Consumer page: What is the 'fiscal cliff' anyway?
BY PHIL MULKINS World Action Line Editor
Wednesday, October 31, 2012
10/31/12 at 4:25 AM
It's Halloween, so watch out for that "fiscal cliff!" Also known as the "fiscal precipice," this is a real and threatening "Thing from the East" that does not lurk in the dark or need a costume to scare us. The precipice is likely to launch the Great Recession II.
The fiscal cliff is what Federal Reserve Board Chairman Ben Bernanke calls "the many, major, fiscal events that could happen Jan. 1, 2013," says TheFiscalTimes.com.
Events include expiration of the Bush tax cuts, the payroll tax cut, other tax-relief provision cuts, the first installment of the $1.2 trillion across-the-board cuts of domestic and defense programs (required by a bipartisan deficit reduction agreement) and another forced increase of the debt ceiling (triggering another congressional standoff).
If all these take effect, $600 billion could be saved starting next year but impact the economy enough to make a new recession likely, says the Congressional Budget Office.
"If Washington does not agree on a solution to these tax increases and spending cuts, the economy could tip into recession" said Kraig McFarland, a chartered retirement planning counselor with Tulsa Wealth Advisors/Raymond James. "Right now the economy has been growing at a rate of 1.5 percent. If all the tax increases and spending cuts take effect, we will likely see the GDP (gross domestic product) contract by about 3.6 percent, which would mean the U.S. economy would be in recession."
Sylvia Karimian of Karimian & Associates in Tulsa, an Ameriprise Financial associate, said, "Lower federal income tax rates, part of the tax landscape for 10 years, expire at the end of 2012. We'll go from six federal tax bracket percentages (10, 15, 25, 28, 33 and 35) to five percentages (15, 28, 31, 36 and 39.6).
Long-term capital gains: The maximum rate applying will generally increase from 15 percent to 20 percent; but while the current lower long-term capital gain rates now apply to qualifying dividends; starting in 2013, dividends will be taxed as ordinary income.
FICA increase: The temporary 2 percent reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax (active two years), also expires at the end of 2012, as do temporary breaks relating to the federal estate and gift tax.
Itemized deductions & dependency exemptions: These once again phase out for those with high "adjusted gross incomes" (AGIs); the earned income tax credit.
Child tax credit & American Opportunity (Hope) tax credit: Both will revert to old, lower limits and less generous rules; and individuals will no longer be able to deduct student loan interest after the first 60 months of repayment. Lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.
New taxes: In 2013, the hospital insurance portion of the payroll tax, commonly referred to as "the Medicare portion," increases by 0.9 percent for individuals with wages over $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately). Also, a new 3.8 percent "Medicare contribution tax" is imposed on the unearned income of high-income individuals. This applies to some or all of the net investment income of individuals with "modified adjusted gross income" exceeding $200,000 ($250,000 for married couples filing jointly and $125,000 for married individuals filing separately).
How will the 'fiscal cliff' affect economic growth?
Many fear the combination of tax increases and spending cuts will have severe negative economic consequences come Jan. 1. A report issued by the nonpartisan Congressional Budget Office - "Economic Effects of Reducing the Fiscal Restraint That is Scheduled to Occur in 2013," issued in May 2012 - says, "Taken as a whole, the tax increases and spending reductions will reduce the federal budget deficit by 5.1 percent of `gross domestic product' between calendar years 2012 and 2013."
CBO projects that under these fiscal conditions, the economy would contract during the first half of 2013 and we likely will experience another recession.
Result of 2013 fiscal restraint: CBO estimates the combination of policies under current law will reduce the federal budget deficit by $607 billion, or 4.0 percent of gross domestic product (GDP), between fiscal years 2012 and 2013. The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. With that economic feedback incorporated, the deficit will drop by $560 billion between fiscal years 2012 and 2013, CBO projects.
Which calendar: If measured for calendar years 2012 and 2013, the amount of fiscal restraint is even larger. Most of the policy changes that reduce the deficit are scheduled to take effect at the beginning of calendar year 2013, so budget figures for fiscal year 2013, beginning in October 2012, reflect only about three-quarters of the effects of those policies on an annual basis.
CBO's estimates show the tax and spending policies going into effect under current law will reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013 (with the resulting economic feedback included, the reduction will be smaller).
Read the report at tulsaworld.com/CBOfinancialprecipice
"If Washington does not agree on a solution to these tax increases and spending cuts, the economy could tip into recession," said Kraig McFarland, Raymond James. "Right now the economy has been growing at a rate of 1.5 percent. If all the tax increases and spending cuts take effect, we will likely see the GDP contract by about 3.6 percent, meaning the U.S. economy would be in recession."
Original Print Headline: Going over the edge
Tulsa World consumer writer Phil Mulkins wants to know which topics interest you. Call 918-699-8888, email your suggestion to phil.mulkins@tulsaworld.com or mail it to Tulsa World Consumer, PO Box 1770, Tulsa, OK 74102-1770.
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