What the ‘fiscal cliff’ means to you
By TERRY SAVAGE email@example.com or @TerryTalksMoney November 7, 2012 1:28PM
A television feed on the floor of the New York Stock Exchange shows Pres. Barack Obama, left, and his daughter, Malia, the day after he was re-elected, Wednesday, Nov. 7, 2012 in New York. With President Barack Obama elected to another term, U.S. investors dumped stocks Wednesday and turned their focus to a world of problems, including a "fiscal cliff" of tax increases and spending cuts at home and a deepening recession in Europe. (AP Photo/Henny Ray Abrams)
Updated: May 3, 2013 12:15PM
Q. What’s changed in our economic outlook as a result of the presidential and congressional elections?
A. Nothing. We have just edged a lot closer to the “fiscal cliff,” meaning we are coming closer to the possibility of tax increases and spending cuts that could destroy our fragile economic recovery.
These are changes that will affect everyone from the poorest recipient of government aid, to the middle class, which will find less in their paycheck and more on their tax bills, to the wealthy, who will not only pay more taxes on income and investment earnings, but send more to the government upon their death.
The balance of power has not changed as a result of this election. The closeness of the outcome means neither the Republicans nor the Democrats have a mandate to rule or an incentive to compromise. And, as part of the cliff, the looming debt ceiling crisis threatens to shut down our country’s borrowing power — and with it, the ability to pay the government’s bills. A default on refinancing our bonds as they mature would wreak havoc on the world financial system.
There is no single number to put on the “fiscal cliff.” It is designed to “find” $7 trillion over the next 10 years, through a combination of tax increases and spending cuts. But the true cost could be far greater, as the economy is impacted by this sudden shock.
That’s the cliff. It is a long way down — when it comes to the individual, national and global economic impact. Strictly on a personal level, here’s what you’re likely to see happen if the two sides can’t get together:
♦ Payroll Tax Hike: The payroll tax will be going back to 6.2 percent in January from 4.2 percent, leaving you with less money in your paycheck — and the economy with $120 billion less in consumer spending.
♦ Expiration of Bush tax cuts: Rates move up for all brackets, with a top of 39.6 percent. And capital gains rates jump from 15 to 20 percent.
♦ Dividend tax increase: The rate will rise from the current 15 percent to ordinary wage tax rates, hitting seniors trying to live on their dividend income, as well as mutual fund dividend distributions. No wonder the stock market isn’t celebrating.
♦ Alternative Minimum Tax: This tax, once designed to catch the wealthy with “too many” deductions, will return to 2001 levels, directly hitting the middle class — raising taxes on about 26 million households by an average of $3,700.
♦ Marriage penalty “fix” is eliminated: The standard deduction for married couples will no longer be twice that of singles, resulting in a tax penalty for married couples.
♦ Earned income credit is eliminated: The working poor will be hit hard by the end of this credit, along with the expiration of the 10 percent income tax bracket, which will revert to 15 percent.
♦ Estate tax exemption drops: Exempt amount reverts to $1 million (from the current $5.12 million) and a 55 percent top rate. This impacts the middle class directly if you consider the total value of your home, your retirement accounts, and your life insurance, if you own it personally.
Surely, there will be some sort of compromise worked out in the next few weeks, by the lame-duck Congress and the re-elected president. But they had better be quick about it. Talking about a “big deal” to restructure the tax system won’t save us from the imminent changes that will take place within 60 days. Only swift and broad action through compromise can save us from the fiscal cliff and give us a soft landing. That’s the Savage Truth.