In just a few weeks we will have a very important and profound election. At the top of the docket is the Presidential election, but lest we forget, we will be voting on the Senate and House also. The outcome of all of the elections will provide answers to how we as a Nation want to deal with our debt and deficit. One of the issues we face in regards to our nation’s finances is termed the “Fiscal Cliff.” The current economic environment and the investor behavior it is influencing is in great part due to the threat of our country falling off the fiscal cliff. Therefore I wanted to take time to explain what it is and the impact it may have on you as an investor.
01All Bush tax cuts are set to expire. The top tax rate would go from 35% to 39.6%; tax on dividends would increase from 15% to 39.6%; long term capital gains would go from 15% to 20%; and estate tax rates would boost from 35% to 55% while the estate tax exemption would go from $5m to $1m.
02The current 2% payroll tax cut would expire.
03Upper income earners (single earning $200,000 and couple earning $250,000) would have an extra .9% Medicare tax. The same households will have their Medicare tax base broadened to include an additional 3.8% capital gain tax on investment income.
04Extended unemployment benefits would expire.
05The two rounds of discretionary spending cuts agreed to in August 2011 would take effect. The goal of these is to cut $1.2b from the federal deficit.
If all of this was implemented, the deficit could reduce substantially. That’s good right? Yes, however, in such a quick stroke, there would be a great chance that our economy would fall into a recession as spending (consumer, business, and government) retracts.
It is estimated that if nothing is done, 83% of U.S. households would pay higher taxes, with the average tax increase totaling $3,701. Also, the Congressional Budget Office projects the U.S. economy would shrink by an annualized 1.3% rate in the first half of 2013. For an economy growing at only 2 – 2.5% or so, this is severe.
Most politicians of both parties know the nature of the problem, but nothing is going to occur before the election in November. Many people conclude there is one obvious outcome, abrupt and immediate. I would suggest there is not.
Author: David Jeter, CFP®, Allegheny Financial Group, September 2012
Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
The above comments are provided for discussion purposes only and are not meant to be an offer of any specific investment.