I decided to do this series because a friend of mine asked why
Fed Chairman Ben Bernanke
was warning
Congress about a “fiscal cliff.”
Coincidentally that afternoon I found an article discussing the “fiscal
cliff” and its ramifications, so I decided to do some digging.
The “fiscal
cliff” refers to the end of many stimulus tax measures (payroll-tax cut,
investment tax credit, enhanced unemployment insurance), the Bush tax cuts, and
automatic spending cuts called “sequester” at the end of 2012. It is automatic austerity. Here is a rundown:
- Tax Increases
- Under status quo at the end of 2012 roughly 42 tax benefits will expire at the end of 2012. (Source 1)
- The 2001 and 2003 tax cuts are set to expire. This includes tax rates on those making over $250K as well as qualified dividends and in particular the 15% rate on long term capital gains. (Source 2)
- The Payroll tax cut will expire at the end of 2012, increasing from 4.2% back to 6.2%. (Source 2)
- The Alternative Minimum Tax (AMT), currently at 28% for those filing jointly with incomes of $74K or greater, will drop down to $45K. (Source 2)
- Numerous temporary research and development tax benefits to corporations will expire. (Source 2)
- Spending Cuts
- Automatic, across-the-board cut in domestic and defense spending, called the “sequester”, takes effect, cutting about $100 billion from government spending next year. (Source 3)
- Unemployment benefits for workers who have exhausted the standard 26 weeks of benefits will be phased out. (Source 2)
- At the end of the year the infamous debt limit will hit again, potentially forcing further cuts. (Source 2)
In my next post, I will discuss why this is bad.
Source 1 – Lance Roberts and David Rosenberg.
Source 2 – Walter Kurtz and Goldman Sachs.
Source 3 – The Economist.
