Experts say there is one thing that is for sure as America's leaders work to prevent the country's fall from the fiscal cliff – no matter what is agreed upon, many Americans will more than likely be affected.
Talks were expected to resume today on a potential deal, and Towson University economics professor Dr. George Georgiou says we should all be paying attention.
Georgiou has been teaching at Towson since 1980. He served as the chair of the economics department for 12 years, and he is considered an expert on international economics, monetary economics and economic theory. While there remain almost endless scenarios for what could come from talks and a potential agreement, he says there is no "quick fix" for the problem.
"The middle class will get hit," Georgiou says. "The majority of people will get hit."
He describes it as a snowball rolling down a hill. The country's debt is increasing, and the economy is not keeping pace. Steps in the direction of reducing debt and stimulating the economy have seemed to be more than Republicans and Democrats alike can stomach. While there have been proposals, Georgiou argues nothing brought up as of the end of discussions before the Christmas holiday address the real issue.
"None of the proposals put forth at this point actually deal with the fundamental problem – we are spending more than we are collecting in tax revenues," Georgiou says. "Even if we reach an agreement, and they basically decide on how to deal with the worst effects of the fiscal cliff, the budget deficit will not be eliminated. That means it will be improved. It won't be as wide, but we will still have deficits into the future."
The fiscal policy expert says there must be both tax increases and cuts in government spending. Both will certainly affect taxpayers. If an agreement isn't reached, Bush era tax cuts will expire. The payroll tax holiday that currently reduces taxes on every taxpaying American by two percent will be lost.
How will that affect your paycheck?
Well, if you are living paycheck-to-paycheck with no room to cut expenses, you will be in trouble if an agreement isn't reached. A failure to renew the Bush era tax cuts will mean a $2,000-$4,000 per year tax increase for most Americans. That's in addition to the two percent tax deduction lost via the payroll tax holiday.
How will the removal of the payroll tax holiday alone affect you?
Salary Estimated deduction
25K $42 per month
45k $75 per month
65k $108 per month
85k $143 per month
"It appears that the payroll tax holiday that we have been enjoying is not on any of the proposals. No matter what happens, beginning January 1st, people will see a smaller paycheck. Because that payroll tax holiday, will go away. Payroll taxes will increase by two percent. It's something you have to expect at this point."
In addition to automatic tax increases that will happen if an agreement isn't reached, there will also be automatic cuts in government expenses across the board.
Georgiou says while it's a situation that will most certainly affect programs like social security, it could also spell disaster for government employees or contractors.
"One way or another, we are all affected by various government programs," Georgiou says "Whether it's social security, defense expenditures, whatever it is, automatic cuts will take place across the board in all areas."
While it is hoped that an agreement on how to resolve the fiscal cliff will save the economy and the taxpayers, Georgiou says a failure to reach an agreement will most certainly send America into the dark.
"I think economic recession, mainly a slowdown in economic activity, and an abrupt breakdown in existing programs," he says.
The International Monetary Fund (IMF) estimates falling from the fiscal cliff would contract the economy by 3.5 percent.
"We're not growing at 3.5 percent right now," Georgiou says. "Which means that if we are not even growing at that rate, and the economy contracts, that puts us into negative territory. Then, of course, you have all sorts of ramifications. …There's no doubt that the United States' credit rating will be reduced."