We’ve been hearing about it for months: the dreaded fiscal cliff. But what is it and is it any true threat to American consumers or is it just more rhetoric from politicians?
The “fiscal cliff” is what Federal Reserve Board Chairman Ben Bernanke has called the imminent events associated with he tax code that will be expiring on January 1 2013. These events can – and will – happen simultaneously at the close of 2012, including the expiration of the Bush era tax cuts, the payroll tax cut and other important tax-relief provisions. They also include the first installment of the $1.2 trillion across-the-board cuts of domestic and defense programs required under last summer’s bipartisan deficit reduction agreement. Remember that brouhaha? At the same time, lawmakers may have to raise the debt ceiling once again, potentially triggering another standoff in Congress.
If all these tax increases and spending cuts take effect, the government could save nearly $600 billion starting next year, but the impact on the economy would likely mean a new recession, according to the Congressional Budget Office. Don’t let the irony of this occurring after the presidential election be lost on you, either. If you’re thinking “blind leap of faith” as you’re considering who to vote for, you’re not alone.
The fact is, few, if any, financial and political analysts believe Congress and the White House will come together for the good of the country and reach an early accommodation to avoid the fiscal cliff, which would be a moderation in the spending cuts and enacting broad-based tax reform.
Make no mistake – politicians are drawing their lines in the sand, including Senator Patty Murray of Washington State and other senior Democrats who say they are prepared to “weather a fiscal crisis at year’s end unless Republicans drop their opposition to higher taxes for individuals with incomes over $200,000 a year and households with incomes above $250,000 annually”. What will likely happen is once again, the entire dramatic set will include postponing consideration of the measures until after the election.
This, of course, means another four or five months of economic uncertainty and sluggish growth. In fact, there are those who also believe hiring won’t improve and the economy won’t fully begin its recovery until this fiscal cliff is dealt with; of course, that’s not going to happen right away. We have too many politicians to entertain. Goldman Sachs recently released a report that tells the tale:
Companies will not be hiring and won’t be growing until the regulatory requirements are adequately put to rest. Business owners are confused and taxpayers are confused. Who’s going to do what? Which political party will best handle these problems? The fact is, this country has not had as little faith in an election – well, ever. Even defense contractors are beginning to lay off their government employees because they’re already anticipating big problems.
One analyst said that Congress is content with “maintaining the status quo and setting the country up for a horrific crash – or slow death, but they are certainly not setting up future generations for success…”
Most say nothing’s changed and that the best Americans can hope for is a last minute band-aid that will only delay the problem yet again. Remember, every year – for several years – the best any taxpayer has seen is a one percent patch that only delays the inevitable and keeps inflation temporarily at bay.
If it’s specifics you’re looking for, consider this: According to the Census Bureau, the median American household has 2.6 people and brings home just under $50,000. With the expiration of the Bush tax cuts, the first thing that will be seen is an immediate and steep increase in the amount that it sends to the IRS.
After the usual standard deductions, the average family pays 10% of its income up to $17,400 and then 15% of all income between $17,401 and $70,700. For a family making $50,000, this works out to $4,845 in base taxes. If we revert to pre-Bush rates in 2013, the average family will pay 15% taxes on all its income. For a middle class family, this works out to a tax bill of $6,397, a jump of $1,552.
If the Bush tax cuts that have been in effect since the early 2000s are allowed to expire on January 1, the tax rates will automatically jump, which means the federal government will start charging its citizens far more in a dizzying array of taxes and offering fewer services in exchange.
Perhaps the most alarming part is there is no one who isn’t predicting a major catastrophe. Most analysts agree that it’s not likely to change or be permanently remedied before it happens. The nation simply cannot handle another recession. The most change anyone can hope for is more of the same. Folks are being told to “just anticipate the outcome and go about life as you normally would”. The reality, frankly, is going to be more of the same.
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