In 2001, President George W Bush passed a series of tax cuts through Congress under a rule that would see the cuts expire in 2011. In 2010, Congress agreed to extend that deadline for another two years.
On January 1, 2013, those tax cuts expire, while at the same time a number of automatic spending cuts will be introduced. It means individuals and companies will face tax hikes alongside cuts in spending to services such as social security, unemployment benefits and Medicare.
It is estimated the combined tax rises and spending cuts will take more than $US600 billion out of the economy. To stop this happening, Congress has to act by December 31, 2012. If no action is made, the fragile US economy could go back into a recession.
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Despite the looming deadline, Republicans and Democrats are still at odds on how to proceed. Republicans, who control the majority of the house, have proposed limiting tax breaks and cutting government spending. But Democrats say this isn't enough and are pushing for tax increases for the wealthy. The White House has said any bills which don't include increased income tax rates will be vetoed.
According to the White House, a typical middle class family will have taxes raised by about $US2,200 if the growing financial crisis is not averted. The Wall Street Journal estimates that a retiree household could face a tax raise of up to $US540.
There is also a wider impact. There are concerns for the global economy should Congress fail to act in time. Australia's Federal Treasurer, Wayne Swan has raised concerns over the stalemate in Congress saying Australia is not immune to the impacts of the impending fiscal cliff.
