Fiscal Cliff Predictions

December 6, 2012

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The fiscal cliff is looming at the end of the year, and we will be hearing more about it as we get closer to the end of the year.

My predictions regarding the fiscal cliff.

  • A deal will get done, but it might not be until early January.  The new congressional session begins on January 3rd.  This may result in congress having to re-do some of the earlier work, due to the changed in the membership of the congress.
  • The payroll tax holiday will end.  Extending this long term would probably be a bad idea anyway, since this is money that goes into Social Security.  If we’re reducing the funds going into Social Security, we’re increasing the risk that Social Security will be a viable program in the future.  This may even be phased in over 2-3 years to allow families to slowly adjust to the lower take home pay.
  • The Bush era tax cuts for families making less than $250,000 per year will remain in place.
  • Rates for families making more than $250,000 will rise, but not quite to the levels they were at before the Bush era cuts.  Maybe slightly above the midway point between the old and new rates.  Yes, I am predicting an actual compromise.
  • The capital gains rate will rise, perhaps to a maximum rate of 18-20%.  One misconception about capital gains is that they are a form of double taxation.  This can be the case, if the rise in a stock’s price is attributable to the company retaining/reinvesting earnings rather than paying dividends.  However, in many cases a stock price rises for other reasons.  Sometimes the company has never made a profit, but has a very promising future.  In this case, corporate taxes have never been paid.  Additionally, capital gains can arise from the ownership of non-stock assets (real estate and physical objects).

Up to this point, both sides have been hesitant to budge very much, although some Republicans have said they would support a tax increase on the wealthy.  Without action, tax rates for everyone will go up on January 1st.  In essence, this is a game of high stakes chicken.  It may even make sense, politically, to wait until 2013 to pass the legislation.  If the legislation passes this year, before the rates revert, it would just be an extension of the earlier cuts.  If the legislation passed after the rates have already reverted, it would be an actual cut of those new rates.  Very little difference in the grand scheme of things, but a big difference on the political trail in 2014.

2 Comments (+add yours?)

  1. Martin Kelly
    Dec 07, 2012 @ 07:32:23

    Wait a minute, are you saying that the Bush era tax cuts were not just for the rich?! How could that be? For years we have heard from candidates, congressmen and the president that Bush’s tax cuts were only for the rich.

    Sorry, just could not resist. You are right about the FICA holiday. That never made sense to me. It was just a political gimic just like the checks that were distributed during the Bush administration. Social Security has been on the bink of insolvancy for years, so the solution was to starve it?

    I have never understood why capital gains is treated differently than other income. Income is income regardless of how you get it. And why do you get to deduct losses? The suggestion that people only invest if there is a safey net is rediculous. People invest to make money, the safety net was created as a gift to wealthier people. Besides that, it complicates the tax preparation effort for anyone who even sell a single share of stock.

    Overall, I think your predictions are correct, but you left out the effects of the budget cuts that will hit. I predict that most of the cuts will be to the military. This is mostly based on the commentary of the Senate and the fact that the congress as a whole has not passed a budget for years. The last campaign focused on making sure that promised benifits to as many people as possilbe continue to be distributed.


  2. kosmo
    Dec 07, 2012 @ 08:26:55

    Hmm. I’ve always thought it was public knowledge that the Bush era cuts were across the board. Maybe the public doesn’t how the knowledge that I assume they do.

    Deducting capital gains losses makes sense to me, because you’re allowed to offset losses in many other cases as well.

    I think the logic for the different rates is that people may be more willing to take the risk on a company (a small startup, for example) if they get to keep 85% of the potential gain. Whether this is true or not is a question about the psychology of investors more than anything. Also, there’s the question of that money flowing offshore intead of being invested in the US.

    I don’t follow the budget enough to get into the issue of the cuts. I definitely do expect the military to be one of the big cuts, though. However, with engagement in Iraq and Afghanistan winding down, I’d expect a natural reduction in expenses anyway.


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