Over the River and Through the Woods, Off the Cliff We Go….. (Written December 31, 2012, 5:52 pm)

While the Senate appears to have negotiated the tax increase side of the Fiscal Cliff issue, the House has opted not to vote today, December 31st, and they are not in session tomorrow. So at best, the House could vote on Wednesday, or they may not vote on the expiration of tax cuts at all. Good news is that this information came out AFTER the markets closed. That said, unless something is achieved prior to the market open on Wednesday, stocks will close down significantly that morning first thing in the new year. Bandied about has been a bill from the Senate that would raise taxes on single people making more than $400,000 per year and married couples earning in excess of $450,000, along with a permanent fix on inflation creep of the alternative minimum tax, plus an increase to exempt more of an individual’s estate from death taxes.

The Fiscal Cliff is a combination of expiring temporary tax cuts, a pre-agreed cut in spending from Congress’ Joint Select Committee on Deficit Reduction — also known as the Super Committee –, and once again reaching the debt ceiling, requiring Congressional approval for the Federal government to borrow more. (We evidently are at the debt ceiling level, but Tim Geithner, Secretary of Treasury can play some accounting games for a few months to avoid admitting we are bumping the debt ceiling).

The Super committee consisted of six each Democrats and Republicans with an equal number from the House and the Senate. Their binding conclusion was, that, if Congress could not agree on $1.5 trillion of spending cuts over a decade by December 31, 2012, then automatic cuts would take place totaling $1.2 trillion divided evenly over the next nine years split equally between defense and domestic programs. Protected from domestic program cuts were the major entitlement programs.

Thus, with no agreement in Congress, (or least assuming until they do agree in 2013), Federal spending will automatically decline $133 billion per year. Income tax collections would rise $536 billion. Read that as $536 billion less money consumers will have in their pockets in 2013. The Tax Policy Center estimates that the average annual income tax bill (and this is just from Federal taxes) would increase by $3,446 per household (base on estimated changes in taxes and incomes from 2012 to 2013).

That increase would not be equivalent across the country since household incomes are not equal from state to state. The Tax Foundation, a non-profit tax research group in Washington, DC, completed a study this Fall examining the increased incidence of taxation for the typical household in each state assuming an across-the-board expiration of previous temporary tax cuts. They compared 2011 versus projected 2013 incomes, and assumed taxpayers would opt for maximum standard deductions. The following table details median household impact by state of a wholesale reversion back to pre-Bush (43) tax rates. For the entire report and data set from the Tax Foundation, click here.

































Thus, assuming no resolution is reached on the pending tax increases, households making the median income level in Washington State would see their annual Federal income tax bill increase by $3,362 (up 4.12 percent), while the taxes for the median household in New Jersey would jump 6.82 percent with an almost $7,000 annual income tax rise ($6,933).

Most economists believe that the combined one-two punch of decreased government spending plus an increase in taxes would put the economy back into a recession. Gross Domestic Product (GDP) is defined as total U.S. Consumption + Investments + Government Spending + Exports – Imports. That said, the 2012 GDP was $15.094 trillion while 2011 tallied $14.5842 trillion, a gain of $511.6 billion increase from 2011 to 2012. Yet the net effect of fully going off the Fiscal Cliff would be $133 billion annual reduced government spending and $536 billion less in consumer’s pockets after the tax increase. Assuming these two reduced GDP by their combined amount with no multiplier effect, then 2013 GDP could decline materially from the $15.094 trillion in 2012 by $669 billion in 2013, with a GDP of $14.425 trillion (less than in 2011). That would be a 4.4 percent decline in GDP, and would all but guaranty another recession.

And this is all before we see Social Security technically go into default and the new whiz-bang never-to-run-a-deficit ObamaCare Act to take effect.

The Tax Foundation completes broad-based research on tax issues, including analyses and data at state levels. You may also wish to subscribe to the Tax Foundation’s findings and press releases at:

The Tax Foundation

I know everyone will have a restful New Years Eve and knowing that our political leaders in Washington, DC, are taking care of the issues important to their constituents.

Is there any way to possibly get more sarcastic than that previous line?

Happy New Year.


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