You’ve probably read or heard news recently about the upcoming “fiscal cliff,” a confluence of political decisions and automatic triggers that could take place in January 2013 if congress and the president can’t agree on how to proceed. The scheduled changes will force the reset of many tax rates and trim government spending.
Many economists believe that if these changes collectively happen without intervention, the U.S. economy will return to recession quickly in 2013, if not before.
We have been thinking about how we got to this fiscal cliff and how the circumstances have affected the average citizen. Most folks take for granted the many changes that the politicians have made over the past 10 years to put more money in their hands. The government has:
- Lowered federal tax rates for all Americans. According to the Heritage Foundation almost 49.5% of Americans don’t even pay federal income taxes.
- Reduced or eliminated long-term capital gains taxes. They are currently 15% of the gain for taxpayers who are not in the 0% or 15% tax brackets. If you are in the lowest two tax brackets, there is no capital gains tax.
- Increased the federal estate tax exemption amount from $3 million to $5 million before estate taxes are levied.
- Reduced interest rates for college loans.
- Decreased Social Security tax that most workers pay from 6.2% to 4.2% in 2011 and 2012.
- Provided significant extensions to unemployment benefits.
- Guaranteed pools of mortgages, so if home owners could not pay, the investors were made whole.
- Created TARP (Troubled Asset Relief Program) to guarantee banks and insurance companies and to bail out corporations that were considered too big to fail.
- Spent on “shovel ready projects” and increased federal government contributions to state government to pay for police, fire and teachers.
- Provided seniors with Medicare Part “D” which provides prescription benefits.
At the same time the government has fought the war on terror in the Middle East, adding massive expenses without a revenue source to fund them.
Many of these changes were designed to increase the growth of the U.S. economy.
Mostly, these acts failed. Instead, these created a significant deficit for the Federal government. According to the Congressional Budget Office, in 2012 Federal revenues (taxes) are expected to account for just 15.7% of Gross Domestic Product (a measure of economic output). This is more than 12% below our long term average of 17.9%. At the same time, Federal expenditures are expected to make up 23.4% of our GDP. This is 10% more than our long-term average.
Personal Benefits from Conditions That Created the Fiscal Cliff
We wonder how the average person has been affected by this transfer of money from the government to the people. Has your standard of living or ability to save and/or pay off debt has been dramatically improved by the relatively low-tax environment of the past decade? What has the extra dollar in your pocket meant to you and have you used it wisely?
For some, this money has provided a life line—they might now have a job or were able to meet their living expenses while they found a job—as a direct result of this money.
For others, the benefits of these policies have been more subtle. They might have a little more to save or invest or have been slightly more willing to make a big-ticket purchase, take a nicer and longer vacation, or maybe been able to afford higher college tuition.
Others may not have noticed any difference in their financial wellbeing.
Despite little impact on the average American, these incentives have come at significant cost. They have contributed to the growing potential for the financial instability for the U.S. government.
Has it been worth it? Did you benefit from low taxes over the past decade? Will you be harmed if tax rates reset back to prior levels?
We’d love to hear your thoughts.
~ Allyn Hughes — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA