In the final hours of December 31, 2012, congress and the democrats agreed on a deal in the White House that averted the fiscal cliff in the US and saved the economy from slipping away into darkness. But for how long?

According to Forbes magazine, income tax rates up to $450,000 (for married couples) will be subject to older tax rates, but income above $450,000 will taxed at 39.6%. Tax-rates on long term capital gains and dividends will be hiked from 15 percent to 20 percent only for those taxpayers above; for everybody else it will be the same 15 percent.

Further, according to Forbes, the deal is composed of an extension of exemption on estate taxes at $500,000, but rates have been increased to 40 percent from 35 percent.

It seems rather uncomfortable to say that President Obama achieved victory on tax code debate since democrats were pushing top tax rates for income just above $250,000; nevertheless, tax revenues have been made somewhat stronger.

As reported in my last article, updating tax rates for the rich may strengthen the revenue part of the budget. Perhaps it is a good sign, but the deal barely mentions anything about chronic deficits.

Perhaps the most pivotal portion of budget is spending. Because spending and taxes are branches of the same tree, and there is a threat that the tree might lean to one side if the other branch grows too heavy.

According to the Heritage Foundation report, “Federal spending by the Number 2012,” federal entitlements are driving this spending growth, increased from less than half of the total federal outlays some 20 years back to nearly 62 percent in 2012.

Further report says that three major programs (Medicare, Medicaid, and Social Security) eat up about 44 percent of the budget. Other programs such as anti-poverty program increased by 49 percent in the last 10 years, food stamps tripled since 2002, and housing assistance rose by 48 percent since 2002.

Debt Facts

The year 2012 marked $1.1 Trillion of deficits, the fourth consecutive year the deficit exceeded 1 trillion.

The 2012 Deficit. was estimated to be 7.3 percent of the GDP.

Over 2 decades, spending grew 71 percent.

In 2012, spending on entitlements was nearly 62 percent of total spending, while defense expenditure was 18.7 of the budget.

The US economy is drifting towards deeper deficits for two principle reasons: a dramatic shift in spending on the outset of recession, and a large chunk of financial resources diverted towards a host of social programs.

What’s happening in the US economy can be summed up as a fiscal fiasco. It is also economic uncertainty and political confusion over the fate of the tax code, massive spending and mountainous federal deficits, since this deal focused extensively on one side of the budget.

Ironically, what remains to be the most awful aspect of the deal is the extension of rapid spending cuts, generally known as sequester. The sequester problem should have been solved under this deal.

According to the Christian Science Monitor, ‘sequester’ is composed of mandatory spending cuts, hammering down $600 billion in defense and $600 billion in domestic programs, which have been extended to March 1, 2013.

Are we going to experience the same kind of frustration and confusion again in March as we did prior to this deal? Fiscal deficits are a jinx to growth and the whole of the economy because it forces us to cease off-spending.

But again a question arises whether welfare policies sometimes ask for more than what the economy can produce? Is this too much welfarism?

The article Fiscal Cliff Deal and Deficit Dilemma appeared first on The Toonari Post - News, Powered by the People!.

As the fiscal cliff approaches, the clock starts to tick louder. For those who have yet to understand: the fiscal cliff is a soup of expiring tax cuts scheduled for the end of the year.

The core of the fiscal cliff consists mainly of the cuts passed from 2001 to 2003 under then President George W. Bush. There are also across-the-board cuts: the expiration of measures delaying the Medicare Sustainable Growth Rate, and the expiration of the 2 percent Social Security payroll tax cut, among others.

If the federal government allows this to happen, the effect on a still-weak economy may be drastic, perhaps even sending it back into a recession. On the other hand the fiscal cliff can significantly decrease the federal budget deficit. This brings us to the question of possible positive effects for the economy in the long run.

According to some surveys, about two-thirds of Americans do support reduction of the federal budget deficit, even if it means cutting Medicare and Social Security. Aside from this data, it is quite hard to believe that the majority will eagerly give away their money for seemingly no good reason. It is better to not take into consideration some quavering long-term improvement projections for the common citizen who is not keen on economic analysis.

Unfortunately according to the experts, if Obama and Congress do not avert these legislative changes, America may “fall over the cliff.” It will also mean that taxes will rise the most in the last 60 years or so. The Tax Policy Center reports that middle-income families will pay $2,000 or more in taxes in 2013.

In addition to this, the Congressional Budget Office predicts that about 3.4 million people will lose their jobs. The Unemployment rate of 7.9 percent in October 2012 represents a significant improvement over the October 2009 rate of 10 percent. According to research millions of jobs would be lost after the fiscal cliff. This could result in an unemployment rate of up to 9.1 percent or more.

Some say there is a bright side. The cliff would be a long-term positive, they say. Everybody understands that at some point the U.S. government should deal with the deficit. But in what way and when are the questions. The policy of kicking the can down the road may no longer be effective or will at least become so in the near future. So will the short-term disaster be worth the possible benefits? The truth is, it’s hard to tell.

The Congressional Budget Office estimates that by 2022, the budget deficit would fall to $200 billion from $1.1 trillion now, in the fiscal cliff case scenario. But that is a pretty long shot and in order to get there, the economy would have to face certain financial difficulties.

The bottom line is the cliff will certainly result in the tax rate increases. But the problem is that increasing taxes won’t necessarily increase total tax revenue. The only right way to increase tax revenue is for the economy to recover.

So the bottom line may be that the fiscal cliff doesn’t matter that much any more. The U.S. may have passed the point of no return long ago.  For everyone with average income there is only one thing that can be suggested. Use everybody’s old favorite: cash, not credit. Congress will eventually have to learn this lesson also and finally cut back on a wasteful spending.

If you want to see what your tax life will look after the cliff you can try the links for experienced tax payers or those who want to get a simple answer.

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