Fiscal Cliff...a Primer

[Scuttlebutt]

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron's, over 1,000 government programs - including the defense budget and Medicare are in line for "deep, automatic cuts."

In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:

•They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
•They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.
•They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Can a Compromise be Reached?

The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had three years to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. The most likely result, in any event, is that the problem will linger at least until after the election, and there's a strong possibility that Congress won't act until the eleventh hour. Another potential obstacle is that the next Congress won't be sworn in until January 3.

The most likely result is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. The election will almost certainly have an impact on the direction of future policy, particularly if one party earns a decisive victory. Nevertheless, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.

Possible Effects of the Fiscal Cliff

If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs. A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40 million from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.

The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP by a full half-percent in the second half of 2012.

Having said this, it's important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, the impact of the changes - while destructive over a full year - will be gradual at first. What's more, Congress can act to change laws retroactively after the deadline. As a result, the fiscal cliff won't necessarily be an impediment to growth even if Congress doesn't address the issue until after 2013 has already begun.

What do you think will happen?

[Jim in CT]

Obama will call for tax hikes on the rich with no meannigful cuts. Boehner will fight the tax hikes and push for spending/entitlement cuts that will never be agreed to.

They'll come up with a compromise that does little, makes everyone unhappy, and that kicks the can down the road.

Obama will give a little, Boehner will give a little. The media will say Obama is a compassionate genius and that Boehner is a heartless racist. Then, Obama will be awarded the Nobel Prize in economics, presumably for ensuring America's bond rating is no higher than that of Europe, because he doesn't want to hurt their feelings, and he doesn't want them to be lonely when they go down the drain. Hyperbole I know, but you get the point.

[striperman36]

the one fiscal cliff that is killing me is the AMT patch

To protect more than 30 million middle class households from having to pay the Alternative Minimum Tax, Congress typically passes an AMT "patch" every year.
They have yet to do so for 2012, but because most Americans don't have to file their returns until early 2013, lawmakers could pass a patch at any point this year and have it apply in time for the 2013 filing season.

The patch increases the amount of income tax filers may exempt from consideration when calculating whether they need to pay the AMT.
Without the AMT patch, tax filers would only be able to exempt $33,750 in income if single or $45,000 if married filing a jointly, according to CCH, a tax information publisher. That is considerably less than the $48,450 that single filers and $74,450 joint filers may claim on their 2011 returns.

If you've had to go through this this is a painful way to have to pay your taxes.

[Piscator]

AMT is an effing joke for the middle class, wait......what is middle class and what is rich? Nobody can answer that question I guess. Someone at the lower end of the AMT scale that has young kids, home office with deductions.etc etc gets fisted. It is not a rich only tax, it hurts the middle class and hurts the economy.
Posted from my iPhone/Mobile device

[striperman36]

Originally Posted by Piscator

AMT is an effing joke for the middle class, wait......what is middle class and what is rich? Nobody can answer that question I guess. Someone at the lower end of the AMT scale that has young kids, home office with deductions.etc etc gets fisted. It is not a rich only tax, it hurts the middle class and hurts the economy.
Posted from my iPhone/Mobile device

We can drink to that at the winter playoff party. I've already stocked up on lube for this year. My company healthcare is going up 50 pct for less coverage and a higher deductible.

[RIJIMMY]

Originally Posted by Piscator

AMT is an effing joke for the middle class, wait......what is middle class and what is rich? Nobody can answer that question I guess. Someone at the lower end of the AMT scale that has young kids, home office with deductions.etc etc gets fisted. It is not a rich only tax, it hurts the middle class and hurts the economy.
Posted from my iPhone/Mobile device

I think you and I are in the same boat as we both bitch about AMT

I get royally screwed and there is nothing I can do but make less $$. I usually do my taxes myself but decided last year to sit with a CPA and he said, there is nothing I can do. The AMT screws me.
Im sure Zimmy will chime in and tell me I am making a big deal about taxes and Im not really screwed.

This whole fiscal cliff stuff has me RIPPED. Why the F is this coming up NOW??>???????? THE FISCAL CLIFF IS 100% OBAMAS FAULT and it got no press during the campaign? Holy hell this counrty id F'ED! I have been reading the comments on CNN and other sites and its disgusting. People have no clue - Yup someone making 250K and living in Manhattan, LA, San Francisco, is RICH???? are you shatting me?

[striperman36]

or any other state. just another way of beatin down the masses

[RIJIMMY]

and by the way - Obama is supposed to address the country on the problem today but so far only has had a brief converstaion on the phone with Boehner. We'd all be fired if that was us.
GET THE F TO WORK!

[RIJIMMY]

months and months and months and months with the problem hanging over our heads and now our re-elected leader speaks...

The president avoided any mention of specific tax rates in his remarks, saying only that the wealthy should pay more. He also called on Congress to quickly pass an extension of tax cuts, first enacted by George W. Bush, for families making less than $250,000 a year.

WTF !!!!!!!!!! This is what you people voted for! Serioulsy??????

[spence]

It's a negotiation position.

-spence

[RIJIMMY]

Originally Posted by spence

It's a negotiation position.

-spence

and thats what it was a year ago too. And they've been doing what ever since?

[Scuttlebutt]

Easy RIJIMMY...hope you have an AED nearby...Haha. No seriously you are so right. The Libs can't see past their next handout. Wait till the creditors come calling(China). You think it's bad now...you ain't seen nothing.

Perhaps John R can post this site as a sticky...so that everyone can see the debt run up in real time...

U.S. National Debt Clock : Real Time

[RIJIMMY]

I think I was a little shell shocked after the election and now I am ripped. Especially when i keep reading comments on a lot of sites. people are morons

[striperman36]

When is Obama laying down the challenge?

[Fly Rod]

like U Rijimmy I will be in a higher tax bracket too

a friend of mine will be in the 45ish % bracket ...he notified his relatives and charities that they will not be receiving monies...he usually gives family 20,000 each..

[Piscator]

No joke, both my wife and I have careers, 3 kids, etc etc. My accountant literally told me, stop working an make x amount under the table and you will be in the same position you are now with a full time good paying job. In my case with AMT, I'd be better off less productive. That isn't right.......
Posted from my iPhone/Mobile device

[RIJIMMY]

Originally Posted by Piscator

No joke, both my wife and I have careers, 3 kids, etc etc. My accountant literally told me, stop working an make x amount under the table and you will be in the same position you are now with a full time good paying job. In my case with AMT, I'd be better off less productive. That isn't right.......
Posted from my iPhone/Mobile device

true

[striperman36]

Originally Posted by Piscator

No joke, both my wife and I have careers, 3 kids, etc etc. My accountant literally told me, stop working an make x amount under the table and you will be in the same position you are now with a full time good paying job. In my case with AMT, I'd be better off less productive. That isn't right.......
Posted from my iPhone/Mobile device

pm me an offer