What’s This Fiscal Cliff Thing?

I have been asked it now from 3 clients. It’s the same question – “what’s this fiscal cliff thing I keep hearing about?” Anytime three of you ask me the same question I know it’s well past time for me to create a blog post on it. So here you go…

On January 1, 2013, a number of different policies are set to change all at the same time. Each one on its own is big. Combined, they could lead to an economic nightmare.(I HIGHLY recommend you to take a look at the slide show on the Business Insider website just click here to be taken to the slideshow)

~The 2001 and 2003 (Bush) tax cuts are planned to expire. This would increase the tax liability of almost everyone.
~The Alternative Minimum Tax (AMT) will affect more taxpayers increasing taxes by $132 Billion.
~Payroll taxes are set to increase by $120 Billion.
~Domestic and defense spending are scheduled to be reduced by $86 Billion.
~Unemployment benefits will run out.
~And the debt limit will be hit yet again!

At the same time, a large number of smaller, miscellaneous items will be coming up, like Medicare slashing reimbursements to doctors and hospitals by 25% and a number of corporate tax issues as well.

The Fiscal Cliff and You

If Congress does nothing at all to resolve these issues, many economists like Morgan Stanley and Citigroup are predicting an instant reduction of GDP of 5%. That would put our economy into deep recession if it isn’t already there by that time. You can also expect to see 2008 all over again in the stock market.

Meanwhile, the odds of Congress taking action in an election year are not great. They can barely agree on lunch, much less economic concerns. It’s almost certain that absolutely nothing will happen prior to the election, and that leaves very little time for something to be done before the end of the year.

Who Will do What

My guess is that Congress will end up doing what Congress does best. I suspect they will kick the can down the road and do nothing. In other words, I expect them to extend everything for 6 months to a year and go from there.

Ultimately, it’s a mess. If they could only simplify the tax code (I’ve written about this in past blogs), none of it would be necessary. But I am a realist, so I’m not holding my breath…

Matt Golab

Matt is an Investment Advisor Representative and the Chief Advisor of Aaron Matthews Financial Resources headquartered in Elk Grove, CA.
Just click right here for more information about Matt Golab!

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