The “Fiscal Cliff”

It seems that everywhere I turn these days, the “buzz” is about the “Fiscal Cliff.” The news media has taken to predictions of collapse and chaos like nothing since the dreaded Y2K Millennium Bug. Businesses and individuals alike are being cautioned daily of the impending economic disaster that will result when the federal government falls off the “Fiscal Cliff” in January 2013. Seeing the hype in the media, but being mindful that the Y2K “buzz” turned out to be less than cataclysmic, I couldn’t help but wonder: ”What is this “Fiscal Cliff”? And are we all really going to plunge from it into disaster?” So I started reading, and here’s what I found:

In its simplest form, the “Fiscal Cliff,” is comprised of a combination of three things:

1. The expiration of tax cuts. Tax cuts passed by Congress in 2001 and 2003, and then extended in 2010, are slated to end. Beginning in January 2013, federal tax rates on the top four income tax brackets, corporate dividends, long term capital gains, and numerous other items will revert to higher levels, which were in place pre-millennium. Income limits on itemized deductions will also be reinstated. The reversion to these higher tax rates, if left in place, is expected to cost U.S. businesses and taxpayers an additional $221 billion next year.

2. The expiration of a 2% payroll cut for the majority of working Americans. Two years ago, Congress passed a 2% payroll tax cut. This cut was extended through 2012 but is set to expire at the end of the year. The additional 2% payroll tax, which American workers will begin paying in 2013 if nothing is changed, is estimated to cost working taxpayers an additional $95 billion in taxes next year.

3. A mandatory $1.2 trillion reduction in federal spending. Yes, that’s correct: trillion. In connection with the Budget Control Act of 2011, the federal government must reduce its spending starting in 2013. The $1.2 trillion dollars will come out of defense spending, unemployment benefits, Medicare, and a host of other government programs, at the same time that taxpayers are taking home less from their paychecks.

The combination of these three things (and a few others) is expected to push the U.S. government off a “Fiscal Cliff” and push the U.S. economy back into recession, stifling the economic recovery which most agree is underway. Unemployment is expected to rise significantly, and the impact of falling off the Fiscal Cliff is expected to reach most Americans fairly quickly.

But the questions remain: “Will all of this actually happen? Or is this just another Y2K–like false alarm?” The answer lies with Congress. The Fiscal Cliff was created by Congress and can be averted by Congress. Congress can agree to extend some or all of the tax cuts, to pass legislation that overrides the Budget Control Act of 2011, or to provide a different alternative altogether. The catch is that Congress must agree on a plan of action and do so before the end of 2012.

A review of the potential ramifications of the Fiscal Cliff for your business and personal affairs is recommended. If the government plunges over the cliff, your family and your business will need to make adjustments. And a call to your U.S. Senator and Representative to urge him or her to work with fellow statesmen on both sides of the aisle might be worthwhile as well.

At Wright Beamer, we are monitoring Congressional Fiscal Cliff negotiations carefully. Look for more information to come as we continue to update and advise you of potential developments.

For an in depth look at the tax provisions which are set to expire at the end of 2012, including an easy to read table showing tax increase comparisons at pages 8-11, see the Congressional Research Service report for Congress:

Recent Blog Posts

Before the Sun Sets

Transparent Time

Here’s a Tip!