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Fiscal Cliff Tax Hikes

Written By Brian Hicks

Posted November 14, 2012

Talk is growing about the looming fiscal cliff—but what might we really expect? Brief answer: a lot, and it won’t be pretty. Unless Congress can get its act together and pass a budget deal, the nation will go over this so-called cliff in January, and it will affect nearly everyone.

The Huffington Post provides a brief analysis.

According to the non-partisan Tax Policy Center, middle-income households will end up paying, on average, $2,000 extra in the coming year.

But that’s hardly the worst of it. The Congressional Budget Office expects unemployment to shoot back over 9 percent (it’s just fallen to its lowest since the recession, at 7.9 percent). The market will reel, of course.
The overall cost of going over this cliff, in just 2013, could be as high as $671 billion (again, a CBO estimate). The tax increases to be borne across America would be the highest in almost 60 years.

The severity of the consequences will, hopefully, force the White House and Congress to cooperate and achieve a satisfactory deal.

Yesterday, Congress returned for a session that may—if need be—last through the end of this year. A likely situation is that some sort of placeholder deal will be thrashed out, leaving the details to be worked out later in 2013. Such a compromise would at least avert the massive impact of going over the fiscal cliff.

That’s hardly consolation to many companies, though, which have already entered a holding pattern (much like gold and gold investors did prior to the election) to see what the outcome is.

And the news emerging from D.C. is not very encouraging; while the newly re-elected President Obama has said that he’s open to compromise with Republicans, he has also asserted that he would veto any proposals that would allow tax cuts to cover those with income exceeding $250,000, the Post reports.

Republican House Speaker John Boehner, predictably enough, has reiterated that increasing taxes for upper-income Americans will hurt job growth, and that any tax deal seeking instead to close special-interest loopholes and end government benefits.

It doesn’t help the President’s side that the budget deficit has exceeded $1 trillion every year for the past four fiscal years. And 2013 is looking no better, as the budget year began with a $120 billion deficit in October.

Nevertheless, it’s clearly a better idea to ease into deficit reductions than forcibly impose drastic cuts and increases across the board—which will undoubtedly flip a barely-recovering economy on its head.

Let’s take a look at some of the real effects, as analyzed by the Huffington Post, of going over the so-called cliff.

Roughly 20 percent of the tax increases is set to originate as a 2010 Social Security tax cut expires. For someone making $50,000 a year, this means they’ll pay $1,000 extra over the year.

Interestingly, the SS tax change isn’t actually a direct effect, but happens to coincide with the timeline and is thus lumped into the discussion.

The end of around 80 tax breaks—mostly targeting businesses—would account for another 20 percent of the tax increases.

Almost the whole of the rest of the increases comes from the Alternative Minimum Tax (AMT), which will affect nearly 30 million Americans (compare that to the 4 million already affects).

The AMT, while intended to stop rich people from evading income tax via loopholes and deductions, was never inflation-indexed, meaning with each year it has nearly encompassed many middle-income taxpayers, and Congress has had to take steps each year to prevent that.

In general, this means consumers will spend far less, withholding money from circulation, which in turn will freeze up the economy again and send us back into an economic slump.

Finally, let’s not forget widespread spending cuts, which will affect everything from defense to health research, higher education, environmental agencies, and even law enforcement.

With so much at stake, it is clearly in everyone’s interest that both White House and Congress work out a deal.

Investors are increasingly hedging against the impending cliff with gold, which has been inching up in anticipation.