Hanging on the fiscal cliff

3 Oct

The fiscal cliff is a term given to all the tax increases and budget cuts that automatically kick in if “sequestering” happens next year.

That cliff is there because the so-called super-committee couldn’t come up with a budget deficit plan, even with that hanging over their heads as the price.

So, let’s assume Congress is back in its lame-duck session and hits its usual gridlock.

What’s the fiscal cliff we go tumbling over?

You could face an average tax hike of almost $3,500 in 2013.

Almost 9 of every 10 households would pay higher taxes.

Every income group would see their taxes rise by at least 3.5 percent, but high-income households would suffer the biggest hit by far.

The Tax Policy Center says if the tax hikes last the entire year — a big “if” – those in the top 0.1 percent would pay an average $633,000 more than if today’s tax rules were extended.

Before you snicker about those rich folks – even middle-income households would take a hit.

About an average of almost $2,000 more, and see their after-tax income drop by more than 4 percent.

Remember – all this would happen automatically.

All that has to happen is for Congress to grind into its normal state of bickering and fighting.

There’s a perfect storm brewing and you are in a small dingy in the middle of the ocean.

What will happen is reversal of just about the entire tax code to what it was at the end of the Clinton Administration.

New taxes to pay for the 2010 health reform law, and automatic across-the-board spending cuts that would trim just about every government program except for Medicaid and Social Security.

Before you say “good”, remember you probably benefit from some government program that’ll get the axe.

Hanging in the background – the Treasury will hit its borrowing limit sometime in the first quarter of next year and temporary funding to keep the government operating will run out in March.

Taxes would go up by half a trillion dollars in 2013.

With all the massive budget cuts, there’s no doubt the deficit will be cut – a lot.

But it also is likely to throw our still-struggling economy back into recession.

The Congressional Budget Office predicts that if the tax hikes and spending cuts last the entire year, the 2013 economy would shrink by 0.5 percent and employment would drop by 2 million.

The why is simple – tax increases would hit nearly everyone, and from all directions.

The tax cuts enacted in 2001, 2003, 2009, and 2010 would end.

More than 120 million households would lose the benefits of the two-year-old payroll tax cut.

Low-income working households would suffer as the Earned Income Tax Credit and the Child Tax Credit are cut back.

Upper middle-income households would lose their protection from the Alternative Minimum Tax and pay much higher rates.

Those at the very top would not only see rates on their ordinary income rise, but they’d also face higher taxes on their capital gains and dividend income as well as their estates.

At the same time, those high-income households will pay an extra 0.9 percent Medicare payroll tax and a new 3.8 percent tax on investment income—both included in the 2010 health law.

So, how did we get into this mess?

It all comes from the temporary debt limit deal Congress and the President reached in the summer of 2011.

The idea was to make it something no one could stomach.

The theory was lawmakers would come to their senses and replace the cliff with a steady and predictable glide path to fiscal responsibility.

That’s not what happened.

Now what?

Congress could do nothing and send us all over the fiscal cliff.

Is there another possible outcome?
Of course.

You could get angry and push politicians to finally do the budget deal they’ve been avoiding for more than a decade.

But it better happen soon.

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