Unless the impasse in Washington is resolved soon, America will go over the so-called “Fiscal Cliff.” We’ve all heard the term, but what exactly is the “Fiscal Cliff”? The “Fiscal Cliff” is a combination of massive tax increases as well as large scale, but indiscriminate Federal spending cuts that are due to come into effect on January 1, 2013. The result would be higher taxes and job losses for Ohioans and the nation.

The circumstances surrounding the creation of the “Fiscal Cliff” are complex and go back years. They include past congressional failure to permanently extend the Bush-era tax cuts as well as the failure to obtain a bipartisan deal on shrinking the massive $16 plus trillion US debt in 2011 as part of negotiations over extending the US debt ceiling.

In Part One, we will take a quick look at the first piece of the Fiscal Cliff: the tax hikes.

A myriad of tax increases will begin hitting Ohioans on January 1. Among these are:

• The re-introduction of the Federal Death Tax;
   
• A reduction in child credits;
   
• Payroll tax increases (Social Security)
   
• The elimination of the Alternative Minimum Tax Patch that prevents “bracket creep” where middle-class earners are stuck with a much higher rate;
   
• Increases on capital gains and dividend taxes;
   
• Other new taxes as a result of Obamacare, including a new tax on medical device manufacturers and a cap on the amount that can be set aside tax free in Flexible Savings Accounts in order to pay for families’ medical needs.

These tax increases are expected to have a significant and negative impact on US GDP growth.

According to the non-partisan Tax Foundation, the US GDP could be as much as 9.6 Percent lower ten years out as a result of the numerous changes. This isn’t cumulative—this is the loss at year 10, and so the total loss of growth would be substantially higher.

Outside of the loss of GDP, and an attendant loss of jobs due to those increases, Ohioans will be paying more in a time of economic uncertainty.

According to another analysis done by the Tax Foundation, a family of four in Ohio earning the state median income of $72.8 thousand (in 2011 dollars) would see a federal tax increase of $3,437 or 4.72 percent.

Overall, the tax increases that would be imposed as a result of the full Fiscal Cliff will reduce the economic freedom of all Americans. As the Heritage Foundation points out, the US has already fallen from the fifth freest nation in the world in 2008 to the tenth in 2012. The fall will continue if the Cliff is not avoided.

This is hardly the time for large tax increases, not that there is a good time. Tax increases suppress economic vitality by sapping the incentive for people to work hard and enjoy the fruits of their labors. They create negative incentives for additional investment of time and capital by individuals and small businesses, which are the real job creators. As Dr. Arthur Laffer points out (and we have previously), higher rates often fail to generate the revenue envisioned. The Laffer Curve demonstrates that higher rates can become counterproductive, incentivizing taxpayers to engage in creative measures to reduce their taxable income, and disincentivizing growth.

In Part Two, we will look at the other side of the Fiscal Cliff equation: indiscriminate spending cuts that will leave our national defense in a state of disrepair despite the tumult we see in the world around us.