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Fiscal Cliff: Cure Worse Than Disease?

3 January 2013 by

Fiscal Cliff: Cure Worse Than Disease?

For months, we’ve heard that finding a solution to the fiscal crisis was absolutely crucial for our very survival and just as importantly, we heard time and again that it had to be done by midnight, December 31st. Two things happened: the solution that was necessary for our very survival, as it turns out, just might be worse than the initial problem and too, the world didn’t come to an end because the solution wasn’t put into place before the deadline. Now, here we are, two days later and as with most things, the devil’s in the details.

A few of the headlines that are alarming consumers run the gamut:

  • Payroll Tax Hike Erases Gains for Minimum Wage Workers
  • Deal Sneaks in Wall Street Gifts
  • and our personal favorite:

  • Fiscal Deal to Significantly Damage U.S. Economy

These are just three of the endless number of “gloom and doom” headlines, too.

Your Wallet

So what does this political move mean to yours and my wallets? Will it affect our ability to get credit? Will it affect the way credit card companies issue credit? And what about taxes and payroll? We take a look at all of this – and more.

The short answer is yes, Congress did eventually vote to keep the $600 billion in tax increases from hitting us. Granted it was late and the politicians whined and moaned the entire time – at one time the president even said,

We just didn’t have enough time

(actually, we know they had more than a year to find a solution). And, too, the president took it a step further when he said he’d no longer discuss certain topics with “this Congress”, which suggests the “end” this vote was supposed to provide has done anything but; indeed, there are many hurdles ahead that are going to cause untold damage and unfortunately, there’s still no guarantee that we won’t head into another recession.

Remember, despite all of the brouhaha and bickering and nonsense, this basically came down to two parties with two very different agendas: the Democrats wanted no cuts to their “safety net” programs while the Republicans wanted no tax increases, especially for their wealthy contributors whom they’d promised to protect.

No Deficit Reduction

In fact, this bill will not – in any way whatsoever – reduce the deficit. It adds to it – significantly. It does nothing to rein in the entitlement spending and the CBO says it reduces revenue by more than $3.5 trillion over the next decade. Another school of thought says the debt will be decreased by $650 billion over that same decade, which is ridiculous. It’s like throwing pennies to a credit card debt that totals into the thousands: those pennies aren’t even going to touch the interest that accrues.

Taxes

Taxes on the rich are increased, which is good for the president. And if you’re one of the “rich” who earns more than $400,000 annually, you’re going to be hit in a number of other ways, too. Your deductions on your taxes will be shrinking. On the other hand, if you’ve struggled in your job search, you can now breathe a bit easier for a bit longer as the unemployment period was extended and the Social Security cost of living increases are protected, too. Those are two very good things that remained for millions of Americans. Other than that, though, that’s pretty much going to be the end of the good news for all of us.

Pub Problems

Remember, too, the Pubs are now facing big problems as they turn to their constituents, whom they’d promised not to raise taxes (most signed Grover Norquist’s no-tax-increase pledge). We are now looking at the largest tax increase since 1990. And when we say “tax increase”, we’re not talking only for the rich. All of our taxes are going up somewhere, somehow. Here’s how it breaks down: Federal taxes increase for a full 77 percent of Americans. Remember the 2 percentage point payroll tax we’ve all enjoyed? It expired. If you earn $50,000 a year, you can expect a hit of about $82 a month. Remember, that’s $82 that you can’t apply to your credit card debt, or put into retirement or in your child’s college fund. The numbers get worse the more you earn. After all of the taxes (including many not included here because we’re just not sure how it’s all going to “land”), there will be only one half of one percent of Americans who aren’t looking at a tax increase.

Wondering how this is going to affect unemployment? It should be noted this is still being debated. Many economic analysts vehemently believe small businesses will be forced to lay off workers, cut hours and eliminate pay raises. Other analysts are just as adamant in their belief that this new package won’t affect small business owners. Again, it’s important to remember the details haven’t been hammered out in their entirety yet, so there’s a lot of gray area. This is just as maddening, though, and goes back to the fact our elected leaders had ample time to hammer these details out.

Debt Ceiling

So what’s on the horizon? Remember, as we were all watching the so-called fiscal cliff, we also hit the debt ceiling, ironically, on New Year’s Eve. This means the Treasury is going to be moving mountains to ensure the U.S. can…wait for it…borrow money to keep the country moving forward. Later this year, in March, to be specific, the sequestration – $110 billion in across-the-board spending cuts, half in defense and half in domestic programs – kicks us in the teeth yet again. So what could prevent it – you guessed it – Congress doing its job.

As if that weren’t bad enough, in April or May, a law will be expiring that up until now has kept the government from shutting down. Already, teeth are being sharpened as both sides are planning on using it as leverage to even the score board. This, of course, is exactly what the president meant when he said he wouldn’t discuss this again with “this Congress”. Indeed, this is the epitome of a vicious cycle. Make no mistake – there are already whispers that these officials, sworn to keep our country running and out of default, are willing to do whatever it takes regardless of who it annihilates in the process – up to and including the American taxpayer.

Finally, here are a few things everyone should be doing right now. You should be discussing with your advisor your 401(k) since it can be converted, at least partly, to an account similar to a Roth. You should discuss your options, especially since it will require an upfront tax payment. Also, your capital gains and dividends are going to be affected, courtesy of the Affordable Care Act. Also – that tax went into affect January 1 and is what’s being used to pay for the controversial health care coverage.

Ten states also put into place higher minimum wages for their workers. Unfortunately, when the deal was passed, the payroll tax holiday wasn’t part of it and the 2% increase wiped out, in its entirety, the benefits of that bump in minimum wage.

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