What is the "fiscal cliff?" This is a popular term used to explain how the economy wil be affected by the expiration of the Bush-era tax breaks we have enjoyed in previous years. If you look at my previous post, you see that there are many tax breaks that are set to expire December 31, 2012, including temporary payroll tax cuts (which means there will be a 2% increase in a worker's payroll taxes), the beginning of the new Obama Care healthcare law taxes, an increase in personal income taxes (to be exact 4.6% increase) for higher income brackets, and an increase in the capital gains rates (increased from 0% to now 10% for low income earners and increased from 15% to now 20% for higher income earners).
So what does this all mean for the economy? Well, it is speculation, in my opinion. The plus side is that the budget deficit (as a percentage of GDP) would be reduced by $560 billion. But at what cost, you might ask? Higher taxes and huge spending cuts, which could potentially weigh heavily on growth by cutting GDP by nearly 4 percentage points and drive the economy into a recession.
The term "cliff" is misleading, however. This is a term the media has created, which seems to create some panic and frenzy among investors and the general public alike. Failing to make the decisions by December 31st does not necessarily mean that the economy will move into a recession or that the markets will crash.
Any tax law changes or breaks made after the end of the year will most likely have a retroactive date, to relieve some of the pressure.
On a lighter note, I wish everyone a very MERRY CHRISTMAS and a Happy Holiday season. We wish you and your family the very best in the New Year!
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