{A Primer} The Fiscal Cliff

The Fiscal Cliff that Everyone Is Talking About 
By Courtney D. Ward

What in the world is a “fiscal cliff?” If you’re not too sure what is means, its best to know now. Dr. Thomas “Danny” Boston, Georgia Tech economics professor and CEO of EuQuant, states in his article, Understanding the Fiscal Cliff: Part I, “The fiscal cliff is a figurative expression designed to convey the economic pain that is likely to occur if the tax cuts and spending policies, put in place by Congress and the President to stimulate economic growth, all expire at one time.”

The economic pain Boston is referring to will not only affect the middle class, but private and public entities as well. The total budget deficit reduction caused by the fiscal cliff, i.e. through tax increases and automatic spending cuts is estimated by Dr. Boston to be around $607 billion.

In January 2012, the Joint Committee of Taxation published the Listing of Expiring Federal Tax Provisions 2011-2022. This listing gives specifics on each tax provision. For the entire listing visit https://www.jct.gov:

 Reduction in other individual income tax rates: size of 15 percent rate bracket modified to reflect 10 percent rate, and 28 percent, 31 percent, 36 percent, and 39.6 percent rates are reduced to 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

 Dependent care credit: increase of dollar limit on creditable expenses from $2,400 to $3,000 ($4,800 to $6,000 for two or more children), increase of applicable credit percentage from 30 to 35 percent, increase of beginning point of phase-out range from $10,000 to $15,000.

 Work opportunity tax credit targeted to hiring qualified veterans.

 Employer-provided educational assistance expansion to graduate education and making the exclusion permanent.

 Election to accelerate AMT credits in lieu of additional first-year depreciation

 Education Individual Retirement Accounts (Coverdell education savings accounts): increase of maximum annual contribution from $500 to $2,000, expansion of definition of qualified education expenses, increase in the size of the phase-out range for married filers to double that of unmarried filers, provision of special needs beneficiary rules, contributions by corporations and other entities, and contributions until April 15th, permitted.

 Refunds disregarded in the administration of Federal programs and Federally assisted programs.

If you recall, the Bush tax cuts in 2001 and 2003 were only intended to be in place for a short period of time to give relief to the middle class; however, these tax cuts have led to an increase in the deficit, and they are still place.

What Next? The last day Congress will be in session is on Dec. 14th and our economic future rests surely in its hands. When in session, the live recording can be found here http://house.gov/.

President Obama’s Stance

In a news conference held on Nov. 14th, President Obama, addressed reporters and the public by expressing Congress’s pressing task to work together. “We face a very clear deadline that requires us to make some big decisions on jobs, taxes, and deficit by the end of the year. Both parties voted to set this deadline and I believe that both parties can work together to make these decisions in a balanced and responsible way,” said President Obama. Forbes.com reported “The cuts hit all areas of the federal budget, including a $55 billion reduction to the Pentagon’s budget in 2013, a reduction of payments to physicians participating in Medicare, substantial cuts to FEMA and the Department of Education budget, along with a host of serious reductions across the wide ranging operations of the federal government.”

The Bowles-Simpson “Chairmen’s Mark” Deficit Reduction Plan

There is a solution on the table, and its something Congress can consider. Erskine Bowles and Alan Simpson, co-chairs of President Obama’s Deficit Commission, have released a “Chairmen’s Mark,” a broad plan to reduce the federal deficit by cutting spending and raising taxes. The plan includes various options that would impose different changes on the tax side of the fiscal equation. The first option, “The Zero Plan,” would, among other things, pare away most tax expenditures, devote $80 billion annually to reduce the deficit, and use remaining revenue gains to cut tax rates.

The Tax Policy center has analyzed the distributional effects of three variants of the Zero Plan:

1. Eliminate all tax expenditures—for both income and payroll taxes—except the EITC, the child credit, foreign tax credits, and a few less common preferences.

2. Eliminate tax expenditures only for income taxes, not for payroll taxes.

3. Eliminate tax expenditures only for income taxes—not for payroll taxes—but cap and restructure the tax benefits for mortgage interest, employer-sponsored health insurance, and retirement saving instead of eliminating them. http://www.taxpolicycenter.org/taxtopics/Bowles_Simpson_Brief.cfm
Here are links that further discuss the fiscal cliff:

http://topics.nytimes.com/top/reference/timestopics/subjects/f/federal_budget_us/index.html http://www.forbes.com/sites/rickungar/2012/11/10/the-fiscal-cliff-explained/ http://www.taxpolicycenter.org/taxtopics/Bowles_Simpson_Brief.cfm https://www.jct.gov/publications.html?func=startdown&id=4383