Q: How will markets react if no agreement is reached by Jan. 1?
A: On Dec. 21, stocks sank around the world after House Republican leaders scrapped Boehner’s plan to allow higher taxes and budget talks stalled. The Standard & Poor’s 500 Index retreated 0.9 percent to 1,430.15 in New York. The Dow Jones Industrial Average slid 120.88 points, or 0.9 percent, to 13,190.84. The benchmark 10-year Treasury note yield dropped three basis points, or 0.03 percentage point, to 1.76 percent at 5 p.m. New York time on Dec. 21, according to Bloomberg Bond Trader data.
Q: What is sequestration and how does it work?
A: Sequestration is the official name for the automatic spending cuts, half of which would be in defense programs. The cuts are across-the-board, giving agency officials little discretion on how to achieve them. Defense programs would face a 9.4 percent cut and most other agencies would be cut by 8.2 percent, the administration said earlier this year.
Q: Is it really a cliff or is it more of a slope?
A: A slope may be a better metaphor. Most of the effects — the higher income tax rates and the spending cuts — would occur gradually during 2013 and not deliver an immediate economic shock. For example, the Treasury Department has at least some authority to freeze paycheck withholding even if higher tax rates are in place. The IRS said Dec. 21 that it will issue guidance to employers by Dec. 31.
Q: Are there some changes that won’t depend on negotiations?
A: Yes. A 3.8 percent increase on income earned from investments, rents and so-called passive activities is set to take effect Jan. 1 as a result of the 2010 health-care law. That means U.S. income tax rates for top earners and investors will go up for the first time since 1993.
Republicans opposed the health-care law and wanted to repeal it if Obama was defeated for re-election. The law also imposes a 0.9 percent additional tax increase on wages next year. Both surtaxes apply to individuals earning more than $200,000 a year or couples earning more than $250,000. An excise tax on medical devices also will take effect.