Finally Falling oFF the Fiscal cliFF! OH F… !!!

I’ve written about his little adventure before. I first warned about it in the article “Taxmageddon” originally written Feb. 20^th of this year.

Taxmageddon

I added another warning with “Taxes” on July 24 to explain tax brackets and what that light at the end of the tunnel was … an oncoming train.

Taxes

Bad things come in threes, so I followed that with this article on Dec. 7, when I predicted that the lame duck Congress would not take any action.

Don't Worry

Of course, there’s still time. Anyone really think Congress will act today or Monday?

No, ain’t gonna happen!

Still, it isn’t really a cliff. This set of tax increases and spending cuts that go into automatic effect on Tuesday, January 1, 2013 will have more of a gradual impact throughout the months of 2013 and won’t have a final splat until April 15, 2014. There is still time for Congress and the President to act in January, or February, or March, or even next December.

The effects will be gradual. In fact, due to uncertainties, the IRS hasn’t even published updated withholding tables yet, so pay on Jan. 1 won’t change. Let’s talk a little about how income taxes are collected in this country.

For people who work for other people, they pay taxes via “payroll withholding.” Based on your salary and the number of exemptions and something called the “IRS Withholding Tables,” your employer will hold out some amount of your paycheck and send it to Uncle Sam. If you’re self-employed, the process is similar, only you send the money once every three months.

Then, at the end of the year … usually by the very end of January, the next year … you get all these financial forms. W-2s and 1099s and other statements on taxes paid, interest earned, income, real estate taxes, etc., etc., etc. Then it is a race to April 15 to complete your taxes and determine how much you owe for the previous year. Hopefully, and typically, people have already paid more than they owe through the withholding. That means you will soon receive the wonderful “Tax Refund Check” that usually means bills get paid or a new commercial item will soon grace your home: 60” TELEVISION for EVERYONE. Of course, some didn't withhold enough. Better get out the checkbook.

So, since the new tables aren’t out yet, and won’t be for several weeks assuming Congress doesn’t act, and it will take your employer anywhere from one to two months to get the tables installed in their payroll systems, we may not see any income tax increase until March. Of course, then the systems will actually collect more money to make up for the shortfall.

How much your income tax goes up depends on many factors … most importantly your income. Average will be in the neighborhood of around $2,000 for the year. That will equate to around $100 less in your paycheck, assuming you get paid twice a month.

Then there’s the famous 47%. Those are the people that don’t pay income taxes. Maybe they don’t receive a paycheck. We still have very high unemployment is the US. Most of the 47%, however, don’t pay any income taxes because their income is too low, especially if they have a large family. Now I’m not offering to trade places with those folks. It is tough to make ends meet on a minimum wage income. At least those poor people don’t have to pay income tax. But … guess what? … anyone earning a wage pays Medicare and Social Security taxes. Oh, wait, the rich don’t pay SSN, at least on income above $113,700 next year … but I digress.

Well, for the last two years, all wage earners have enjoyed a 2% cut in the 15.3% FICA tax. (That includes your employers share … you directly pay 7.65% unless your self-employed, in which case you pay the whole enchilada.) That tax cut also ends this year, and, I suspect, on Jan. 15, when you get your first paycheck of 2013, you’ll see that … those tables are already programmed into the payroll computer.

There is one final increase in January. That’s the taxes on capital gains. Sure, that’s just for rich people … or anyone who sells some property … or anyone selling stocks and bonds they saved for retirement … or anyone … you get the idea. That increase also “depends,” but, in general, it will be a 5% increase to a high of 20%.

Heck, there may even be problems with the AMT or Alternative Minimum Tax. That’s a second calculation of income tax enacted to catch rich people that had tons of deductions … they had to, at least, pay a certain amount of tax. Unfortunately, with inflation, the AMT rates now hit middle class persons, especially those in high state tax states. (State taxes are deductible … you know!) So, in typical “kick the can down the road” fashion, congress has been adjusting the AMT annually. Well, guess what? … again! … that adjustment is about to expire too.

Then there's the end to the end of the marriage penalty, and a change in inheritance tax (also called DEATH TAXES). Now don't take my word for it, I'm not sure about all these things and figures, but it is going to be one high cliff that we meet on JanOne.

So, I can’t tell you how much your taxes are going up next year, but I guarantee they are going up, probably around 5% minimum. So, if you make $30,000 a year, that’s $1,500 bucks … make $60,000, probably $3,000. Make more? … well, “There’s one for you, nineteen for me.” Oh, sorry, that’s England. But we’re working on that here in the US.

So, you will have less money to spend next year … and you … and you … and ME!!

So, tighten your belts.

Wait, there's more: we have a “consumer driven economy.” Less spending means less economy which means less purchases which means less manufacturing and sales commisions which means less employment which means even lower national income which means more less spending and more less purchasing and more less manufacturing and more less employment. Why, it’s a vicious cycle. Where will it end?

It will end in a recession … that’s where. Oh, wait, there’s still government spending. That’s help. After all, Uncle Sam still has his credit card. Uncle will save us. He’ll just spend the hell out of the Treasury with some kind of stimulus or bailout or rescue … at least we’ll all get food stamps.

But wait … there’s more. The last time Congress addressed the “Debt Ceiling” -- that’s a limit on borrowing -- the only way the budget hawks would raise the ceiling is if Congress promises to lower spending. They had a plan. I won’t get into details. It didn’t happen. So now AUTOMATIC CUTS are coming. Seems Congress promised to lower spending and put that into the law. That law comes into effect next year too.

Frankly I’m too tired to calculate how much. Let’s just assume 5-10% cut in spending across the board. Some things will be cut: military, discretionary. Some won’t be cut ... Social Security … at least not yet. But they are big cuts and they will also reduce our economy further.

Here are some numbers. Right now, most of the world is enjoying 0% economic growth … sort of enjoying like a toothache. Heard of Greece? Heard of Spain? Or even England? You really should listen to the radio more. Or read a newspaper. Or read my blog!

In our happy home, the United States of Credit Cards, we are enjoying about 1.5% annual growth. Calculate in a 5% raise in taxes and a 5% or more cut in government spending. Go ahead. Just subtract it from the 1.5% growth. It’s more complicated than that, but what the hey. So, what does your calculator say? NEGATIVE NUMBER. That can’t be good. Negative economic growth … why that’s called a RECESSION or, if bad enough a DEPRESSION. Yup, it is depressing.

So now you know. When the Fiscal Cliff meets the Debt Ceiling … we’re in trouble. Oh, one more thing. We need to vote for a new debt ceiling as soon as Feb. But, I’m not worried. Surely Congress will agree and raise the ceiling.

No, my name isn’t Surely, and I don’t think they will. I think we’ll default on our debt, at least for a short time. Never mind Taxmageddon … it may be Financialmageddon…a rum dum.

It won’t happen all at once, but gradually. Know the real problem of all this uncertainty? Businesses are sitting around waiting for the dust to settle. Businesses don’t like uncertainty. If they’re not sure, they won’t spend. And business spending equals jobs. Batten down the hatches. We’re in for a blow. Mixed metaphors sighted off the port bow. The Fiscal Cliff is hitting the Debt Ceiling and we’ll end up burning dollar bills to keep warm. YIKES!!