Fiscal Cliff: How Steep Are We Talking?

The Bush tax cuts, set to expire after this year, represent only the tip of the fiscal iceberg before Congress. Unfortunately, considerable political attention is being focused on only the highest individual tax rate bracket. What’s actually at stake is of much, much more fiscal significance and can be divided into two parts.

"Taxmageddon," a nearly $500 billion per year increase in taxes starting day one of the New Year and federal spending cuts totaling more than $100 billion.

The list below outlines the variety of tax and fiscal matters that will require congressional action before the end of 2012.

To illustrate the scope of the potential dilemma: The so-called Buffet Rule to tax millionaires at a minimum effective rate of 30 percent would generate a relatively minuscule $5 billion annually. That number pales in comparison to the dollars involved with any one of the issues outlined. Examples: The payroll tax holiday costs $117 billion, the sequestration is $110 billion and another Alternative Minimum Tax (AMT) patch is $92 billion, while the extenders account for $78 billion. Or compare that potential $5 billion in new revenue to the amount of tax that simply goes uncollected each year – estimated by the U.S. Treasury to be $450 billion a year.

Many economists fear Taxmageddon alone would plunge the nation into another recession. Yet politicians continue to fight over philosophy, thus ignoring the big (dollar) picture that could have so much impact. The issues are many, the dollars are huge and the time is short. Little is likely to get done before the election. This leaves only a limited number of weeks in November and December for a lame duck Congress to resolve a collection of massive fiscal issues that have been stymied by the Washington gridlock for over two years. On the positive side, these are not new problems. They have been debated many times and a lot has been hashed out previously.

On the negative side, persistent disagreements remain. These are all politically sensitive matters, with middle grounds elusive and few details considered minor. It will entail much debate, necessarily involve negotiation and maybe even require some (dare I use the word) compromise. Can some kind of "grand bargain" be struck, or will they drive us off the fiscal cliff?

Although there are differences in viewpoint, philosophy and principle, there is a bipartisan recognition that these items must be addressed. And there is even some level of consensus on many of them. Sadly, the most probable result is that Washington policy leaders will take the approach that has been applied too many times already and choose to kick the can down the road by passing more temporary measures. But in this case that would still be far better than their other favorite practice – doing nothing. Perhaps by buying some time this go-around, policy makers can set the stage for making broad, comprehensive reforms next year. Eventually, they must take that step if they hope to avoid an even more treacherous and bigger fiscal cliff that looms somewhere on the horizon.


The Bush Tax Cuts
Expire, revert back to higher rates at year’s end
Current rates of 10, 15, 25, 28, 33 and 35% go back up to 15, 28, 31, 36 and 39.6 percent

Alternative Minimum Tax (AMT)
No patch in place for this tax year (2012)
Some 30 million taxpayers will pay more unless exemption amount is adjusted for inflation

Capital Gains
Revert back to higher rate at year’s end
Current rate of 15 percent goes back up to 20 percent

Qualified Dividends
Special rate expires
Current rate of 15 percent goes away, will be taxed at ordinary income rates

Estate, Gift Taxes
Revert back to higher rates and lower exclusion
Current maximum rate of 35 percent with $5M exclusion goes back up to 55 percent with only $1M exclusion

Extenders/Numerous Other Tax Provisions
Some 80 changes to deductions, credits and exclusions expire
Business examples: research and experimentation credit, $179 enhancement of the deduction for equipment. Individual examples: marriage penalty relief, child care, earned income credit

The “Doc Fix”
No extension in place
Medicare reimbursements to physicians will drop 27 percent

Federal Budget
No 2013 budget or appropriations bills have passed
Poses the threat of government shutdowns

The Budget Control Act of 2011 goes into effect
Will cause indiscriminant 10 percent cuts to defense and 8 percent for other non-discretionary spending

Payroll Tax Cut/Holiday
Terminates at year’s end
Rates will go back up by 2 percent

Unemployment Insurance
Extended benefits end 1/1/13
Long-term benefits scaled back when temporary benefits end

Debt Ceiling Limit
Will have to be raised by year’s end (or very early next year)
Jeopardizes credit rating and unnerves stock market

Affordable Health Care Act Taxes
Go into effect next year
Imposes 0.9 percent Medicare tax on high income individuals and a 3.8 percent Medicare contribution tax on unearned income; also a substantial new tax on medical device manufacturers