The fiscal cliff tax timebomb: How American families would be $400 worse off a MONTH from December 31 if no deal is reached

Hard working American families could be $4,603 a year in total worse off on their paycheck if the U.S. falls off the fiscal cliff

The President has returned to the Capitol from his Christmas vacation in Hawaii to deal with the looming fiscal cliff which will be triggered on Monday when the U.S. debt ceiling is hit

Treasury Secretary Timothy Geithner however has told Congress that the president's administration would take 'extraordinary measures' to avoid the tax increases

The inability to make a decision has been likened to a group of kindergarten children playing a dare game of 'who goes first'

With time running out for lawmakers in Washington D.C. to reach a deal on the looming fiscal cliff, every hard working American is staring down the barrel of a combined $536 billion tax hike.
Monday is the deadline for a resolution between the White House and the House of Representatives and if that is not reached then middle income American families will be hit hardest - losing upwards of $4,603 a year for a couple whose household earns $100,000.
That would leave married Americans almost $400 a month worse off and with high gas prices and a fragile economy only starting to show green shoots of recovery, it could be catastrophic not just for the U.S. but for the wider global economic health.
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The fiscal cliff tax burden for married people is shown here in this graph

This chart shows a snapshot of how single people in different income groups will be affected by the U.S. stepping off the fiscal cliff

Indeed, no American would escape the terrifying prospect of large tax rises, should the George W. Bush era tax cuts be allowed to expire.
A single American earning $50,000 would lose $1,128 off their yearly salary, as their effective tax rate rises from 18 percent to 21 percent.

And a married American Middle Class family on $50,000 would find themselves and their household down $2,008 or $167 dollars a month.
Economist, Robert Salvino has said that he does not expect those on Capitol Hill to meet the midnight December 31st deadline and said, deal or no deal - the payroll tax cut is certain to change.

President Obama returned to Washington under pressure to forge a year-end deal with Republicans to avoid the tax hikes and spending cuts of the fiscal cliff

He justified this by saying that the tax break was part of the stimulus plan for the recession and that immediate danger has passed.
'If the payroll tax cut expires then, it doesn't matter what tax bracket you are in, everyone will be hurt' he said.
The average household income across the country is $43,000 per year and with the additional two percent tax on payroll will cost the average household around $800 a year from their paychecks.
Frighteningly, if lawmakers do not act fast, farm and dairy subsidies could expire too, which could lead to a ruinous rise in food prices for average income families.

The move comes as President Obama and the GOP are locked in negotiations over how to avoid the fiscal cliff. Obama is pictured (second right) with Geithner (far left), House Speaker John Boehner (second left) and Senate Majority Leader Harry Reid (right)

'The extent that the cuts could effects education is through various federal programs that provide grant money for schools to do certain things like providing free or reduced lunch or providing laptop for students,' said Salvino.
The outlook on the 'fiscal cliff' coming up at year-end is uncertain. Democratic President Barack Obama has said he hopes for a last-minute deal to avert it. That would need to get done soon, with Congress just now coming back from its holiday break.

'We are heading over the Fiscal Cliff because of a Dictatorship': Senate Leader Harry Reid Voices His Fears Today

Speaking on the Senate floor today, Democrat Harry Reid said that the U.S. appears to be heading over the 'fiscal cliff' and accused the House of Representatives of being a 'dictatorship'.

Taking to the floor to declare his frustration with the other chamber, Reid said that getting the 60 plus Senate votes any new legislation needs seemed to be doomed unless the Republicans gave it strong backing.

'It looks like that's where we're headed,' said Senate Leader Mr. Reid about the fiscal cliff.

He said the the House-Speaker John Boehner could easily end the impasse and stop the massive $536 billion tax hike by adopting the legislation the Senate has already passed to preserve the Bush tax-cuts for incomes under $250,000.

However, Reid said that Boehner will not do that because he is more concerned with his own power and re-election as Speaker which comes up for renewal on January 3rd.

'The American people I don't think understand the House of Representatives is operating without the House of Representatives,' Reid said. 'It's being operated by a dictatorship of the speaker, not allowing the vast majority of the House of Representatives to get what they want.'

'If the 250 were brought up, it would pass overwhelmingly,' said Reid, referring to the Senate approved $250,000 plan.

'What goes on in this country shouldn't be decided by 'the majority,' it should be decided by the whole House of Representatives,' Reid said.

Boehner's office was unimpressed with Reid's declarations.

'Senator Reid should talk less and legislate more,' said Boehner spokesman Michael Steel. 'The House has already passed legislation to avoid the entire fiscal cliff. Senate Democrats have not.'

Weeks of inconclusive political drama over the 'cliff' have focused largely on individual income tax rates and spending on federal programs such Medicare and Social Security, but many tax issues are also involved, including the estate tax.
At the moment, under laws signed a decade ago by Bush, the estate tax is applied to inherited assets at a rate of 35 percent after a $5 million exemption.
That means a deceased person can pass on an inheritance of up to $5 million before any tax applies. Inherited wealth passed to a spouse or a federally recognized charity is generally not taxed.

President Barack Obama walks down the the lower steps instead of the usual longer stairway from Air Force One upon his arrival at Andrews Air Force Base this morning

Obama wants to raise the rate to 45 percent after a $3.5 million exemption. Republicans have called for complete repeal of the estate tax, which they call the 'death tax,' though Boehner earlier this month called for freezing the estate tax at its present level.
It was difficult to determine what the Republicans want after last week's events in the House.
If Congress and Obama do not act by Dec. 31, numerous Bush-era tax laws will expire, including the one on estate taxes. That would mean the estate tax rate will shoot up next year to the pre-Bush levels of 55 percent after a $1 million exemption.
It would also mean that for the first time in years, a portion of that estate tax would go to the states, through the return of the credit system.
Under that old law, estates paying the tax could get a credit against their federal tax bill for state estate tax payments of up to 16 percent of the estate's value.
If the fiscal cliff were allowed to take hold unaltered by Washington, 30 states would again automatically begin getting their share of federal estate taxes. The state laws are generally written so the state estate tax amounts are calculated under a formula based on the amount of the federal credit.
This would help states that have struggled with lower tax revenues since the 2007-2009 financial crisis and resulting recession, according to research by the Pew Center on the States, though painful federal spending cut backs would also hurt the states.

President Barack Obama waves as he steps off the Marine One helicopter and walks on the South Lawn at the White House in Washington as the fiscal cliff looms

In fact it is thought that millions of middle-class Americans would face higher taxes immediately if Congress fails to reach an agreement to avoid the fiscal cliff.
The alternative minimum tax which was enacted years ago and was meant to hit what were then higher income Americans is due to expire, affecting those making as little as $45,000.
'It'll come as a surprise for many people,' said Marshall Mennenga, an enrolled agent with Mennenga Tax and Financial Service.
'There's going to be a lot of people very upset if they don't pass the 'patch' and get this thing corrected.'
The alternative minimum tax of AMT, went into effect in 1968 to deduct tax from wealthy Americans who were deducting so much that they weren't paying any viable income tax.

Peering over the Fiscal Cliff: What happens if no deal if reached by December 31st?

On January 1st the tax cuts instituted by George W. Bush expire and huge spending cuts will have to occur.
In total $607 billion of cuts and tax rises are planned, these include:

• Reductions in the defense budget
• The end of the two-percent payroll tax cut
• Changes to Medicare allowances - which provide provisions for the elderly
• Family income credits for lower income families will be reduced
• The 'alternative minimum tax' for many employees will return
• Two million people will see the end of their long-term federal unemployment benefits - which are around $300 a week.

If this happens most observers say that a five percent cut in the country's output will happen in one swoop.
Unemployment, which has been falling could rise as businessess have to cut back in hiring because of the new costs.
The head of The Federal Reserve, Ben Bernanke has said that falling off the fiscal cliff could send the economy 'toppling back into recession'.
The Congressional Budget Office has said that U.S. unemployment could rise above nine percent in a year if the impasse is not resolved.
And as is often the case, any difficulties experienced in the world's largest economy will affect the health of the global financial situation.

However, the tax was not linked to inflation which means it is catching more people each year.
And with the so called 'patch' or Congress' short-term solution to the fiscal cliff, those on $45,000 to $74,450 could fall into paying the tax.
Without any deal, the net expands to a low of $33,750 for individuals and $45,000 for married couples.
While the U.S. stares over the 'fiscal cliff' and $536 billion in tax increases for all Americans, President Obama and the House of Representatives have been accused of acting like kindergarten students engaged in a dangerous dare of 'who goes first'.
President Obama returned to Washington D.C. after cutting short his Christmas vacation and the Senate is going back into session, but the Republican ruled House is still out on recess as the deadline of January 1st looms that could damage a still fragile recovery.
Treasury Secretary Timothy Geithner informed Congress on Wednesday that the government was on track to hit its borrowing limit on Monday and that he would take 'extraordinary measures as authorized by law' to postpone a government default.

President Barack Obama waves as he boards Air Force One to return to Washington to deal with the looming fiscal cliff that the U.S. is staring over

Still, he added, uncertainty over the outcome of negotiations over taxes and spending made it difficult to determine how much time those measures would buy.
In recent days, Obama's aides have been consulting with Senate Democratic Leader Harry Reid's office, but Republicans have not been part of the discussions, suggesting much still needs to be done if a deal, even a small one, were to be struck and passed through Congress by Monday.
At stake are current tax rates that expire on Dec. 31 and revert to the higher rates in place during the administration of President Bill Clinton.
All in all, that means $536 billion in tax increases that would touching nearly all Americans. Moreover, the military and other federal departments would have to cut $110 billion in spending.
But while economists have warned about the economic impact of tax hikes and spending cuts of that magnitude, both sides appear to be proceeding as if they have more than just four days left.
Indeed, Congress could still act in January in time to retroactively counter the effect on most taxpayers and government agencies, but chances for a large deficit reduction package would likely be put off.
House Republican leaders on Wednesday said they remain ready to negotiate, but urged the Senate to consider or amend a House-passed bill that extends all existing tax rates. In a statement, the leaders said the House would consider whatever the Senate passed.
'But the Senate first must act,' they said.
Aides said any decision to bring House members back to Washington would be driven by what the Senate does.
Reid's office responded shortly after, insisting that the House act on Senate legislation passed in July that would raise tax rates only on incomes above $200,000 for individuals and $250,000 for couples.
Meanwhile, Obama has been pushing for a variant of that Senate bill that would include an extension of jobless aid and some surgical spending reductions to prevent the steeper and broader spending cuts from kicking in.
For the Senate to act, it would require a commitment from Senate Republican Leader Mitch McConnell not to demand a 60-vote margin to consider the legislation on the Senate floor.
McConnell's office says it's too early to make such an assessment because Obama's plan is unclear on whether extended benefits for the unemployed would be paid for with cuts in other programs or on how it would deal with an expiring estate tax, among other issues.

President Barack Obama greets base visitors and personnel before boarding Air Force One to return to Washington on December 26th from Hawaii

What's more, House Speaker John Boehner would have to let the bill get to the House floor for a vote. Given the calendar, chances of accomplishing that by Dec. 31 were becoming a long shot.
Amid the standoff, Geithner advised Congress on Wednesday that the administration will begin taking action to prevent the government from hitting its borrowing limit. In a letter to congressional leaders, Geithner said accounting measures could save approximately $200 billion.
That could keep the government from reaching the debt limit for about two months. But if Congress and the White House don't agree on how to avoid the "fiscal cliff," he said, the amount of time before the government hits its borrowing limit is more uncertain.
'If left unresolved, the expiring tax provisions and automatic spending cuts, as well as the attendant delays in filing of tax returns, would have the effect of adding some additional time to the duration of the extraordinary measures,' he wrote.
Whenever the debt ceiling hits, however, it is likely to set up yet another deadline for one more budget fight between the White House and congressional Republicans.
Initially, clearing the way for a higher debt ceiling was supposed to be part of a large deal aimed at reducing deficits by more than $2 trillion over 10 years with a mix of tax increases and spending cuts, including reductions in health programs like Medicare.
But chances for that bargain fizzled last week when conservatives sank Boehner's legislation to only let tax increases affect taxpayers with earnings of $1 million or more.
Obama and his aides have said they would refuse to let Republicans leverage spending cuts in return for raising the debt ceiling.
But Republicans say the threat of voting against an increase in the limit is one of the best ways to win deficit reduction measures.
Treasury Secretary Timothy Geithner said in a letter Wednesday to congressional leaders that the department will take several accounting measures to save approximately $200 billion.

U.S. Treasury Secretary Timothy Geithner is going to unveil 'extraordinary measures' in efforts to avoid the nation triggering the debt ceiling

The government borrows about $100 billion a month, so that typically would keep the government from reaching the limit for about two months.
The move comes as President Barack Obama and the GOP congressional leadership are locked in negotiations over how to avoid a series of tax increases and spending cuts, known as the 'fiscal cliff,' that are scheduled to take effect next week.
Congressional officials said Wednesday they knew of no significant strides toward a compromise over a long Christmas weekend, and no negotiations have been set.
After conferring on a conference call, the House Republican leadership said they remain ready for talks, but gave no hint they intend to call lawmakers back into session unless the Senate first passes legislation.
'The lines of communication remain open, and we will continue to work with our colleagues to avert the largest tax hike in American history, and to address the underlying problem, which is spending,' the leadership said in a statement.
Obama has sought to include an increase in the borrowing limit in the talks. But Speaker John Boehner and other Republican leaders have demanded concessions in return. The negotiations hit a stalemate last week and Obama and lawmakers are returning to Washington this week to resume talks.
Geithner says it is harder to predict how long the delay will last because ongoing negotiations over tax and budget policies make it hard to forecast what tax revenue and government spending will be next year.
The borrowing limit is the amount of debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from Social Security revenue.

Warning: The phrase 'fiscal cliff' is attributed to Ben Bernanke (pictured), chairman of the Federal Reserve, America's central bank, who has warned about 'a massive fiscal cliff of large spending cuts and tax increases'

Another potential showdown is pending. A renewed clash over spending could come in late March; spending authority for much of the government expires on March 27.
In 2011, Congress raised the limit to nearly $16.4 trillion from $14.3 trillion. Three decades ago, the national debt was $908 billion. But Washington spent more than it took in, and the debt rose steadily — surpassing $1 trillion in 1982, then $5 trillion in 1996.
It reached $10 trillion in 2008 as the financial crisis and recession dried up tax revenue and as the government spent more on unemployment benefits and other programs.
In August 2011, the rating agency Standard & Poor's stunned the world by stripping the U.S. government of its prized AAA bond rating because it feared that America's dysfunctional political system couldn't deliver credible plans to reduce the federal government's debt. S&P decried American 'political brinksmanship' and concluded that 'the differences between political parties have proven to be extraordinarily difficult to bridge.'
A year and a half later, the two political parties are still as deadlocked as ever.
Despite S&P's warnings and the political stalemate, investors still want U.S. Treasurys. Given economic turmoil in Europe and uncertainty elsewhere, U.S. government debt and U.S. dollars look like the safest bet around.
That is why the interest rate, or yield, on 10-year Treasury notes has fallen from 2.58 Aug. 5, 2011 to 1.75 percent Wednesday.

VIDEO: Obama's last public statement on the fiscal cliff:  

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