responded to the
looming tax by cutting
research and development.
 Country’s jobs outlook
hampered as the industry
employs nearly 400,000
Americans.
PARTICULARS REVENUE
REDUCTION IN DEDUCTION $15 b
FSA CAP $13 b
SUTAXES $123 m
TAX ON MEDICAL DEVICES $29 b

29. APPROACHING THE END:
Effect on the society
What do you reckon?
• Imbalanced
o Biased against middle class and
upper middle class
• National Security and
future Human Resource
Development affected.
1)ObamaCare
2)Favourable
tax breaks for
businesses and
lucrative
sectors
1)Payroll tax
2)Federal and State
and Local Tax
3)AMT Slab
4)Tax rate hike
5)Sequestration
(Defense and Non-
Defense)

30. EFFECT ON THE ECONOMY
Positive Side- Debt (%GDP)
Negative Side- GDP
Reduction
50
55
60
65
70
75
80
85
90
95
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Fiscal Cliff
No
Tightenin
g
-2
0
2
4
6
8
10
12
0%
Fiscal
Cliff
25%
Fiscal
Cliff
50%
Fiscal
Cliff
75%
Fiscal
Cliff
100%
Fiscal
Cliff
Unemplo
yment
rate
GDP
Growth
(%)

31. IS IT A FAIR GAME?

32. REFERENCES
• Congressional Budget Office (CBO) reports, CBO.gov
o “Choices for Deficit Reduction”- Nov 2012
o “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013”- May 2012
o “The Budget and Economic Outlook: Fiscal Years 2012 to 2022”- Jan 2012
• “Between a Mountain of Debt and a Fiscal Cliff”, The Committee For a Responsible Federal Budget, CRBF.org- July 2012
• Congressional Research Service, “The Fiscal Cliff and the American Tax Payer Relief Act of 2012”; Mindy R. Levit, Coordinator,
Analyst in Public Finance, Margot L. Crandall-Hollick, Analyst in Public Finance, Jim Hahn, Specialist in Health Care Financing,
Jim Monke, Specialist in Agriculture Policy, Janemarie Mulvey, Specialist in Health Care Financing, Julie M. Whittaker, Specialist
in Income Security; January 4, 2013
• Tax Foundation, “The Fiscal Cliff: A Primer”; Tax Foundation Staff, November 13, 2012
• RBS Group: “The US economy- falling off a Fiscal Cliff”, July 2012
• “Under Threat Sequestration’s Impact on Non-defense Jobs and Services”; report by, Sen, Tom Hankin, Chairman, Senate
Appropriation Sub-Committee on Labour, Health and Human Services and Education and Related Agencies, July 25, 2012
• Congressional Research Service: “Sequestration: A Review of Estimates of Potential Job Losses”; Linda Levine, Specialist in
Labor Economics, Oct.1, 2012
• OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155); Executive Office of the President of the
United States
• AAAS Analysis: Federal R&D and Sequestration; “Brief: Federal R&D Sequestration in the First five years”; Matt Houristan
• CSBA: “Analysis of the FY 2013 in Defense budget and Sequestration”; Todd Harrison; August 2012
• “Capital Gains and the Fiscal Cliff Deal”, Forbes- 4th Jan 2013
• “The Economic Implication of extending the Bush Tax Cuts”, Forbes- 12th Nov 201S
• “After the fiscal cliff a mountain range, Federal budget”, The New York Times
• “Fiscal cliff deal has billion in business tax break”, Los Angeles Times
• “Congress passes payroll tax cut deal”, CNN.com
• “Fiscal Cliff finally deals with AMT”, Time.com
• “Fiscal cliff, Sequestration”, The National Law Review
• “On Cliff’s edge”, M.K.Venu, Indian Express- 3rd Jan 2013
• “U.S. Senate approves last minute deal on ‘fiscal cliff”, The Hindu- 1st Jan 2013
• “Fiscal Cliff disputes remain as deadline nears”, The Hindu- 31st Dec 2012
• “Fiscal cliff deal sours US Tax Reform outlook”, “Americans wary after fiscal cliff deal “, The Economic Times- 8th Jan 2013
• “The Fiscal Cliff- on the edge”, The Economist- 15th Dec 2012