The Fiscal Cliff Explainer: What It Is, Where It's From, Who Will Pay, and Why It Matters

Understanding the biggest story in Washington today

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In an ideal world, all cliffs are non-fiscal in nature/Wikimedia Commons

The end of the election means the most important story in politics is the Fiscal Cliff -- a sudden rise in taxes combined with spending cuts scheduled for January 1, 2013.

But before we get to the policy -- and the graphs -- let's talk about the term. "Cliff" is an imperfect analogy. It's really more a long, rolling hill. A fiscal slope.

In January, family income won't plunge into the watery depths and government spending won't collapse. Instead, higher tax rates would reduce family income throughout the year, and mandatory spending cuts would shrink the deficit. The federal government would have to cut programs, fire some people, and cancel some company contracts. It would be bad. It might turn out to be awful. But it wouldn't be sudden.

Whether you prefer cliffs or loping hillsides for your metaphor, topography is a good analogy for this crisis. It has been forming, as if tectonically, for many years. One could trace its origins all the way back to the 1960s and the creation of the perennially troublesome Alternative Minimum Tax. But the best place to begin is 2001, when President George W. Bush signed the first of two tax cuts which were scheduled to expire under the next president. That next president, Barack Obama, twice extended the tax cuts and added his own, including a huge break on payroll taxes. Then, in 2011, after Republicans insisted on trillions in spending cuts in exchange for raising the debt ceiling, the Budget Control Act. This law scheduled $1.2 trillion in cuts divided between defense and other parts of government.

Now all of these things -- the Alternative Minimum Tax, the undoing of Bush/Obama tax cuts, and the Budget Control Act -- are about to hit in seven weeks. What will that look like? How will it feel? How could we avoid it?

To the graphs, my friends.

What Does the Fiscal Cliff Look Like?

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Here is an at-a-glance look at the $500 billion in government savings that will take place in 2013. Taxes are in BLUE. Spending is in RED.

The pie, as you can see, is almost all blue. This is a tax cliff. Or a taxy knoll. Whatever.

Half of the savings come from the expiration of the Bush tax cuts, the Obama tax credits, and the payroll tax cut. Another quarter comes from the alternative minimum tax kicking in and walloping upper-middle-class and rich families.

As for the Budget Control Act, it's a $1.2 trillion machete chop to government spending. But that's a 10-year figure. Only 5% of that cut -- about $65 billion -- would actually take place in 2013, according to the Committee for a Responsible Federal Budget. That's a big deal for defense contractors and doctors and federal government employees.

But most Americans wouldn't feel it. They'd just feel the tax hike.

How Much Would the Fiscal Cliff Cost You?

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You pay more. That's the three word summary of the fiscal cliff's impact on your taxes.

If your household makes a typical salary -- say, $50,000 -- you should expect to pay $2,000 more in taxes next year. If your household makes an atypical salary -- say, $500,000 -- you should expect to take a $50,000 hit. The richer you are, the bigger the hit you face as a share of income. The top 0.1% would see an average tax hike of $600,000.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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