Now that the November elections are over, attention has finally turned to the looming fiscal cliff. Congressional leaders, President Obama, and their aides have been meeting to negotiate a potential deal to prevent tax increases and $109 billion in federal spending reductions that will commence in January.

Last week, Congressional Republicans swiftly rejected a plan offered by the Obama administration. The White House proposal would increase tax revenues by $1.6 trillion over a decade by allowing tax breaks for the wealthy to expire and by raising taxes on capital gains and dividend income. Notably, the proposal would also postpone for one year the automatic federal spending cuts scheduled to begin in January. Cuts, however, would be made to federal health care programs. Republican lawmakers denounced the framework for being too similar to President Obama’s budget proposal for 2013. Democrats responded by calling for the other party to produce a detailed plan of their own.

Despite the stalemate, leaders of both political parties have expressed a desire to prevent the looming tax hike on the middle class. A major sticking point, however, has been whether or not to allow the tax breaks to expire for wealthy Americans. Another point of contention is the expanding costs of entitlement programs, such as Medicare and Medicaid. Recently, some senior Democrats in the Senate have spoken out against a deal that would cut such social programs.

Although the negotiations are still in the early stages, some lawmakers anticipate that the short time frame before the fiscal cliff will necessitate a two-phase solution. A down payment of spending cuts could be agreed to and enacted during the lame duck, with larger, more encompassing fiscal reforms-including an overhaul of the tax system-to follow next year. This would have the effect of forestalling a fall off the fiscal cliff, and would help to alleviate fears in the business community that may already be negatively impacting the economy.


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