The election is over, the dust is settling and the economic landscape is coming into focus. The fiscal cliff and the Federal debt ceiling dominate the immediate foreground. Both of these issues come down to the business practices of revenues and expenditures. However, since this is the government and not a business it will be subjected to gamesmanship and hyperbole as both political parties spin their solutions in an attempt to come out, “a winner.” Unfortunately, the reality is that regardless of the spin, you and I will end up paying more for the year that’s already past as well as the coming years.
The post election stock market sell-off is no aberration. Wealth, for many has come through the ownership of equities. When it comes to the vast ownership of equities we can quickly narrow the demographic to investors who’ve chosen wisely over the years and benefited from their patience in the market. However, the economic crisis of 2008 saw the equity markets halved in the blink of an eye. When global market uncertainty is combined with rising estate and capital gains taxes, its no wonder that investors are pulling money out of a stock market that has very nearly recovered to 2007 levels, especially when the rally appears to have run its own natural course.
The estate taxes and capital gains tax increases may seem a bit out of touch with the everyday person but the alternative minimum tax (AMT) is something that will affect more than 70% of U.S. tax payers, according to the New York Times. Here’s the real world perspective you need prepare for. The Washington Post stated that the average income tax refund is $3,000. The expansion of the AMT will levy taxes on individuals earning less than $200,000 and married couples earning less than $250,000. The cost as applied to the middle 20% of all earners will be $888. The net effect will be nearly a $4,000 adjustment to your lifestyle. Furthermore, there will be no tax refund. In fact, odds are you’ll have to pay more taxes instead.
The combined effects of the tax increases for the middle 20% of earners ($40k-$65k) will be an increase of about $2,000. However, it is important to understand that this is an additional pay in, on top of the tax refund you probably won’t receive. Therefore, the net change in your spending habits will have to account for about $4,000 less in 2013. The same numbers for the top 20% (more than $108k) is about a $14,000 difference.
The second part of the fiscal cliff is the debt ceiling. Most of us are now familiar with this term thanks to the political standoff last summer that brought about the first credit downgrade of U.S. Treasuries in history. The debt ceiling is currently set at $16.4 trillion Dollars. The argument over the debt ceiling is the same as our family deciding which bills to pay except, rather than laying out a course of action, the politicians simply ask the Treasury to print more money. These arguments are about funding the same programs that they already passed (but shouldn’t have) in the budget. Technically, if Congress doesn’t raise the debt ceiling then the government has to decide who gets paid and who doesn’t, just like the rest of us.
The debt ceiling has, historically, been a non-event. It has been raised 76 times since it was first enacted in 1962. However, the economic welfare of this country and its citizens is being held hostage by both political parties as they attempt to find a deal that works best for themselves individually, rather than us collectively. Currently, there is talk of forcing the U.S. off the fiscal cliff in order to gain a political advantage as one side blames the other. The sad part is that it really would come down to whom has the best spin-doctor to sell the U.S. population on their version of what happened. After all, it’s not like someone is going to stand up and take responsibility. I believe the reality is that the truth is usually somewhere in the middle and most decisions aren’t as black or white as they first appear. Therefore, very little will be done, just enough to keep us rolling. Alarmingly, that may be the biggest problem of all as we are tossed back and forth between Scylla and Charybdis.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer