Fiscal Cliff

From Dan Celia - financial advisor explaining the "fiscal cliff" in layman's terms. Really hating our new reality. 

Fiscal Cliff 

...one of the huge problems we are facing in 2013 is the need to increase government's borrowing capacity or "debt limit."

    

I'm sure by now we are beginning to get tired of this whole conversation around the fiscal cliff. Probably "cliff" is not the proper word. "Cliff" would indicate that there will be an immediate death when one falls over. It is obviously not going to happen that way. On January 1st there are certain things that will take effect which will eventually lead to a falling over the cliff that we will fall over to the death of the Nation as we now know it.

 

The idea that January 1st is the time when we will go over the fiscal cliff is actually more representative of the fact that on January 1st, if things don't get fixed, it will give certainty to the fact that we will be going over the fiscal cliff unless something changes. This would be after the new Congress and the President are sworn into office that they would resolve the problem.  

 

  There are a number of different triggers that will push us toward the probability of this cliff. Several temporary tax cuts are going to expire at that time. This includes, of course, the Bush tax cuts - the cuts that were imposed by President George W. Bush. These were due to expire by 2010 and included cuts in income levels and income rates, cuts in taxes on investment income, dividends and interest. They also included a provision where married couples would have certain tax credits and a reduction in their overall taxes. Families with children also received specific tax credits which theoretically gave more money to families to strengthen the family's financial condition and to help them deal with the rising cost of raising children. Tax credits on monies received through inheritance were also dramatically increased. All of this was supposed to expire in 2010. They were extended by President Obama in 2010 to continue through 2012. So, on January 1st these are once again due to expire unless extended.

 

There will also be an impact on Middle Income Americans. As a matter of fact, estimates are that somewhere between 25 and 30 million middle-class Americans will be impacted by the alternative minimum tax that will now disappear. These folks will see their tax bill increase, at the end of 2013, by an average of $3,700 per person. Also, keep in mind that on January 1st, the payroll tax cut of two percent (2%) which we have enjoyed will be expiring and we will now have two percent more in taxes coming out of our pay. In addition, the current extension of unemployment benefits to 99 weeks will revert back to the former 76 weeks. Both the tax cut of two percent and the extension of unemployment benefits were implemented by this administration so that they might stimulate the economy. (By the way, it did not work.)

 

On January 1st we will also see the termination of many tax credits and tax cuts that were designed for individuals and businesses. The majority of these are small businesses and most of these credits were designed to help the bottom line of small companies. There was even a deduction for State Sales Tax. These also will disappear, hurting those small proprietors and small businesses.

 

Automatic spending cuts will also kick in, totaling about $600 Billion per year. This would apparently save $6.1 Trillion over the next 10 years. The problem with that $6.1 Trillion is that much of the savings is just "smoke and mirrors" and no real cuts in spending at all - just cuts in what might be anticipated spending. There will also be a Real cut in Defense Spending by $55 Billion, thus causing hundreds of thousands of people to be unemployed. This, by the way, will weaken our National Defense all the more.

 

 Don't forget, of course, the upcoming Medicare cuts, meaning that all of those folks who are dependent on Medicare - who have certain conditions allowed for in the government system or for their disabled children - will see their benefits cut dramatically. These cuts will reduce payments by two percent (2%), including a sharp reduction (as much as 30%) in reimbursements to doctors. Does anyone really believe that our quality of care will not suffer as a result of this? If you are someone with a disabled child this law is despicable in my opinion and fly's in the face of what has made America great. If you are a Senior and you voted for Obama Care you have lost your right to complain and I hope the socialized medicine that you voted is everything you think it is (by the way it's not). We will all be paying more taxes for diminishing care.

 

According to the non-partisan Congressional Budget Office (CBO), these automatic tax increases and non-renewal of tax cuts and spending are equivalent to about five percent (5%) of GDP. It is estimated by the CBO that tax increases and spending cuts will reduce output by around three percent (3%), which means a real drop of three percent in GDP growth. Remember that GDP is only now growing at about 1.8% and we need 2.5% to just keep pace with population growth. Also, the CBO estimates that all of the fiscal cliff scenario will increase unemployment almost immediately to 9.1%. This is, of course, if you believe that the real unemployment rate is 7.9%. I do not.

 

One last thing...one of the huge problems we are facing in 2013 is the need to increase government's borrowing capacity or "debt limit." This is currently at $16.4 Trillion, which we are likely to hit by the middle of January. This will involve some fierce negotiation in Congress about whether we are going to increase this even more. My guess is that Democrats will be pushing for some sort of open-ended increase, which would be the absolute worst-case scenario. However, I also believe that Republicans will not stand their ground and will adopt the Democratic talking points so that they can justify their compromise at their town hall meetings next summer on this issue. They will surely compromise and we will raise the Debt Ceiling a bit further down the road.

 

I know this is a lot of information, but it is the best summary (without getting into too much detail) of what we are likely to see as a result of the fiscal cliff. On top of all this, what is truly needed is a RADICAL overhaul of the U.S. Tax System. The probability of this happening is likely slim-to-none, with some in Congress talking about a Value Added Tax (VAT) which, as I said two years ago, we are likely to see over the next few years. Then we will truly be close to European Socialized Medicine with more of our pay going to the government than to our families.

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