For the past week or two I’m sure you have heard something about the “Fiscal Cliff” on the news. Here’s a basic summary in case you’re still curious.
Basic idea: if our friends over in Washington can’t address a series of spending cuts and tax increases then there is a chance that we could be thrown into another recession. That concept seems a little crazy until you realize we’re talking about a total of $7 trillion worth of tax increases and spending cuts. So what specific spending cuts and tax increases should we look out for?
The Budget Control Act – $1.2 trillion in deficit reduction over 10 years. This goes into effect because Congress has failed to reach a bipartisan debt-reduction deal.
Defense – $55 billion will be cut in 2013 (roughly 10% of every program). I don’t think this one is as crucial because just 10 years ago our military budget was 100s of billions lower. Still, the cut is significant in present day.
Nondefense – $55 billion will be cut to departments/programs like education, food inspections and air travel safety. Estimations say at least an 8% cut to programs, projects and activities.
Bush Tax Cuts – All of the Bush tax cuts are set to expire December 31. This results in income taxes going from 10%, 15%, 25%, 28%, 33% and 35%…. To 15%, 28%, 31%, 36%, 39.6%. Nobody likes taxes… Could be necessary considering our debt and deficit situation, though. Regardless… all of the taxes that follow are caused by these tax cuts expiring:
- Capital Gains Rate: Rises to 20%, used to be 15% for most fliers.
- Qualified Dividend Rate: Rises to one’s top income tax rate, up from 15% for most fliers.
- PEP/Pease Limitations: Restored, making high-income households unable to take some itemized deductions and personal exemptions in full (not in every case).
- Child Tax Credit: Falls to $500 per child (used to be $1000). The amount permitted for a refund is also reduced.
- American Opportunity Tax Credit: Expansion of eligibility for the credit expires.
- Marriage Penalty Relief: Expires. This means that low- or middle- income two-earner couples will owe more to the IRS than they would if they were single and making the same income.
- Estate Tax: Parameters return to pre-2001 levels. Exemption level used to be $5 million, falls to $1 million. The top tax rate on taxable estates used to be 35%, rises to 55%.
AMT patch – This will not be renewed, it was for income exemption from the Alternative Minimum Tax. Individuals and married couples used to get the following exemptions, respectively: $50,600 and $78,750.
Now they get this amount, respectively: $33,750 and $45,000
As a result more than 30 million people will be included in the “wealth” tax. Only 4 million people used to be included.
There is a bipartisan bill from the Senate Finance Committee which proposes a patch for 2012 and 2013. Unfortunately, the bill has not passed the Senate or the House yet. Doesn’t look good.
Payroll Tax Holiday – Expires. Social Security tax reverts to 6.2%, used to be 4.2%, on the first $110,100 in wages. What this means is someone making $50,000 will essentially pay another $1,000 in payroll taxes next year.
Unemployment Benefits Extension – Federal extension expires. Workers who lost their jobs were able to get as much as 99 weeks in state and federal benefits. Once this expires, they will only receive up to 26 weeks. In my opinion, 99 weeks is way too long. I haven’t done enough research to say anything other than that, but it certainly seems excessive. I suppose the recession makes it more reasonable, though.
Tax Extenders – Many business and smaller individual tax breaks will expire. There has been a bipartisan bill to extend many of them. Unfortunately (again), it has not passed the Senate or the House at this point in time.
Medicare Doc Fix – Expires. Medicare payment rates for physician services drops by 27%
Medicare Surtax – Some budget experts count this as part of the fiscal cliff. I didn’t have to add it, but why not? The surtax is on high-income households under health reform.
A 0.9% surtax will apply to wages on earned income over $200,000 ($250,000 if married). That’s on top of the 1.45% Medicare currently owed on all wages. Those making between $200,000 and $500,000, for instance, will only pay about $633 extra while households making $1 million or more would pay another $11,242.
A 3.8% Medicare surtax will also apply for the first time to at least a portion of high-income households’ investment income.
Here are some CBO projections in the event that all of these policies are allowed to go into effect. These are projections and, honestly, I wouldn’t be surprised if they were downplaying some things. That tends to happen a lot. I’m not qualified to give you any hard evidence or professional opinion, though, so just ignore that .
- Economy will shrink by 0.5% between the fourth quarter of this year and the fourth quarter of next year.
- Unemployment (currently 8.3%) will rise to 9% in the second half of 2013.
- Another recession
- Deficit will hit $1.1 trillion this year
- For 2013, deficit would fall to $641 billion (biggest single year drop in the annual deficit as a percent of economy since 1969)
- Deficits would continue to fall drastically through 2018. They would begin to rise again as the costs of supporting an aging population begin to take hold.
- Debt projection: 58.5% of GDP in 2022, it is currently 73% of GDP (projected for this year)