Cliff Effect


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Cliff Effect

In economics, the disproportionately positive or negative results of an action. For example, suppose a company takes on too much debt and a credit ratings agency downgrades its bond rating. This may increase the company's borrowing costs significantly, which in turn gives it less cash on hand to make coupon payments. This can lead to a further downgrade and the cycle continues. The cliff effect implies that relatively little separates a company from being seen as quite healthy to being seen as a poor investment.
References in periodicals archive ?
The intent of this program is to help Colorado families by providing support as they gradually move away from needing assistance, rather than experiencing a cliff effect where assistance is immediately cut off due to a wage earner receiving a raise.
All these efforts are designed to support parents, make child care more affordable and, hopefully, eliminate the cliff effect.
Determine the Goals of the Tax Provision to Which the Cliff Effect Is Attached 2.
When the difference in tax liability is significant, the result is known as a cliff effect.
Qualitatively, a cliff effect exists when a differential change to some characteristic of an individual has significant economic consequences to that individual.
38) A cliff effect thus exists with respect to the voting power and the stock ownership post-acquisition, because if only 79% of the voting power is held by the acquiring corporation, then the acquisition becomes a taxable event.
Another example of a cliff effect used as a bright-line rule for purposes of categorization is found in the definition of a nonchild relative qualifying as a dependent.
As demonstrated above, at the income threshold at which the cliff effect is triggered, taxpayers suffering a cliff effect are in a worse economic position relative to a lower-earning taxpayer whose income is just short of the cliff effect threshold.
The term "equity cost," as used in this Article, is an aggregate microeconomic metric that represents the net economic loss suffered by all taxpayers who are in a worse economic situation post-tax than they would have been had they not exceeded the cliff effect threshold.
Not every taxpayer with an income beyond the cliff effect threshold suffers an equity loss; at some level of income greater than the cliff effect threshold the economic loss of the equity cost of the cliff effect is outweighed by the additional income.
The deadweight loss associated with a tax provision with a cliff effect is greater than a tax provision that is phased out at some rate less than 100%.
133) For effective marginal tax rates that rise to the level of a cliff effect, the result is straightforward: taxpayers are incentivized to either earn enough income to overcome the loss created by the cliff effect or reduce their income to not be subjected to the cliff effect.