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
Forward to a friend
Kicking cans toward the cliff – similarities between Europe’s crisis and the U.S. fiscal cliff
John Mauldin, an economist and writer who has focused much of his attention on the European monetary crisis, published an interesting article August 11. In his earlier articles on the subject, Mauldin identified two most likely outcomes for this crisis, either:
A third, less likely choice is that the Euro will break up and two different currencies—one for northern Europe and another in Southern Europe—will take its place. Mauldin admits that these choices are hugely expensive, and increase the risk that Europe will fall into a recession or depression in the near future.
In his latest article, Mauldin presents another possibility that I think is most plausible. That is that the politicians in Europe will (using a term that I have come to hate) “kick the can down the road” for as long as possible until they are forced to make a decision about saving the European monetary system. Then, they will choose to keep the euro. He paints this as the most expensive solution offered because all of the votes will come at the last possible minute, when the decisions will be made because they have to be made. He thinks that this solution is the only politically tenable way to deliver bad news to the voters/constituents of each country.
After reading this article I started thinking about the upcoming “fiscal cliff” here in the United States. This cliff is a series of decisions that Congress and the President have to make as a result of yes, “kicking the can down the road” on topics like increasing taxes on income, capital gains, and dividends at the same time as government spending is cut due to automatic budget triggers that have not been addressed. Mix in changing health care law and financial services regulations not yet fully implemented and there are a lot of decisions to be made. In theory, most of the fiscal cliff decisions should be made in the 76 days between Election Day 2012 and Inauguration Day 2013.
Why is it important that we get answers to the fiscal cliff questions? Business owners and managers are unsure how to proceed. They have talked about waiting until they receive some clarity around the fiscal cliff issues before they go out and hire more workers. These employers are scared that changes to their tax structure will force them to cut back on their growth plans, and the long-term plans for their companies.
My sense is that Mauldin’s analysis of the most likely outcome of the European Monetary crisis can also be applied to our Congress’ negotiations around the fiscal cliff topic. Instead of making decisions about the fiscal cliff and providing a clear path for Americans, I think that they will defer or postpone as many of them as possible. The fiscal cliff will never occur. Instead it will be a slope—gradual and convoluted.
This will cost American’s many millions or billions over the long run, but will be the way that most members of congress will keep their jobs. And what is more important—billions of dollars or the job security of your favorite politician?
~ Allyn Hughes, CFP, ChFC, CLU — Brooks, Hughes & Jones, Partners in Wealth Management Tacoma, WA
www.BHJadvisors.com
→ Leave a comment
Posted in Commentary, Economy, Taxes
Tagged budget, economy, euro, european debt, fiscal cliff, Hughes, taxes