The election is over, and President Obama has been elected to a 2nd term. After spending his first term clawing this country out of the Great Recession and the brink of total financial ruin, the looming debate of the “Fiscal Cliff,” is being thrust upon the Federal government and into public discourse. It was beginning to rear its ugly head during the latter part of the campaign.
It’s been talked about, but many people still don’t know what the term actually is and what it will do to the country and the economy. It boils down to a few key aspects: 1) the expiration of the Bush tax-cuts 2) automatic $1 trillion cuts in Federal government spending, which includes defense and non-defense spending.
So, what’s that include?
Defense spending will be cut by $55 billion in 2013, which translates to at least a 10% cut to every program and project and activity that’s not exempt
Non-defense spending will also be cut by $55 billion. You know the less important stuff like education and air travel safety.
Income tax rates will rise to 15%, 28%, 31%, 36% and 39.6% from 10%, 15%, 25%, 28%, 33% and 35%
Capital gains rate will rise from 20% from 15%
PEP/Pease limitations will include high-income households not being able to take some itemized deductions and personal exemptions in full.
The Child Tax Credit will fall from $1,000 to $500 and the refundable portion will also be cut
The American Opportunity Tax Credit will expire, but the HOPE tax credit will be reinstated, but it’s of lesser value.
Earned Income Tax Credit will see a reduction in eligibility.
Marriage penalty relief will expire, which basically means that a low- or middle-income two-earner couple will owe more to the IRS than they would if they were single making the same income.
The Estate Tax will head back to prior levels, and exemption level falls to $1 million from $5 million, and the top tax rate on taxable estates rises 20% to 55%
The income levels for Alternative Minimum Tax will fall significantly and the number of people being hit by the “wealth” tax will increase up to 30 million people. That’s 26 million more people than it affects not, and the income levels would be $33,750 for individuals and $45,000 for married couples.
Payroll Tax Holiday will expire and the Social Security Tax rate reverts to 6.2%, which is an increase from the current 4.2%.
Unemployment benefits extension will expire, so the time one can receive unemployment benefits will be cut by 73 weeks to 26 weeks.
So the consequences? Unemployment shoots back up and our country heads right back into a recession. – Hmm maybe I should have led with that.
The mission ahead is for the politically polarized Congress to work together with President Obama to avoid this upcoming obstacle. There has been some encouraging signs out of Washington, that differences will be put aside, and a compromise will be made to ensure the needs of America are met. Speaker Boehner has alluded to this, and even went as far as to say the President has been America’s choice and they will do their best to work with the President and Democrats in Congress. Republicans are now warming to the idea of the need for increased tax revenue; however, they’re staying away from the “T” word and using phrases such as “revenue generating reform.” My prediction is that the Democrats and Obama will not budge on letting the tax rates for the wealthy revert back to the Clinton-era rate, but reach a compromise on some less than desirable spending cuts in order to illustrate bipartisanship, settle this problem, and ease economic uncertainty.
“Uncertainty.” – You’ve been hearing that word a lot. I heard Republicans already harping on the “uncertainty” today that came along with Obama getting elected to his 2nd term, but in all reality no matter who was elected on Tuesday, there still would have been economic uncertainty for a few key reasons, most of which are outside the President’s control.
With the Fiscal Cliff approaching, future fiscal policy is unclear; therefore, creating a foggy projection of the future economy. There’s also the financial crisis in Europe right now. Even though it didn’t make the front cover during campaign, rest assured, it’s still there. There’s also the growing tensions in the Middle East with the possibility of a nuclear Iran, a defensive Israel, and a Syrian civil war spilling into neighboring countries potentially destabilizing a fragile region.
There’s always the possibility the government proposes some patchwork solution and punts on the issue and sends it down the road a bit, just to reappear just as bad, if not worse. I think it’s imperative to act now rather than later, during the lame-duck session when members of Congress will be more willing to compromise. The areas that define economic uncertainty are vast and seldom controllable by one man or one country, but this is one enormous area that we can tackle now. Starting off a new term with bipartisanship support would be the best thing for this country.
Two things are for certain, taxes will be raised and Grover Norquist will shit his bed.