I have been thinking about the blame game and the political pandering going on in D.C. over the Fiscal Cliff. In case you haven’t heard about the fiscal cliff, I will share with you, the Cliff Note version. On Jan. 1, 2013 about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect. In total, the measures are set to automatically slash the federal budget deficit by $503 billion between FY 2012 and FY 2013.
- 2001/2003/2010 Tax Cuts & AMT Patch. This series of legislation, often referred to collectively as the “Bush tax cuts,” will expire on December 31, 2012, raising all income tax rates (top will go from 35 to 39.6 percent), as well as rates on estate and capital gains taxes. The alternative minimum tax (AMT) will also automatically apply to millions of more citizens.
- Payroll Tax Cut. The Social Security payroll tax holiday will expire December 31, raising the rate from 4.2 to 6.2 percent.
- Other Provisions. Several other policies such as the Research and Experimentation tax credit, many of which are typically enacted retroactively, are due to sunset at years’ end.
- Affordable Care Act Taxes. Some provisions in the Obama health-care legislation, including increased tax rates on high-income earners, are set to take effect in January 2013.
- Budget Control Act. The automatic spending cuts or sequester legislated by the Budget Control Act of 2011 will hit January 2. Half of the scheduled annual cuts ($109 billion/year from 2013-2021) will come directly from the national defense budget, half from non-defense. However, some 70 percent of mandatory spending will be exempt.
- Extended Unemployment Benefits. The eligibility to begin receiving federal unemployment benefits, last extended in February, will expire at year’s end.
- Medicare “Doc Fix.” The rates at which Medicare pays physicians will decrease nearly 30 percent on December 31.
Debt Ceiling Clock
The debt limit, which sets the maximum amount of outstanding federal debt the U.S. government can incur by law, is currently capped at $16.39 trillion. Treasury is expected to hit this borrowing capacity again sometime in early 2013. Analysts fear another protracted debate over the debt ceiling could bring repercussions similar to those that followed the debt battle in summer of 2011, which rattled financial markets and, according to a study from the Government Accountability Office, raised the cost of Treasury’s borrowing by $1.3 billion for FY2011.
So here we are, pointing fingers and unable to agree on what the sound fiscal path should be going forward. So what I say is; ask the “soccer moms“, they are the pulse of many trends and a good barometer for public opinion.
* If a “soccer mom” family who lives on an income of $100,000 annually finds themselves in debt to the tune of $714,500 what would they do? These numbers are symbolic, because they are equal to the percentage of total tax revenue taken in by the federal government, ($2.3 trillion), divided by the overall federal deficit ($16 trillion).
I would venture to say that the “soccer mom” family would consider putting themselves on a strict budget, all non-essentials are out (that is if filing bankruptcy was not an option!) Perhaps a consideration would be to find a second job to increase that $100,000. What seems to get lost in translation is the cost of servicing this debt. Lets consider the “soccer mom’s” debt load of $714,500 which is a mixture of mortgage debt, credit card debt, student loans, personal loans, etc etc. Let’s assume that this debt, called for an average monthly payback of 10%. This is high for a mortgage, but typically lower for credit card and smaller balance loans. But, for the sake of argument, lets say 10%. That would make the payment $6270 per month. Cause for alarm? Probably so!
So, what would the “soccer mom” family do, if filing for bankruptcy was not an option? Most likely we would have to drastically cut spending, get ourselves on a strict budget, and consider getting a second job. So why cant the government do this? Well you see, it is all about constituents, special interests, lobbyists, and re-elections. The Republicans don’t want to raise taxes, out of fear derived from all these groups. The Democrats don’t want to cut spending, out of fear derived from these groups. So, here we are on a road to bankruptcy because our friends in Washington lack the collective integrity to stand up to these groups and do what is right, that is to do what the “soccer moms” would do!!
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