Okay, just what is this “fiscal cliff” that we are about to fall off? How far will the drop be if we go over it? Are Congress and our President supposed to save us from going over this cliff? If so, I think we may be in trouble.
It seems like the lead story in the news media ever since the November election has been the probability that the U.S. economy will fall off the “fiscal cliff” after the first of next year. They say this will happen unless both parties in Congress and President Obama can reach some sort of agreement concerning taxes and government spending. Unless this happens, previously mandated severe spending cuts and tax increases will take effect. Economists and business experts predict that if this happens it will have a dramatic effect on our nation’s economy.
So, what is involved in this “fiscal cliff” and why will it have so much effect on the economy? Probably the best explanation I’ve seen was written by my friend Dale Denning in a newsletter he wrote last winter for the clients of Denning and Sessoms, P.A., CPA firm. Dale saw all this coming almost a year ago. He wasn’t too sure about who was going to be president, but he knew there were some important items that needed to be dealt with. Evidently, the politicians in Congress and our president have felt that there were other things more important, like getting re-elected.
So what will happen if the folks in Washington can’t reach an agreement? In his CPA style, Dale wrote in the newsletter, “The Bush Tax rate cuts are scheduled to expire at the end of 2012. The favorable tax rates on the capital gains, and ordinary dividends also expires at the end of 2012. In 2013 itemized deductions and personal exemptions will once again be subject to a phase out for high income taxpayers. The current five million estate tax exemption is reduced to one million for individuals dying after 2012. The estate tax rate will increase to a range of 45 percent to 55 percent for all amounts above the one million dollar exclusion.” (In other words, if you are a farmer and maybe you own some farmland, livestock houses, and farm equipment, it can add up to a million dollars in a hurry. So, if things don’t change, don’t plan on dying after December 31. The same goes if you own a small business, etc. That’s my comment, not Dale’s.)
If an agreement is not reached in Washington, it is estimated that 88 percent of Americans will be facing a tax increase in January. If nothing is done about U.S. government spending, there will be another trillion dollars added next year to our already over sixteen trillion dollar national debt. To get around a spending and deficit deadlock last year, Congress set a deadline of Dec. 31 of this year to reach an agreement or automatic cuts would take place. About this Dale wrote, “Congressional mandated budget cuts of 1.2 to 1.5 trillion over 10 years with 50% defense and 50 percent domestic cuts will automatically become effective on 2013 if the budget super committee can not reach a consensus on what to cut. No action is expected prior to the election on November 6, 2012.”
Dale was right about that when he wrote the newsletter almost a year ago. But our Congress and our President have been too busy to reach some sort of agreement. But now that the election is over, and Congress is back from its Thanksgiving break, (They have only been in session for a couple of weeks since August) and President Obama is back from his trip to Thailand, (He did ask a Buddhist monk to pray for our economy) maybe they can work things out before the end of the year.
Why have Congress and the President not acted before now in order to avoid the fiscal cliff? The main reason is because they are human. Human nature is to put off as long as possible anything that may be difficult or painful, even if it is necessary. (Also, it is human nature to blame others when you delay and not take the necessary action. Like I said, the folks in Washington are human.) And getting our country’s economic house in order is going to be just that, difficult and painful. But, like with many other things we face in life, you can delay too long and the difficulty and pain will be much greater than it should have been. The tragic thing is that you can delay too long and you won’t be able to recover. I hope that is not the case for our economy and our country.