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The Fiscal Cliff

Are You Facing Your Own Fiscal Cliff?

The Fiscal Cliff
You can’t turn on the News without seeing the talking heads discussing “Fiscal Cliff” this or “Fiscal Cliff” that.  What is the Fiscal Cliff anyway?  Will it really affect you and me?  Well, let’s see.  I’ll try to put all of this in a nut shell to make it easier to figure out and then we’ll go from there.

OK, “The Fiscal Cliff”, where did this name come from?  I don’t remember ever hearing this term used before so I did a little research.  Well, no wonder we never heard it before, this is a new term, most likely made up by an Ivy League political speech writer, used by Ben Bernanke (The Federal Reserve Chairman) in his testimony to Congress earlier this year.  Not everyone thinks the term “cliff” is accurate in describing what we, the Nation, are facing.  The Center on Budget and Political Priorities likens it to more of a “slope” and The Economic Policy Institute says no, it’s a mere obstacle course.  Whatever verbal imagery you want to use, one thing is for sure, the impending consequences are not good.

Well, January 1 or around there, $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect.  According to the Congressional Budget Office (that might be an oxymoron!) if allowed to take place that will likely throw us into a recession.  None of the bean counters in Washington can agree on how fast the recession will hit us.  If Wall Street freaks out it will happen quickly, but who knows, it could take a while.  No matter what, everyone is in agreement that this stuff should not be allowed to kick-in.  What they are not in agreement on is how to fix it. …we’ll address that in a little bit.

Tax Increases and Spending Cuts.  But what’s that really mean?

Tax Cuts:

There are 5 or so tax related provisions that are set to expire at the end of the year, here are a couple that could affect you and me:

  • Bush Tax Cuts – If you remember, these cut individual tax rates, lowered capital gains and dividends rates, and expanded the child tax credit and others.  If these cuts are extended it could cost $203 billion next year.
  • Payroll Tax Holiday – This little gem decreased the payroll tax rate on employees from 6.2% to 4.2%.  If this is kept it is estimated that it will cost $115 billion in 2013.
  • 2009 Stimulus – There’s that little ditty in the 2009 stimulus that has in it the expansion of the child credit, American Opportunity tax credit (helps families pay for college) and the expansion of the earned income tax credit.  For this one if they kept everything it would cost$10 billion next year.

Spending Cuts:

Here are a couple of the what some feel are ridiculous spending cuts, that no one really wanted, that will go into effect next year:

  • Caps on discretionary spending – This will set a limit that policymakers will have to stick to.  This could reduce spending by $78 billion next year.
  • Budget Caps – Cuts to defense and non-defense spending, some predicting a crippling effect on all affected departments and agencies.  You’re looking at around $110 billion next year for this one.
  •  Doc Fix – This is another one of those quirky things that if it was to hang around would cost around $14 billion next year.

Debt Ceiling:

Of course it all depends on how much the government spends and taxes, but the groups that study stuff like this figure the debt limit will have to be raised between $730 billion and $1.25 trillion to avoid the debt ceiling for 2013, that’s whether anything is done about the “fiscal cliff” or not.

So What If We Just Thelma and Louise This Thing?

It seems that law makers on both sides of the isle can’t make a decision on how to handle this problem.  Democrats want higher taxes on the rich and the Republicans won’t stand for any tax increases.  What’s screwed up is that if we take the plunge over the cliff, taxes will go up higher than either sides wants.

Hold on to your wallet because it’s you and me that will feel the effect of a cliff dive.  Taxes will go up for nearly every taxpayer and most businesses.  You know what an increase in taxes means, yep, less of your paycheck in your pocket.  And when businesses get hit by tax increases they don’t just say “oh, that’s OK.  We’ll just make less profit”, no they pass the joy on to us, the consumers.  You can expect the cost of everything to increase, with the exception of Twinkies, but that’s something we’ll discuss in a future article. It would seem to me that there are only three options available.  1 – Make a Deal.  This would be the best bet, to make a deal between the two. The problem is that Congress moves at the speed of molasses in the winter and I don’t see how there is any time left to work out a deal.  It’s been over 4 years and they haven’t been able to produce a budget for our country. 2 – Just Extend It! There’s always the “put off for tomorrow what you can do today” mentality and just extend everything.  No loss, no gain.  3 – Ladies and gentlemen, the Captain has turned on the We’re Screwed Sign. If you haven’t already done so, please stow any cash you might have underneath the mattress in your bedroom or in a can buried in the back yard. Please take your seat and fasten your seat belt. And also make sure your seat back and folding trays are in their full upright position.  There are no emergency exits on this flight so don’t bother looking for them.  Please assume the bracing position, lean forward with your hands on top of your head, and kiss your butt good bye!  …end transmission.

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