The Incredible, Inedible Budget

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Actions speak louder than words. Unfortunately, the impending fiscal crisis set to occur on January 1, 2012, has evoked little but words to this point. Photo Credit: U.S. Federal Government.

What budget, you ask?

President Obama’s proposed 2013 budget was roundly defeated by both the House and Senate earlier this year, as were several alternative proposals,  including an amendment based upon the bipartisan Bowles-Simpson commission — a balanced plan which would have gradually raised taxes as well as cut spending.

Partisan politics has littered the political landscape for decades, but never worse than today, as the parties have such profound differences that they are unable to even agree upon a framework budget under which to operate.

As such, the federal government has keep the doors open with a series of Continuing Resolutions, the latest funding operations until March 31, 2013.

Therefore, for the third straight year (the fiscal year begins on October 1), the United States will once again operate for the immediate future without a fully-enacted budget plan.

The Impending “Fiscal Cliff”

On July 17th, Federal Reserve Chairman Ben Bernanke urged Congress to set aside their differences and enact a compromise budget with mechanisms to avoid a “fiscal cliff” set to occur on January 1, 2013. On that date, the payroll tax holiday will end, the Bush tax cuts will expire, and automatic across-the-board spending cuts totaling $1.2 trillion over the next ten years (mandated by law after the failure of a bipartisan Super Committee to agree upon a budgetary solution in November of 2011) will begin. The sudden impact of raised taxes and lowered spending on an already-fragile economy is projected to be profound in 2013.

The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” Bernanke said at a hearing of the Senate Banking Committee. “Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”

Despite Bernanke’s exhortations, the sides remain at odds as the calendar turned to September, choosing to use the brewing storm clouds as political fodder instead of a catalyst toward action.

No Budget: The Potential Adverse Effects

The net result  of the triple hit in taxes and spending absorbed at essentially the same time is likely to be dramatic, and could plunge the U.S. economy back into recession. Key details are as follows:

The U.S. Congress has binged on debt during this recession. Image credit: Vcelloho

  • The payroll tax holiday reduced taxes by 2% of a worker’s wages. For  a salary of $50,000, the result was $1,000 more into the pocket of the employee over the course of a full year. The sunset of that provision, conversely, will lower discretionary income by an equal amount, creating a likely drag on retail sales.
  • Marginal tax rates will revert to 15%, 28%, 31%, 36% and 39.6%, roughly 10% higher than current levels.
  • Long-term capital gains rates will increase from 15 to 20% at the top end of wage earners, and from zero to 10% at the bottom.
  • Stock dividends will revert to being taxed as ordinary income, instead of at the lower capital gains tax rate.
  • Higher-income taxpayers will see certain tax exemptions reduced or eliminated, and itemized deductions reduced.
  • The “marriage penalty” will affect more couples.
  • More taxpayers will be subject to the Alternative Minimum Tax.
  • Higher education deductions will be reduced.
  • Dependents will earn smaller tax credits.
  • Fewer child care expenses will be deductible.
  • The estate tax will increase from 35 to 55%, and the exemption from estate taxes will decrease from $5 million to $1 million.

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