Sunday, December 30, 2012

The Fiscal Cliff: Huge Taxes & Hard Times Coming!

What Is The Fiscal Cliff?

Hitting the national economy with that double whammy of tax increases and spending cuts is what's called going over the "fiscal cliff."

The "fiscal cliff" refers to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the US budget deficit beginning in 2013 if existing laws remain unchanged.

The deficit which is the difference between what the government takes in and what it spends is projected to be reduced by roughly half in 2013.

The Congressional Budget Office estimates that this sharp decrease in the deficit will likely lead to a recession in early 2013. This is the so-called Fiscal Cliff.

The laws leading to the fiscal cliff include the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011.

Because of the short-term adverse impact on the economy, the fiscal cliff has stirred a great deal of talk from both inside and outside of Congress and has led to calls to extend some or all of the tax cuts, and to replace the spending reductions with even more targeted cutbacks.

So what has caused of the consternation over this issue?

Well, negotiators are haggling over what threshold of income to set as the demarcation between current tax rates and higher tax rates.

They are negotiating over Estate Tax limits and tax levels, how to extend unemployment benefits, how to prevent cuts in Medicare payments to doctors and how to keep a minimum income tax payment designed for the rich from hitting about 28 million middle class taxpayers.

Washington has had two years to work on it. The Obama White House delayed negotiations until after the election - giving Washington only a few months to deal with a huge problem that they have known is coming for almost two years.

The Budget Control Act was a compromise intended to resolve a dispute concerning the public debt ceiling.

Some major programs, like Social Security, Medicaid, federal pay which of course includes military pay and pensions, and veterans' benefits, are exempted from the spending cuts.

Spending for defense, federal agencies and cabinet departments would be reduced through broad cuts referred to as budget "Sequestration."

So who came up with this?

Well, during a lame duck session in December 2010, Nancy Pelosi's Democrat controlled Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

The act extended the Bush tax cuts for an additional two years and "patched" the exemptions to the Alternative Minimum Tax (AMT) for tax year 2011.

This act also authorized a one-year reduction in the Social Security (FICA) employee payroll tax. This was extended for an additional year by the Middle Class Tax Relief and Job Creation Act of 2012, which also extended federal unemployment benefits and continued a freeze on Medicare physician payments.

On August 2, 2011, Congress passed the Budget Control Act of 2011 (BCA) as part of an agreement to resolve the debt-ceiling crisis.

The Act provided for a Joint Select Committee on Deficit Reduction. If you remember, it was called the "super committee" to produce legislation by late November that would decrease the deficit by $1.2 trillion over ten years.

When the super committee failed to act, another part of the BCA went into effect. This directed automatic across-the-board cuts - known as "sequestrations" - to take place split evenly between defense and domestic spending, beginning on January 2, 2013.

Also, the Affordable Care Act, aka ObamaCare, imposed new taxes on families making more than $250,000 a year, $200,000 for individuals, starting at the same time in January 2013.

Remember Democrat Speaker Nancy Pelosi famous said, "We have to pass the bill [ObamaCare] so you can find out what is in it" - well, they really should have read the new law before enacting it into law.

At the end of 2011, the fiscal patch to the Alternative Minimum Tax (AMT) exemptions expired.

Technically, the AMT thresholds immediately reverted to their 2000 tax year levels, a drop of 26% for single people and 40% for married couples. Anyone over these reduced thresholds at the end of 2012 would be subject to the AMT.

That means, more taxpayers would pay more unless some legislation was passed like what was done back in  2007 that affects the exemptions retroactively.

Key laws leading to the fiscal cliff:
  • CBO projections of the sources of deficit reduction in the FY2013 budget, not counting economic feedback.
  • Expiration of tax cuts and the subsequent growth in the AMT: $221B (36.41%)
  • Expiration of 2% FICA payroll tax cut: $95B (15.65%)
  • Other expiring tax provisions: $65B (10.71%)
  • Affordable Care Act taxes: $18B (3.97%)
  • Spending cuts ("sequestration") under the Budget Control Act of 2011: $65B (10.71%)
  • Expiration of federal emergency unemployment insurance: $26B (4.28%)
  • Reduction in Medicare payment rates for doctors: $11B (1.81%)
  • Other changes (mostly revenue, primarily reflecting economic growth): $105B (17.30%)
A number of laws led to the fiscal cliff, including these provisions:
  • Expiration of the Bush tax cuts extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010;
  • Across-the-board spending cuts ("sequestration") to most discretionary programs as directed by the Budget Control Act of 2011;
  • Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels;
  • Expiration of measures delaying the Medicare Sustainable Growth Rate from going into effect (the "doc fix"), as extended by the Middle Class Tax Relief and Job Creation Act of 2012;
  • Expiration of the 2% Social Security payroll tax cut;
  • Expiration of federal unemployment benefits, and
  • Huge new taxes imposed by way of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 - aka ObamaCare.
Without new legislation, these provisions would automatically go into effect on January 1 or 2, 2013, except for the Alternative Minimum Tax growth, which can be changed retroactively until December 31, 2012.

Some provisions would increase taxes. For example, the expiration of the Bush and FICA payroll tax cuts and the new Affordable Care tax and AMT thresholds) while others would reduce spending (sequestration, expiration of unemployment benefits and implementation of the Medicare SGR).

On the other hand, some lawmakers intend to attach a bipartisan extension to the expiring wind-power tax credit. Unlike the provisions above, this will reduce, not increase, taxes by $1.3 billion.

Proposals to avoid the fiscal cliff involve repealing legislation containing certain of these provisions or passing new legislation to extend provisions that are due to expire.

But honestly, Washington is out of time.

So what is the baseline projection, if we follow the current law? Well, this scenario would have lower deficits and debt but also have lower spending and higher taxes.

The alternative fiscal scenario is estimated as another option only if some laws are changed. This would result in higher deficits and debt but lower taxes and higher spending. Basically the very problem we have now.

These are two completely different fiscal futures.

So would it help if we just went off this so-called cliff?

Well, that's the question that some folks around the country are wrestling with. Fact is that the United States public debt would continue to grow even if the fiscal cliff occurs.

But, over the next ten years, the smaller deficit will lower projected increases in the debt by as much as $7.1 trillion or about 70%, resulting in a considerably lower ratio of debt to the size of the economy.

For the first year (from fiscal year 2012 to 2013), federal tax revenues are projected to increase by almost 20% (specifically 19.63%), while spending outlays are expected to decline by 0.25%.

So in other words, everyone's taxes will go up dramatically while hardly any cuts are expected in the way Washington spends our money. In reality, it would be the highest tax increase since the days of War Mobilization and America's highest taxation which took place in World War II - all while unbridled spending takes place.

If Congress and the President do not act, allowing tax cuts to expire and mandated spending cuts to be implemented, the next decade will more closely resemble the baseline projection of lower deficits and debt but also have lower spending and higher taxes.

If they act to extend current policies, keeping lower tax rates in place and postponing or preventing the spending cuts, the next decade will more closely resemble the alternate fiscal scenario - which means we'll simply have more of the same.

If the so-called fiscal cliff takes place, the total deficit reduction or debt avoidance over ten years could be as high as $7.1 trillion, versus the $10–11 trillion debt increases if current policies are extended.

In other words, roughly 70% of debt increases projected over the next 10 years could be avoided by allowing the expiration of tax cuts and required sequestration expected at the end of 2012 in the absence of new legislation.

In the long run, lower deficits and debt should lead to relatively higher growth estimates. But, in the short run, real GDP growth in 2013 would likely be reduced to 0.5% from 1.1%.

This would mean that Obama has spent us into a certain recession and a 1.3% GDP contraction during the first half of the year followed by what most believe we be 2.3% growth in the second half.

Projected effects

Overall effects of the fiscal cliff are scary.

The Congressional Budget Office estimates that allowing certain laws on the books during 2012 to expire or take effect in 2013 (the baseline scenario) would cut the 2013 deficit approximately in half and significantly reduce the trajectory of future deficits and debt increases for the next decade and beyond.

If Congress acts to extend current policies, the alternative scenario, then deficits and debt will rise rapidly over the next decade and beyond, slowing the economy over the long run and dramatically increasing interest costs.

The Congressional Budget Office, the CBO, estimates that if the baseline scenario is allowed to take effect in 2013, it would reduce federal spending by $103 billion and increase tax revenues by $399 billion (and another $105 billion "mostly in revenue") through September 2013 (the end of FY2013).

This would amount to a net total of $560 billion, roughly half the $1.2 trillion FY2011 deficit. 
And no, it's not only the rich, the wealthy, the successful who would be drastically effected.

Because of all of the hidden spending in ObamaCare, and stopping the Bush Tax-Cuts, the Obama White House estimates that a family of four with an income of $50,000 to $85,000 would pay an additional $2,200 in federal taxes.

Each piece of the fiscal cliff has varying effects on people at different income levels.

Low-income households are most affected by expiring expansions of the child tax credit and earned income tax credit.

Middle-income households are affected most by the payroll tax and income tax increases.

Households at the top income level are most affected by the income tax and the tax increases on unearned income such as capital gains.

Many experts have argued that the U.S. should avoid the fiscal cliff while taking steps to bring the long-term deficit and debt trajectory under control. 

For example, economist Paul Krugman recommended that the U.S. focus on employment in the short-run, rather than the deficit.

Federal Reserve Chair Ben Bernanke emphasized the importance of balancing long-term deficit reduction with actions that would not slow the economy in the short-run.

Charles Konigsburg, who directed the bi-partisan Domenici-Rivlin deficit reduction panel, advocated avoiding the fiscal cliff while taking steps to reduce the budget deficit over time. He recommended the adoption of ideas from deficit panels such as Domenici-Rivlin and Bowles-Simpson that accomplish these two goals.

Other experts at the Center on Budget and Policy Priorities and the Carlyle Group have argued that allowing the tax increases and spending cuts to occur under current law may be necessary to create the "grand bargain" required to get the U.S. deficit and debt trajectory under control for the long-run.

In other words, allowing current law to take effect would create conditions under which legislators might be forced to enact better designed deficit reduction approaches of similar or greater magnitude.

Conservative budget experts have opposed calls to raise taxes or to allow defense sequestration, and have called on congressional leaders to return to normal budgetary process.

Patrick Knudsen, a Heritage Foundation fellow, argued that lawmakers should seek long-term stability by rejecting short-term fixes and "grand bargains."

According to former Secretary of Defense Robert Gates, the deep across-the-board cuts in defense spending required by the Budget Control Act will threaten military-dependent local economies and "do great damage" to American military strength and homeland security.

During November 2012, President Obama expressed a preference for replacing the more blunt cuts of the sequester with more targeted cuts, while raising income tax rates on the top 2% of earners.

The White House said they would veto of any bill that: 1 - averts defense cuts while leaving intact non-defense cuts; or 2 - excludes an increase in tax rates for top earners (the job creators).

As of November 30, 2012, Obama was calling for $1.6 trillion in higher taxes over ten years, and cuts of another $400 billion from Medicare and other benefit programs over a decade.

Obama also wanted another Stimulus Package of "at least $50 billion" in 2013. He said it is "to boost the economy." But some folks don't believe him and insist it is to pay off big Campaign Donors

Of course, Obama does not want to discuss where the money for his first almost One Trillion Dollar Stimulus Package went to because no one seems to know where all the money did go.

Democrats in Congress have dutifully marched to the tune that Obama has played. 

Congressional Republicans have proposed that the Bush tax cuts be extended in their entirety.

Republicans have dutifully marched to the tune set by the voters in this last November Election and have rejected Obama lame proposals. 

The Timeline Shows This Is All A Result Of Passing ObamaCare 

Some say that this has all come to a head because of Obama's desire for power. Some say it is the result of the federal government's expansion of power and taxation through ObamaCare.

I believe it all has to do with Obama's desire to "fundamentally change America" by bankrupting the country.

March 23, 2010: President Obama signed into law the Patient Protection and Affordable Care Act. One of this law's provisions is to impose new taxes on families starting in 2013.

December 17, 2010: Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, patching the AMT through 2011 and extending the Bush tax cuts to the end of 2012.

August 2, 2011: The President signed the Budget Control Act of 2011. This act provided that, if the Joint Select Committee did not produce bipartisan legislation, across-the-board spending cuts would take effect on January 2, 2013.

February 22, 2012: Obama signed into law the Middle Class Tax Relief and Job Creation Act of 2012, which extended the following provisions until December 31, 2012: the 2% Social Security payroll tax cut, federal unemployment benefits and the freeze on Medicare physician payments.

February 29, 2012: Ben Bernanke popularized the term "fiscal cliff" in his testimony before the House Financial Services Committee.

July 3, 2012: IMF head Lagarde warned that the threat of "going over the fiscal cliff" could weaken the US economy later in 2012. The IMF also reduced its projection for US growth in 2013 from 2.4 to 2.25 percent of GDP.

July 17, 2012: Bernanke pushed Congress to avoid the fiscal cliff, warning that a failure to do so will further dampen the sluggish economic recovery.

July 31, 2012: Reid and Boehner agreed on a continuing resolution that would pay for the day-to-day running of the government until the end of March 2013. This does not affect the fiscal cliff or the debt-ceiling.

August 7, 2012: Obama signed the Sequestration Transparency Act of 2012, which directed his administration to detail in 30 days how they plan to implement the automatic cuts mandated by the Budget Control Act.

September 14, 2012: Obama released a 400-page report listing his proposal for spending cuts.

October 22, 2012: At the third of three presidential debates, Obama says sequestration "will not happen."

November 16, 2012: President Obama met with Republican and Democratic congressional leaders to discuss the fiscal cliff and to try to come up with their initial plans immediately after the Thanksgiving break.

November 28, 2012: Certain Republicans, such as Orrin G. Hatch (R-Utah), supported "modifying tax expenditures as a way to raise revenue."

November 29, 2012: Treasury Secretary Timothy Geithner delivered a proposal containing $1.6 trillion in new taxes, $50 billion in stimulus spending, and $400 billion in federal health savings over the next decade.

As part of the proposal, the President wants an extension of the 2% payroll tax cut and authority to by-pass the Constitution and Congress and raise the debt ceiling whenever he wants to.

December 3, 2012: Both Republicans and Democrats remain in the early stages of negotiations for a possible solution. Republicans proposed adding $600 billion in spending cuts by increasing the Medicare eligibility age from 65 to 67 and reducing Social Security benefits.

But both parties continue to ridicule each other's proposals,such as when Jay Carney called a proposal "magic beans and fairy dust" or when Boehner called a proposal a "La-La Land offer."

December 5, 2012: Senate Minority Leader Mitch McConnell (R-Ky.) offered to vote on President Obama’s proposal, as proposed by Treasury Secretary Geithner, as an amendment to H.R. 6156, the Russian trade bill, in the Senate. However, Senate Majority Leader Harry Reid, (D-Nev.), prevented the vote.

Reid's reported reasons was that the Russian trade bill "is to protect American jobs" and “there is no Geithner proposal." McConnell said he would introduce the bill as "a stand-alone vote."

December 5, 2012: Confirming leaks from the White House, Treasury Secretary Geithner told CNBC that the Obama Administration is "absolutely" willing to go over the fiscal cliff if Republicans refused to back off from their opposition to raising rates on wealthier Americans.

But according to Economists, it is the wealthier Americans who are the job creators in America - and taxing them more will reduce their ability to hire workers or invest in their businesses.

December 13, 2012: Both parties have publicly stated the negotiations are at a stand still. Several commentators have reported that a deal is not expected until after December 25, 2012 but not before

December 15, 2012: In confidential talks, Boehner proposed an increase in tax rates for those who earn over a million dollars.

December 17, 2012: According to media reports, various proposals were exchanged between President Obama and House Speaker Boehner to deal with the fiscal cliff.

These included: changing the Consumer Price Index for entitlements to a "chained" CPI, allowing marginal tax rates to increase on income over $400,000, a one- or two-year increase in the debt ceiling and increasing the eligibility age for Medicare from 65 to 67.

December 18, 2012: Speaker Boehner announced that the House would vote on a "Plan B", which would raise tax rates on people earning more than a million dollars a year.

December 20, 2012: "Plan B" was pulled from consideration in the House because the Republican leadership could not find enough votes to pass the legislation. This was seen as a defeat for Speaker Boehner.

December 21, 2012: With just 10 days left before the end of the year, President Obama scaled back his proposals and urged Congress to adopt stopgap measures to: prevent taxes from rising on income under $250,000 a year, restore unemployment benefits and “lay the groundwork” for budgetary action next year.

December 26, 2012: The US Treasury Department announced that it will begin a series of measures, similar to the ones taken in the summer of 2011, to delay exceeding the current 16.4 trillion dollar debt ceiling.

December 27, 2012: Obama cuts short a vacation to Hawaii and returns to Washington D.C. in a last-chance attempt at a deal regarding the fiscal cliff.

December 28, 2012: According to confidential sources, the 112th Congress may not pass legislation to avert the fiscal cliff until January because Congress will not meet until December 31, 2012.

The 113th Congress is scheduled to convene January 3, 2013 at 12 p.m.

December 28, 2012: Speaker Boehner and President Obama turned negotiations over to Senator Harry Reid and Senator Mitch McConnell to create a last minute agreement. At last check, nothing was taking place to avert the so-called cliff.

It is interesting to note that The Boston Globe reported on Friday that the IRS may delay the impact of tax hikes by holding off on telling employers to change how much they withhold from workers.

Why the Fiscal Cliff Won't be Bad for State Governments?

An article on December 26th, asks if falling off the "fiscal cliff" is a bad thing?

It concludes that that might not necessarily be the case for some state governments that could begin collecting more in Estate Taxes on wealth left to heirs if the United States goes over the "cliff," allowing sharp tax increases and federal spending cuts to take effect in January.

In an example of federal and state tax law interaction that gets little notice on Capitol Hill, a full 30 states next year could collect $3 billion more in Estate Taxes if Congress and Obama do not act soon, estimated the Urban-Brookings Tax Policy Center which is a Washington Think Tank.

The reason they see this?

Well, the federal Estate Tax would return with a vengeance and so would a federal credit system that shares a portion of it with the 30 states.

They had been getting their cut of this tax revenue stream until the early 2000s. That was when the credit system for payment of state Estate Tax went away due to tax cuts enacted under former President George W. Bush.

With the return of the credit system next year as part of the "cliff," states such as Florida, Colorado and Texas - which have not collected estate tax since 2004 - could resume doing so.

California Democrat Governor Jerry Brown has already begun to add the anticipated estate tax revenue into his plans, including $45 million of it in his 2012-2013 revised budget. And yes, that's why we are in so much trouble in this state - "creative finances."

Greedy Democrats like Jerry Brown may or may not be jumping the gun

The outlook on the "fiscal cliff" coming up at year-end is looking fairly certain.

Weeks of inconclusive political drama over the "cliff" have focused largely on individual income tax rates and spending on federal programs such Medicare and Social Security, but many tax issues are also involved, including the Estate Tax.

At the moment, under laws signed a decade ago by Bush, the Estate Tax is applied to inherited assets at a rate of 35% after a $5 million exemption.

That means a deceased person can pass on an inheritance of up to $5 million before any tax applies.

Inherited property wealth passed to a spouse or a federally recognized charity is generally not taxed.
Obama wants to raise the rate to 55%  after a $1 million exemption.

Republicans have called for complete repeal of the estate tax, which we call the "death tax." Earlier this month Speaker Boehner actually called for freezing the Estate Tax at its present level just to help out some folks like Farmers who have a great deal to lose.

Obama and Democrats across the nation are way too greedy to allow folks to inherit what is left to them. They want it all, and if not all - than as much of it as they can get.

Besides Obama, States Stand To Gain With Cliff

If Congress and Obama do not act by December 31, numerous Bush-era tax laws will expire, including the one on estate taxes. That would mean the Estate Tax rate will shoot up next year to the Bill Clinton levels of 55% after a $1 million exemption.

It would also mean that for the first time in years, a portion of that estate tax would go to the states, through the return of the credit system.

Under that old law, estates paying the tax could get a credit against their federal tax bill for state estate tax payments of up to 16 percent of the estate's value.

If the fiscal cliff were allowed to take hold unaltered by Washington, 30 states would again automatically begin getting their share of federal estate taxes. The state laws are generally written so the state estate tax amounts are calculated under a formula based on the amount of the federal credit.

This would help states that have struggled with lower tax revenues since the 2007-2009 financial crisis and resulting recession.

Political greed has a way of working out that way, the more they tax - the less businesses can stay afloat and subsequently less tax revenues come in. Imagine that! 

An Increased "Death Tax" will take it's toll!

For places like California where land is worth so much, a $1 Million exemption on inherited property is not very much.

Because of this, we can expect to see Farms disappear instead of them being passed down one generation top the next.

Since they are barely holding on right now, it is almost for certain that increased inheritance taxes will be what finally kills many farms across the nation.

What will it cost you?

Fiscal deal failure would dent monthly budgets for millions

Families across the country might soon have to start trimming back their monthly budgets, with lawmakers running out of time and ideas for averting a crushing set of tax hikes.

President Obama, cutting his family vacation short, flew out of Hawaii late Wednesday and planned to be back in Washington by Thursday morning. He was definitely not happy about cutting another vacation short.

He is truly working on his golf game and doesn't like interruptions.

Of course it's not clear what Obama will do once in Washington, as of last Wednesday, Congressional leaders on all sides reported little to no bipartisan progress, or even conversations, toward a fiscal crisis deal over the Christmas break.

Obama aides and lawmakers are now talking about a scaled-down package as the most likely vehicle for solving the problem, something that could at least prevent most of the scheduled tax hikes.

But without at least a short-term fix, families are going to have to break out the calculators in the new year. And yes, thanks to Obama's tax hikes they will have to figure out how to make do with a lot less.

"You're going to have less money to spend in a very difficult economy with very little clarity on how the economy will pick up in the near future, or even in the long run," financial adviser Ed Butowsky said. "We are entering into a very difficult economic environment, unfortunately."

According to numbers crunched by the Tax Policy Center, millions of families will take a hit, to varying degrees.

For those making below $10,000, the tax increase amounts to roughly $300.

But those making between $40,000 and $50,000 would pay an additional $1,700 in 2013.

Up the pay scale a bit more, households earning $50,000-$75,000 would send an extra $2,300 to Washington.

And for those households making over $200,000 - but under $500,000 - the tax bill will grow by roughly $14,000.

And yes, believe it or not, the numbers go up from there!  Those American households making more than one million dollars a year could pay more than $200,000 in additional taxes.

So ask yourself, by taxing Americans more, will the Federal Government cut its spending? That's like asking an Addict if they get more dope would they stop using it. The answer is no.

Obama sees the Federal Government as his own private checking account the same as if it were set up by his grandma. And yes, when the money runs out, he does exactly as used to do as a kid - simply get more.

In my opinion, in an effort to change the country fundamentally Obama wants to kill the concept of the American Dream which says if we work hard and push ourselves, then we can get ahead and become prosperous even exceeding the dreams of our father's.

In my opinion, this whole litany of tax hikes is Obama's way of saying "Happy New Year Suckers" as he tries to bankrupt America.

Story by Tom Correa

No comments:

Post a Comment

Thank you for your comment.