Monday, January 14, 2013

Fiscal Cliff- We Survived the Fall - Now What??

If there was a real "fiscal" Cliff, at least three-quarters (¾) of Congress would have been thrown over into the abyss far below. Sorting out the facts from the political rhetoric and greed, we are quick to discover that this entire issue was created by Congress itself in 2012 because of a basic moral disconnect within Congress and a desire to stop the President’s re-election.

Congress was deadlocked within itself and with the President on the National Debt-Ceiling (IT'S BACK - NEXT POST - TRILLION DOLLAR COIN?) – that is the amount of money the Country is authorized to borrow; right now it’s about $16 trillion or $16,000,000,000,000. We had hit the limit a year ago when it was nearer to $14.5 trillion and the Republican controlled House of Representatives would not go along with raising the ceiling. The argument is that we, as a nation, already owe too much – that we are mortgaging our childrens’ futures. Congress with the White House decided to pass a law that would force a minimum of $1.2 trillion in cuts to Government agencies’ budgets across the boards. At the same time there’d be an increase in taxes for almost everyone, but especially the highest paid and wealthiest, unless an agreement was reached before January 1, 2013

The idea was to create such a nightmarish picture that Congress and the President (all being reasonable people) could come to a quick agreement to strike a balanced program. If there was no agreement, the law would go into effect and automatic cuts to Social Security, Food Stamps, Unemployment and other so-called Entitlement Programs would take effect and there would be an equal cut to defense and related spending. And there would be those tax increases. The technical term for this is Sequestration.

No wonder that for the sake of easy reference someone called the failure to reach an agreement a “Fiscal Cliff” because we would “fall” into a financial crisis that no one wanted nor about which anyone could predict the outcome. So the term FISCAL CLIFF was just shorthand for a very complex set of spending cuts and tax hikes that would go into effect at the stroke of midnight as the Times Square Ball dropped on 1/31/2012.

THE DETAILS (most of them anyway)

Enough background and theory: What does the agreement that was reached at 3 A.M. on Jan 1st and signed by the President, really mean to us – the rich, the poor, and the few in the middle?

1. Tax cuts, that had been passed in George Bush’s term will stay in effect except for persons earning more than $400,000 (couples $450,000) who will have those income tax cuts disappear. The top tax rate will jump from 35% to 39.6%. This is supposed to bring in $600 billion over 10 years **

2. The spending cuts to all of the entitlement programs and the defense industry won’t happen

3. Capital gains taxes, the tax paid on profits from the sale of stocks or any other investment will go up 33% from 15% to 20% if income is above the $400,000/$450,000 “safe” level. (I have yet to see the tax effects on business capital gains)

4. The Child Tax Credit, which would have expired will continue another 5 years

5. The Alternative Minimum Tax (a tax that’s calculated to be sure you don’t have too many tax breaks) will be adjusted so middle-middle class and below incomes won’t be affected**

6. UNEMPLOYMENT BENEFITS will be extended for the long-term unemployed for 1 year

7. The amount doctors are paid under Medicare WILL NOT be cut THIS YEAR by the threatened 27%. That would have caused many docs to stop taking Medicare and therefore Medicaid patients

8. The estate tax exemption, the level at which estates start to get taxed, will stay at $5.12 million but it will have an inflation adjustment in the future. Also, the top rate will move from 35% to 40% **

9. Itemized deductions will be limited for taxpayers making $250,000 or more ($300,000 for Joint Filers)

10. Businesses developing wind projects and doing certain research and development programs will receive the same tax credits they have had for an additional two years

11. Businesses, and this affects even small business, will be able to obtain bonus depreciation. Simply put , instead of being able to deduct 1/7th of the cost of a truck (depreciating value) each year for 7 years, the law may allow a two (2) year period which makes short-term investment in equipment more attractive.

** (These items are permanent changes, not needing further action)

THE “BACK-STORY” – Why this really happened

In the first paragraph there was a reference to a “moral disconnect” in Congress. The comment was not a slur but rather the key to most of the fighting. There are those who truly believe that as a Country we should always run with a balanced budget, like a business or a family would do. There are others who are as firm in the philosophy that it’s okay to incur debt that will take a long time to repay. That is the basis for one of the most basic on-going debates in economics.

In a deep recession, one caused by a collapse of a major segment of the economy (housing this time), you may not be able to reach a balanced budget. Even though it might be the best resolution, austerity, not spending, will dry out any ability for employment to get better, for purchases of goods to increase etc. Imagine asking everyone in your family to have a balanced budget within a year. That means that everyone would have to balance at essentially the same time. Well, so much for getting a short-term loan from Mom or Auntie or your favorite Uncle! Now imagine having every family and business in the Country to accomplish a balanced budget in a year – the same year.

There are others who believe that in financially dire times (now), to keep things from getting worse, the Government is equipped to borrow huge sums by selling bonds and spending money on projects to create jobs, to make lending/borrowing easier (thus the low interest rates) and a host of other measures. It’s like a “Texas Steel-Cage Death Match” between the two extremes. That is the real genesis of the dilemma. Well, and the politics of trying to win the presidency.


It doesn’t really matter in the short run which side you are on – spend our way out and pay the bills later or cut spending to the bare bones and enter a true austerity program to pay everything faster. There is no ANSWER, there is no TRUTH in a social science which is what Economics really is. There are many views but we have to settle on a path to recovery, to solvency. If there is no agreement in two months, we get to go to another Fiscal Cliff or sorts but with an unimaginable drop-off: The DEBT CEILING. Will we pay our national debt and keep things running here at the same time, or will we default and become a deadbeat Country?

Author's Copyright by Richard I. Isacoff, Esq January, 2013

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