November 2012
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With a Fiscal Cliff Looming
As the end of the year approaches, we are reminded that tax increases and mandated federal spending cuts are scheduled to take effect on January 1, 2013, unless U.S. policymakers can successfully find a nonpartisan solution to avoid this looming “fiscal cliff.” On the upside, the fiscal cliff will achieve deficit reduction, but at the price of potentially pushing our already weak economy back into recession. This obviously isn't a sound way for our nation to achieve its objective of fiscal responsibility.
To accomplish the goal of reducing annual federal deficits, and ultimately whittle away at the national debt, a combination of increased revenues and spending cuts is necessary. So far, however, political gridlock has provided the excuse to simply kick the can down the road and avoid making tough choices. The result is a poorly timed compromise that satisfies no one.
Tax Increases
According to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution (http://www.taxpolicycenter.org), taxes will increase by approximately 20% ($500 billion) in 2013, absent any action by legislators. On average, middle-income households will pay almost $2,000 more. There are several reasons for these tax increases, but the major culprits are the expiration of Bush-era tax cuts, termination of stimulus credits, resumption of the full (6.2%) Social Security payroll tax, expansion of the alternative minimum tax (AMT), and new taxes resulting from the 2010 healthcare legislation—the Patient Protection and Affordable Care Act (P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (P.L. 111152). Many of the tax cuts that will expire on January 1, 2013, were originally intended to be temporary measures to spur economic growth at the time they were enacted, but the patches to address the AMT's creep into middle-income tax brackets were a stopgap until more complete tax reform could be introduced.
In the hundred years since the U.S. income tax was first enacted, only a handful of major reforms have taken place. Incremental and temporary changes made over the years have contributed to the high degree of complexity and uncertainty in our tax code regarding individual income taxes, corporate taxes, estate taxes, and payroll taxes. A complete overhaul is long overdue.
Federal Spending Cuts
In August 2011, the House of Representatives and the Senate voted to enact sequestration as a means of incentivizing Congress to reach agreement on a fiscally responsible, bipartisan budget. No one expected that the draconian, across-the-board cuts would ever be implemented. An Office of Management and Budget (OMB) report, pursuant to the Sequestration Transparency Act of 2012, outlined more than $109 billion in annual reductions—evenly split between defense and nondefense functions—and made it clear that these cuts “would be deeply destructive to national security, domestic investments, and core government functions” (http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf). Some of the planned cuts on the nondefense side include budget reductions for the Government Accountability Office ($42 million), Customs and Border Protection ($712 million), Food Safety and Inspection Service ($86 million), and the National Institutes of Health ($2.5 billion). In addition, most defense programs will see budget cuts of 9.4% to reach the $54.667 billion total.
If our legislators can't reach a workable fiscal agreement soon, it is anticipated that the government will hit the debt ceiling by early next year. Perhaps the threat of a government shutdown will get policymakers in Washington to act, but it's difficult to imagine that a lame-duck Congress will reach agreement on a long-term budget and tax policy compromises that politicians have failed to achieve for the past decade.
I would like to believe that our democracy still holds the promise of opportunity for future generations that our ancestors found here. Meanwhile, our economy keeps limping along. But despite our lingering fiscal woes, the United States is still the best-looking horse in the glue factory.
As always, I welcome your comments.
The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.