Much has been discussed recently about the so-called fiscal cliff that results mainly from repeal of the Bush-era tax cuts along with other financial breaks implemented under the Obama administration. There are three things most of us need to know about the “cliff.”
First, it is not a cliff that has its full impact felt on Jan. 1, 2013. The world will not end on Jan. 1. The expiration of these tax breaks begin in January and will have an increasing impact throughout the year. As such, one-twelfth of the impact will be felt during January, as well as subsequent months.
We think of the fiscal mess as more of a “soap box derby” race started at the top of a very steep hill. In the first month, our soap box racer is just getting started with plenty of opportunities to keep us on course.
However, with every passing month, our race course gets steeper and steeper. As such, if our elected leaders fail to incorporate a viable solution the increased tax burden associated with the fiscal slope becomes dramatic – with our soap box racer recklessly gaining speed.
As we all know, soap box race cars have no brakes. We are relying on our elected leaders to use wise fiscal policy to smooth out the bottom of the race course and keep our nation under control.
If nothing is done to fix this issue, it is estimated that our nation will slip back into a recession.
Secondly, this is not an issue that affects only “rich people”- regardless of how you define “rich.” In fact, according to studies by the Tax Policy Center, about 90 percent of Americans will face larger tax bills next year with low-income families suffering some of the hardest hits.
Although marginal tax brackets will increase – a variety of tax breaks will be reduced or end altogether. This means that more than 120 million households will have their payroll tax rate increase from 4.2 percent to 6.2 percent.
The provision to reduce the “marriage penalty” will also expire at the end of the year penalizing people who file a joint return.
About 5 million Americans will lose their federal unemployment benefits at the end of 2012 and the Alternative Minimum Tax will continue to snag more and more middle income Americans.
Low income Americans will be further affected by reductions in the expanded child credit and earned-income credit, as well as tax breaks for college costs.
On average, the Tax Policy Center estimates that middle income families with income between $40,000 and $65,000 will pay an additional $2,000 in taxes during 2013 alone.
The wealthy will pay up, too. Although high income earners may see their average tax rate increase less in percentage terms, their tax bill will increase the most in terms of dollars as they continue to pay the majority of federal tax revenues.
A third consideration, separate and in addition to the “fiscal cliff,” is that new taxes to pay for Obamacare will go into effect Jan. 1.
Our elected leaders must realize there are only so many tax dollars to go around before you risk killing the economic engine that powers our economy.
With the election finally over, and the control of the White House and Congress staying roughly the same, our elected leaders must compromise and solve this problem logically. Any intelligent discussion on taxation should be coupled with logical spending controls. If we only address taxes – without a sincere and meaningful discussion on spending cuts, our soap box racer will remain at risk.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.
Originally published Tuesday, November 27, 2012
Victoria Advocate