Saturday, May 5, 2012

We are approaching a US fiscal cliff

Unless the US Congress takes action this year, the nation will be facing a "stimulus" reduction via changes in tax rates and federal spending provisions, all taking effect in late 2012 and early 2013. Here is the list of these provisions:

1. The Alternative Minimum Tax (AMT), currently at 28% for those filing jointly with incomes of $74K or greater, will drop down to $45K. That means that middle class families making over $45K will not be able to use deductions (medical, etc.) to pay less than 28% in taxes - a substantial tax increase on the middle class.

2. The so-called "doc fix" provision, which is currently keeping the government from implementing a 25% cut on physician payments by Medicare, will expire unless Congress acts.

3. The Payroll tax cut will expire at the end of 2012, increasing from 4.2% back to 6.2%.

4. The Super Committee's inability to reach a decision last year will force mandatory cuts (sequester) in the US government's discretionary spending. A great deal of that will hit the defense industry.

5. Unemployment benefits for workers who have exhausted the standard 26 weeks of benefits will be phased out.

6. Numerous temporary research and development tax benefits to corporations will expire.

7. The 2001 and 2003 tax cuts are set to expire. This includes tax rates on those making over $250K as well as qualified dividends and in particular the 15% rate on long term capital gains. People are wondering why we are having a string of large IPOs this year (including may private equity backed IPOs), even in a less than friendly IPO environment. Part of the reason is that the current cap gains tax rate may be the lowest that the owners will be paying in the foreseeable future.

8. At the end of the year the infamous debt limit will hit again, potentially forcing further cuts.

According to Goldman Sachs, the total of amount of dollars the US government will be taking out of the private sector and households is about $600 billion. Clearly some of these provisions may be modified or extended. But given the sharply divided Congress and the contentious election year, the political impasse is likely to continue. A large portion of these tax increases and austerity measures may take effect. These changes will potentially be a positive for the US budget deficit, but for an economy that is still fragile and somewhat dependent on government stimulus, it will certainly generate a material drag on the GDP growth.

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