As a nation, we did a spectacular swan dive over the fiscal cliff only to turn it into a bungee jump. As Auld Lang Syne was sung in New York, all of our taxes increased and billions in spending cuts began. Then it was reversed. At that moment many in Washington DC scrambled to negotiate, bicker, and cut deals. In the worst example of clock management in history, they passed part of a deal, only to kick the other portion down the road. So get ready, we get to go cliff diving again.
So what did they accomplish in the wee hours of the morning of January 1st 2013? How could the American Taxpayer Relief Act 2012 affect us and what could we expect from the debt ceiling debate?
1) Income taxes will remain the same for most people. The tax rates that have been in place for 10 years were made permanent with these exceptions. For couples making above $450,000 and individuals making above $400,000, their top tax bracket increased from 35% to 39.6%, and their capital gains and dividends will be taxed at 20%. Some deductions have been capped for individuals making over $250,000 and couples making over $300,000. The Estate Tax phase out was increased to $5,000,000 and the AMT (Alternative Minimum Tax) was permanently indexed to inflation.
2) You may have already notice a payroll tax increase due to the expiration of the “payroll tax holiday.” This amount is now 6.2%, which had been reduced to 4.2% for previous two years.
3) Congress did not tackle spending, except to kick the can down the road. Automatic spending cuts were set to take place due to the Budget Control Act of 2011, the disastrous debate of that Summer. In February and March 2013, a spending debate will take place. This spending debate will likely be heated, but it needs to be productive. In our opinion, Washington’s addiction to spending is a major problem.
4) How does this affect the US economy? According to the Congressional Budget Office, this Act improves the deficit moderately over the next 10 years. The US economic growth could be slower in the short-run due to lower government spending but faster in the long-run due to lower debt levels.
5) There are two other potential arguments: the debt ceiling debate and the budget debate. These, along with the spending debates, could all be tied together. At some time in January, the US will technically reach its maximum capacity to borrow, i.e. the debt ceiling. Due to technicalities this can be extended for a few months. A definitive budget is needed that incorporates the best of all ideas. The political differences in these debates are deeply philosophical and are hard for some to move away from.
There is good news and bad news to take away from these events. The good news is the US economy is growing. That is a fact according to many statistics such as employment growth and GDP. Businesses from largest to small now know the tax rules that they must follow. In other words, we know that rules of the games so we are more likely to play. This should help the economy. The bad news is that these debates grab national headlines, can be terribly painful events, and the financial markets react. We are confident in the future. At the same time, we are watching it closely.
Weisman, Jonathan (January 1, 2013). "Senate Passes Legislation to Allow Taxes on Affluent to Rise". The New York Times. http://www.nytimes.com/2013/01/02/us/politics/senate-tax-deal-fiscal-cliff.html.
Khimm, Suzy (December 31, 2012). "Your fiscal cliff deal cheat sheet". The Washington Post. http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/31/your-fiscal-cliff-deal-cheat-sheet/.
Hook, Janet; Hughes, Siobhan (January 1, 2013). "Fiscal-Cliff Focus Moves to House". The Wall Street Journal. http://online.wsj.com/article/SB10001424127887323320404578215373352793876.html.
"The Fiscal Cliff Deal". Congressional Budget Office. January 4, 2013. http://www.cbo.gov/publication/43835. Retrieved January 4, 2013.
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Posted on Tue, January 15, 2013
by Chris McAlpin