The 2012 Fiscal Cliff Negotiations - Part 1: What Happens If We Go Over? Fiscal Cliff Explained

President Obama and Republicans in Congress are engaged in a tense struggle over tax rates and spending cuts, all playing out before an end-of-year deadline that ends in scenario where everyone, including the American economy loses. They have only a few weeks to handle the so-called "fiscal cliff," but with bipartisanship in short supply, it might not be enough. What happens if the country does go over the fiscal cliff?

At the end of the year, the Bush-era tax cuts end, and tax rates on everyone who pays federal taxes-the vast majority of Americans-go up, back to the rates they paid during Bill Clinton's presidency.

At the same time, predetermined budget sequestrations kick in, indiscriminately slashing funding for a wide range of federal programs, split evenly between defense spending and non-defense social programs. However, Social Security, Medicaid, federal and military pay and veterans' benefits are all exempt from these immediate cuts.

It's more of a slope than a cliff. Most of the changes enacted by the cliff will be phased in gradually, leaving lawmakers time to come to some sort of compromise.

But the markets and the economy don't react so slowly. The combination of higher taxes and lower government spending will likely throw the economy back into recession for most of 2013, according to the Congressional Budget Office.

And it's very unlikely that no arrangement will be made by Congress and the president before that point, though it may not be until late January, more than enough time to cause a lackluster holiday shopping season and several months of a volatile stock market.

However, Washington is hard at work to avoid the cliff, though everyone has different ideas of how to do that.

Obama, riding high after a resounding victory in last month's presidential and Congressional elections, has proposed $1.6 trillion in new taxes on Americans making more than $250,000 a year. He wants to extend the Bush-era tax cuts for people who make less than that threshold.

Republicans are opposed to the measure, insisting that raising taxes on the wealthy will devastate the economy, and they look prepared to allow everyone's taxes to go up to keep Obama from getting his way.

Instead, they say new revenues can be raised by closing tax loopholes. The CBO agrees that it is technically possible, but it would require ending essentially every tax break in the code, including things like the mortgage tax deduction, the child tax credit and deductions for charitable giving to non-profit organizations of churches-tax breaks many Americans depend on to make ends meet.

Congress and the president seem to be at an impasse. Republicans today made a counteroffer of $800 billion in new revenue, mostly from cutting social programs like healthcare and Social Security.

The White House dismissed it out of hand, saying that no plan will be acceptable unless the bulk of the financial burden is borne by the wealthy, not the middle class.

Coverage of the fiscal cliff continues here throughout the week.

Part 2, "How Many Republicans Are Breaking Norquist's Pledge?", will be published tomorrow.