Fiscal Cliff Update

I’m sure you’ve all heard a basic summary of the Fiscal Cliff negotiations.  Many Bush era tax cuts that were always provisional were made permanent.  At the same time, everyone will see an increase in taxes.  Those with higher incomes will see the biggest hit to their incomes.  We introduced this Fiscal Cliff topic here.

Allianz put together a short “Fiscal Cliff Summary” that I thought might be convenient for you to read about the biggest changes all in one place.  You can find that here.

As you’ll read in the piece, the major tax increases come from:

1) Obamacare tax increases finally taking affect (Remember that the law was originally passed in a way that the people would not see the most direct costs until after they had been able to vote him in again.)

2) Increases in social security withholding that everyone in America who works will pay.  (Social Security needs a major overhaul in order to survive and an honest politician would address that now because the longer we go, the more impossible the situation becomes.  That may have been the greatest attempted deed of George W Bush who tried to tackle the problem, but just about everyone else in Washington ran from him like he had the plague.)  So you won’t find us complaining about them addressing the massive underfunding of Social Security promises in some small way….until we remember that the politicians just blow the money on other projects and don’t actually save it for future Social Security needs that is!

3)  Increases in capital gains and dividend tax rates for everyone.

4) Increases in taxes coming and going if your a high income earner.  They begin taking away deductions at around $200K  and really hit you starting at $400K.

That’s just a quick summary, see the piece for details.

Again, as we said before, the increases in taxes directly hurt the economy, so we could see the economy slow slightly from this over time.  But it was a much smaller tax increase then would have happened without the deal, so the impact will be much smaller and is only one factor in the complex equation that determines growth or recession.

The more important question for our long term health is will they tackle the massive spending problem over the next month in a half in this debt ceiling debate?  The answer will almost assuredly be NO, but we wait and see.

You can read the two previous pieces on the Fiscal Cliff here:  1) Fiscal Cliff Intro & 2) Examples of Higher Taxes Lowering State Revenue.

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