Facing The Fiscal Cliff

Facing The Fiscal Cliff

As Published in the Shore 2012 Edition of NJ Lifestyle

Since we are in an election year, you would think our politicians would spend time trying to solve our nation’s monumental fiscal problems: A national debt of $15.6 trillion and a 2011 federal budget deficit of $1.5 trillion. Instead, most political journalists and insiders believe that nothing will be done until after the elections in November. What is so troubling about this is that only leaves about 6-7 weeks to address what Federal Reserve Chairman Bernanke referred to as the “Fiscal Cliff”. There are four events that will happen automatically on December 31, 2012 if Congress fails to act:

  1. End of the Bush-era tax cuts
  2. End of the 2% social security payroll tax holiday
  3. End of the extended unemployment benefits package
  4. Automatic spending and budget cuts that are a result of the Budget Control Act Bush Era Tax Cuts

The top federal income tax rate will go from 35% to 39.6%. Taxes on dividend income will go from 15% to a top rate of 43.4% (the top rate of 39.6%, plus an additional 3.8% surtax on all forms of investment income which stems from a provision of Obamacare). The tax on capital gains will go from 15% to 23.8%. The child tax credit will be cut in half and no longer be refundable. The estate tax rate will go from the present top rate of 35% to 55%, and the exemption will go from an estate size of $5,120,000 presently back to $1,000,000. The Alternative Minimum Tax (AMT) will affect an estimated 30 million taxpayers, up dramatically from the estimated 4 million that are presently subject to it. Finally, the so-called marriage penalties will increase and various tax benefits for education, retirement savings, and low income individuals expire.

Expiration of all of these tax cuts is expected to raise $303 billion in additional taxes. Payroll tax cut & end of extended unemployment insurance: In February 2011, in an effort to stimulate the economy, Congress approved legislation to reduce the employee portion of the social security payroll tax from 6.2% to 4.2%. An estimated 160 million workers are presently benefitting from this cut. The current extended unemployment benefits will also expire at the end of 2012. Expiration of the payroll tax cuts and the unemployment benefits is expected to raise/save $93 billion.

When the “Super-Committee” (the Joint Select Committee of six members of the House and six members from the Senate) failed to come up with a compromise in November 2011 on 1.5 trillion in budget cuts over a ten year period, automatic spending cuts were set in motion to take effect in January of 2013. In 2013 alone, these automatic cuts represent a $55 billion reduction in defense spending, a $31 billion reduction in non-defense discretionary spending, and a $12 billion reduction in healthcare spending, mainly Medicare and Medicaid.

If you sum all of these items up, the federal government will raise and save approximately $494 billion, or about 3-4% of our current GDP. If you take 3-4% out of an economy that is currently growing between 2-3%, you don’t have to be a financial genius to see we could easily slip into negative growth or, by another name, a recession. We need to demand more of our elected officials. They need to spend less time worrying about re-election and more time fixing the imbalance that is our federal budget deficit. Other than on a short term basis, you can’t spend more than you take in, it is simple math. We need to balance our budget over time with a combination of spending cuts and tax increases. If the parties will not work together and compromise, we as American voters need to vote them out of office. Everything must be put on the table. You cannot fix our deficit and ignore Medicare, which is the largest, fastest growing unfunded and unrecorded liability of our federal government. By 2016, the Office of Management and Budget (OMB) estimates that we will be spending 43% of our federal budget on healthcare and interest on our National debt. If we don’t stop kicking the can down the road, our children and grandchildren will be left with a second rate nation instead of the greatest nation on the planet.