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f you've been paying attention to the news this week, you've probably seen or heard people talking about the "Fiscal Cliff" or "Taxmageddon." These terms refer to a looming combination of tax increases and spending cuts that are scheduled to take effect at the end of 2012 and the beginning of 2013. Federal Reserve Chairman Ben Bernanke is making the rounds on Capitol Hill this week to encourage Congress to avoid a possible financial crisis by reforming the tax code and reducing government spending over the long term. A growing number of experts agree that failure to act could send our economy back into recession and possibly a depression. Politicians from both parties agree that our nation is facing a major financial turning point, and the fallout will have profound effects on every American. Given the importance of this issue, we want to provide you with factual information on the potential impacts of the "Fiscal Cliff," and we will keep you updated on the issue as part of our PlainsCapital Votes 2012 initiative. The non-partisan Committee for a Responsible Federal Budget (CRFB) recently released a report called, "Between a Mountain of Debt and a Fiscal Cliff," which outlines the challenges associated with the "Fiscal Cliff." This excerpt from the CRFB report gives an unbiased account of the serious situation facing our great country: As Federal Reserve Chairman Ben Bernanke has explained, at the end of the year "there's going to be a massive fiscal cliff of large spending cuts and tax increases." Although some combination of spending cuts and new revenue are desperately needed to put the country on a sustainable path, Chairman Bernanke has rightly pointed out that "it is important to achieve sustainability over a longer period...one day is a pretty short time frame." Instead, policymakers should enact a comprehensive plan to replace much of the approaching fiscal cliff with a combination of tax reform, entitlement reform, and spending reductions which could phase in gradually and thoughtfully to put the debt on a clear downward path. Absent such action, however, this deficit reduction would occur all at once in a blunt and ultimately antigrowth manner. The following is set to take place at the end of 2012: The Expiration of the 2001/2003/2010 Tax Cuts On December 31st, the set of tax cuts enacted in 2001, expanded in 2003, and extended in 2010 will expire. As a result, the top rate will rise from 35 percent to 39.6 percent and other rates will rise in kind. The 10 percent bracket will disappear, and the child tax credit will be cut in half and no longer be refundable. The estate tax will return to the 2001 parameters of a $1 million exemption and a 55 percent top rate. Capital gains will be taxed at a top rate of 20 percent and dividends will be taxed as ordinary income. Finally, marriage penalties will increase, and various tax benefits for education, retirement savings, and low-income individuals will disappear. The End of AMT Patches Congress generally "patches" the AMT every year to help it keep pace with inflation. As a result, just over four million tax returns currently pay the AMT. If a new patch is not enacted retroactively for 2012, that number will increase to above 30 million for that year and would exceed 40 million by the end of the decade. The End of Jobs Measures In February, the President signed an extension of a two percent payroll tax holiday and extended unemployment benefits through year's end. Under current law, both will disappear at the end of the year, causing employee payroll taxes to increase from 4.2 percent to 6.2 percent, and reducing the number of weeks individuals can collect unemployment insurance. The End of Doc Fixes The Sustainable Growth Rate formula calls for a substantial reduction in Medicare payments to physicians - a reduction lawmakers have deferred through continued "doc fixes" since the early 2000s. At the end of the year, the current doc fix will end, leading to a nearly 30 percent immediate reduction in Medicare physician payments. The Activation of the Sequester Beginning on January 1, 2013, an across-the-board $1.2 trillion spending sequester over ten years will go into effect as a result of the failure of the Super Committee. The sequester will immediately cut defense spending across the board by about ten percent, will cut non-defense discretionary spending by about eight percent, and will reduce Medicare provider payments by two percent. In total, this will result in an immediate $110 billion single-year reduction in budget authority. The Expiration of Various "Tax Extenders" Various normal "extenders," such as the research and experimentation tax credit and the state and local sales tax deduction, expired at the end of 2011. Some of these extenders are likely to be reinstated retroactively at the end of this year, but will disappear under current law. The Implementation of New Taxes from PPACA The Patient Protection and Affordable Care Act (PPACA) included several revenue measures set to go into effect in 2013. The largest of these measures is a 0.9 percent increase in the Medicare HI (hospital insurance) payroll tax for higher earners and an effective 3.8 percent tax increase on investment income. The law also calls for an increase in the floor for unreimbursed medical expense deduction, a 2.3 percent excise tax on medical devices, limits on annual contributions to Flexible Spending Accounts (FSAs), and elimination of the employer deduction for Medicare Part D retiree subsidy payments. Reaching the Debt Ceiling The debt ceiling agreement reached last summer is likely to allow continued borrowing through the 2012 election - particularly given that the Treasury Department has a number of "extraordinary measures" at their disposal to delay hitting the ceiling. However, the debt ceiling may need to be increased again at year's end in order to avoid a potential default. Allowing some of the policies to occur at the end of the year would not necessarily be problematic, and could indeed improve our fiscal credibility and sustainability going forward. Some of the broad-based changes set to occur could help lawmakers further control discretionary spending, Medicare, and other programs while raising new revenues if they were all implemented in a targeted and gradual way. However, allowing all of the policies to occur at once would be such a large and abrupt change that they would be economically damaging. Moreover, policymakers should not abdicate their responsibilities for determining the nation's priorities and how to pay for them by turning over budget decisions to blunt tools and the sun-setting of existing policies. Instead, they should replace the dangerous fiscal cliff with a gradual, targeted, and credible plan to fix the debt. (Visit CRFB.org to learn more about these important issues.)