Fiscal Cliff – Republican’s Punt to the Democrats
House Speaker Boehner called off a vote on a Bill that would have maintained most of the current tax rates (except for $1 million wage earners). Apparently, it may not have had enough votes to pass. Fiscally conservative House members are not planning to vote for a bill that raises any income tax rates and does not seriously reign in government spending. Finally, some politicians have taken a stand on government spending. The last time this was d0ne was in the mid-90’s with a conservative revolution led by Newt Gingrich and President Clinton agreeing to curb spending and balance the nation’s budget.
Now the ball in squarely in President Obama and The Democrat controlled Senate’s yard to draft a palatable plan for both parties.
In the meantime, expect the media frenzy to be intensified (this will be covered 24/7) and the stock market to be volatile. Watch the VIX as it is a good measure of “fear” by stock market investors. The sky is not falling (although stocks could be in for a significant short-term decline) and significant spending cuts are the most important part of any agreement for the best interest of our country. Falling off the Fiscal Cliff would bring meaningful spending cuts while, unfortunately, taking significantly more money from our paychecks and taxing capital gains, dividends and estates at higher rates for everybody.
As a financial planner, I’m a “numbers guy” and it makes no sense to get excited about raising taxes on people making over $250,000 by two percent as the President has been requesting. If tax rates go up by 2% for people with taxable incomes over $250,000 it might raise $80 billion in tax revenue which would only pay the interest on our current national debt balance for 10 days!
The media’s focus is on raising taxes on higher income people despite the insignificant financial difference it makes to our debt. Even if we taxed Americans earning over $1 million on 100% of their income, we would raise only about $600 billion in revenue.
It doesn’t take a Certified Financial Planner to know that if you spend significantly more money than you have, it will eventually be problematic.
Three Part Financial Mess
Part 1. Falling off the Cliff means – Bush tax rates expire and income, dividend, capital gain and estate taxes go up. If not corrected, the Alternative Minimum Tax (AMT) will also hit almost 30 million additional households, and could hit some couples making as little as $45,000 and individuals making as little as $33,750, according to the IRS. Just four million households had to pay the tax in 2011. The average tax increase for affected households would total almost $3,700 for 2012, according to the Tax Policy Center.
Three Hundred Billion dollars in spending cuts are mandated as part of the Sequester portion of the Fiscal Cliff. The reason the Cliff is drawing all the attention is that there would be some real financial pain for most citizens if tax rates go up and the government handed out less money to people. Unfortunately, even if we fall off the Cliff and all this happened the government would still probably spend around $500 billion more than we pay in tax each year which would be added to our huge national debt.
Obama and Boehner, Both Reckless Spenders
In negotiations over the so-called fiscal cliff, U.S. President Barack Obama is calling for $1.4 trillion in new tax revenue over the next decade. The Republican opposition, led by House Speaker John Boehner of Ohio, has signaled that the Republicans could stomach generating as much as $800 billion in new revenue over the next decade, or half of Obama’s number.
Such a large difference obscures a more fundamental agreement: Neither side is interested in addressing the central role federal spending plays in creating persistent deficits and, more important, damping economic growth.
The deficit for fiscal 2012, which ended on Sept. 30, came in at about $1.1 trillion, marking the fourth consecutive year that the nation has posted a trillion-dollar-plus spending gap. Contrary to what Dick Cheney said when he was vice president, deficits do matter.
Under the most recent budget plans of House Republicans and Obama, the federal government will spend from $40 trillion to $47 trillion over the next decade. Yet in the current negotiations, Boehner has called for only $800 billion in spending cuts and Obama $400 billion, most of which would be pushed off until 2022 or later — tantamount to saying they won’t happen at all. Neither side’s long-term spending plans envision a balanced budget in the next 10 years.
The Obama White House’s frightening debt forecast. The president’s own Office of Management and Budget produced this chart showing the long-term fiscal impact of the administration’s 2013 budget plan. When House Budget Chairman Paul Ryan showed Treasury Secretary Timothy Geithner this chart, Geithner responded, “We’re not coming before you to say we have a definitive solution to that long-term problem. What we do know is we don’t like yours.”
Part 2. Budget Deficit (annual growth in government credit balance in past year) = $1.1 Trillion. Fiscal conservatives are focused on this issue. The government needs to only spend what it takes in from taxes and quit borrowing so much money.
For the past four years President Obama has been borrowing money (by selling Treasury Bonds) through what he calls “stimulus” plans and been spending over $1,000,000,000,000 more each year than the government collects in tax. As a portion of the total economy, federal spending increased from less than 20% to 25% under President Obama and is projected to grow to 35% in coming decades. The hike in spending parallels growth of debt. The U.S. has been running annual deficits of more than $1 trillion for the past four years. In order to finance these budget gaps, the Federal Reserve will pump an additional $2 trillion into the economy. Due in part to these trends, the trade weighted exchange rate of the U.S. dollar has fallen about 30% since 2002. For American consumers, this fall means it now costs more to buy foreign-made products such as Japanese TVs and Canadian maple syrup.
Part 3. Government’s cumulative credit card balance also known as the National Debt is $16.4 trillion and growing.
The Congressional Budget Office projects that the national debt under President Obama’s policies will rise to $21.665 trillion by 2022, according to its updated budget outlook. I believe it will be $20 trillion by the time his term is over in 2016. The updated outlook found that current Obama administration policies will result in a 50 percent increase in debt held by the public and a 40 percent increase in intra-governmental debt held in the trust funds of entitlement programs.
“In CBO’s projections, debt held by the public is expected to increase by more than 50 percent between the end of 2011 and the end of 2022, and debt held by government accounts is expected to rise by nearly 40 percent,” the CBO report found.
As a result of this rise in the federal debt (think credit card balance), CBO projects federal debt will reach $21.7 trillion by 2022. This is the problem that needs to be addressed and it is mainly due to the entitlement promises made to an aging population. There is no separate bank account holding on to our social security deposits so that we can get our share with interest when we are old enough to collect. There will be more money spent on senior healthcare (Medicare & Medicaid) than is paid into the system in the future. Unfortunately, most politicians from both parties do not have the guts to tell people they will have to pay more for their Medicare or wait a few more years until they are eligible to receive it in order to fix the system. This is supposedly being addressed by House conservatives in their negotiations, but I have not seen the details.
What should we do?
Politicians from both parties need to spend less at the federal government level.
I agree with Senator Rand Paul when he said the following:
“Every dollar the government takes is another dollar used unproductively. Every dollar removed from the private sector and wasted in the hands of bureaucrats is a dollar that will not be used to purchase goods, to pay for services or to meet a payroll.
Every dollar the government ever takes — today, tomorrow and forever — is an attack on jobs and the economy.
Instead of sitting around trying to think of new ways to vote away someone else’s money, Washington leaders should finally begin to address the real crisis that has threatened us long before the current hand wringing: spending.
With a $16 trillion national debt and well over $1 trillion annually in deficits, we barreled over the edge of fiscal insolvency long before this month.
Why do we lurch from deadline to deadline with no apparent action on our nation’s problems until the next deadline approaches? I presented Social Security and Medicare reform to the Senate over a year ago. I directly spoke to the president and vice president about my plan. And their response? Absolutely nothing!
Is it any wonder people are fed up with their government? The president announces we have no time for spending reforms, but when the deadline passes I predict not one committee will step into the breach to begin the process of reform.
Why? Because Democratic leadership still insists that Social Security and Medicare are just fine. Meanwhile, Social Security actuaries tell us that Social Security this year will spend $165 billion more than it receives. Medicare will spend $3 for every $1 it collects. Yet, the president says he doesn’t have time for entitlement reform.”
Read More At IBD:
Finally, I recommend you look over your financial plan and investments in preparation for volatile markets and higher taxes on income and investment.
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