The Fiscal Cliff

There is sure to be a lot of talk now about the fiscal cliff, a huge set of $500 billion dollar tax hikes and spending cuts that will go into effect if congress does nothing before the New Year.   How will this confluence of economic events affect your bottom line?

If nothing is done, there will be about $1 trillion in expenses trimmed from the federal budget, including cuts to defense.  Nearly 90% of Americans would have some form of an increase in tax.  The 2 year temporary tax cut on social security (up to ~$2000/year for an individual) will expire as well as the Bush Tax Cuts of 2001-2003. In addition, the temporary AMT patch will expire along with the extension of unemployment benefits.

Lower income taxpayers will lose 2 valuable credits on their 2013 filings that were extended under president Obama in 2009.  The Earned Income tax credit (EITC) and the Child Tax Credit were designed to lift Americans above the poverty line by giving them a credit for actually going out and working.  Families who receive this credit tend to spend the money locally and quickly and this strengthens the local economy.

Higher income households would be hit with higher tax rates on ordinary income, capital gains, and dividends and those making more than $250,000/year will get hit with a 3.8% healthcare surtax on their unearned income.  The marginal tax rate on ordinary income will also rise, and there is concern that that would potentially effect economic decisions.

In the very short term I hope President Obama can work with the lame duck congress to get an extension of the status quo, at least for a few months while the new legislators get settled.  Then it is game on! If I were in Congress I sure would like to improve upon my 20% approval rating.  I would like to be known as someone who could get things done for the betterment of the American people.

Click below to isten to morning guy Win Damon and I review the fiscal cliff on wnbp.com and FM 106.1 in the Newburyport Area


With more than 23 years of experience as a credentialed tax professional, Stu Steinberg, CPA, MBA brings a broad depth of knowledge to his work. He has worked with families and small business entrepreneurs for many years helping them plan more effectively. He can be reached at stu@erocktax.com or (781) 247-5569 anytime

The deficit – and what to do about it

Very recently a friend messaged me and said: Stu, I know you vote socially, and I appreciate that. But what is your economic opinion of the deficit and economic development and how can we best solve this major financial threat to our country? Taking the social issues out of it, Stu, what do you think will work best for our country? I am turning to you because you are a smart guy about the financial space – smarter than I am, and I am very concerned about this particular issue.

This is really the trillion dollar question! The national debt is over 16 Trillion dollars, amounting to $55,521 (1) for every person living in the United States or $136,158 (2) for every family. This is debt that is entirely owned by the United States Government, not debt owned by American Corporations, which are flourishing right now with tremendous balance sheets and lots of investible cash

Most experts feel that both candidates fail in their attempt to balance the budget. President Obama will try and achieve primary budget balance, where all federal spending would be paid by federal revenue, except the interest on the debt itself. This would add 6 trillion to the deficit over the next 10 years however as it contains no changes to the current Medicare program as we know it. We know in a second term for Obama this issue would most certainly be addressed.

The very broad plan put forth by Mitt Romney includes tax cuts, decreased spending, as well as income tax and entitlement reform, with absolutely no specifics.  Romney would also plan to spend 2 trillion more than President Obama on the military over the next decade, and will fund that with more spending cuts that he has yet to introduce to the American people.  Mix all this in an economic trickle down blender and this could spur economic growth say team Romney.

Here is what I feel this all means.  We are in debt, but we can overcome it for sure.  It will have to be a partisan compromise, and I feel the debt is SO MUCH more a political issue than a financial issue.  As recently as Year 2000 we have had a budget surplus.  So it can be done.  Revenue collected today by the Federal Government is at the lowest levels in 60 years when compared to Gross Domestic Product.  Spending is also at the highest levels since World War II as well.  Both areas can be addressed by increasing taxes on the very rich and reforming Medicare and social security to account for the aging population.  These will hopefully be addressed in the immediate future by either candidate.

This is what I would do.  I agree totally with Robert Reich, Professor of Public Policy at University of California at Berkeley and former Secretary of Labor for the Clinton administration (www.robertreich.org). We should put 2% surtax on wealth in excess of 3 million. Also, we should impose a 1/2 of 1 % transaction tax on every financial transaction, as well as restoring the top tax rates to where they were before Reagan was President.  We would use ½ of this savings to pay down the federal debt and the other ½ to make sure EVERY American gets a world class education. The USA is slipping way down in the world rankings in education, and we should be ashamed of ourselves for letting this happen.

I hope this budget mess can be solved in the next four years.  Or at least be put on the right track toward a solution.  A balanced budget can be accomplished, but we will need all parties pulling together and not crying and screaming at each other like a bunch of little children.  We must as a nation improve on the 8% approval rating for congress.  What a shame!

With more than 23 years of experience as a credentialed tax professional, Stu Steinberg, CPA, MBA brings a broad depth of knowledge to his work. He has worked with families and small business entrepreneurs for many years helping them plan more effectively. He can be reached at stu@erocktax.com or (781) 247-5569 anytime

 

[1] U.S. Census Bureau, Population Division, July 2012. http://www.census.gov/popest/data/national/totals/2011/index.html

“Resident Population … June 1, 2012 [=] 313,650,302”

CALCULATION: $16,159,487,013,300 debt / 313,650,302 people = $51,521 debt/person

[2] U.S. Census Bureau, November 2011. http://www.census.gov/population/www/socdemo/…
Total households = 118,682,000
CALCULATION: $16,159,487,013,300 debt / 118,682,000 households = $136,158 debt/household

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