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Posts Tagged ‘fiscal cliff’

Where Did The Money Come From?

paying taxesThe Congressional Budget Office (CBO) released their preliminary estimate of the monthly budget deficit for January.  The CBO estimated the government overspent by a measly $2 billion in January 2013. This compares to a monthly deficit of $27 billion in January 2012.

Hold on before you think we’re making much progress towards reducing the $1 trillion plus deficits of the past four years.  This was only one month out of twelve.  The CBO estimates the cumulative deficit for the past four months is $295 billion (the U.S. fiscal year starts on October 1), and the Fiscal 2013 total deficit is projected to be $850 billion.

The CBO reported a $36 billion uptick in revenues collected in January 2013 over those collected in January 2012.  Some politicians and pundits are already citing these numbers as being indicative of the success of the increased taxes, which were part of the fiscal cliff deal reached on January 1, 2013. It’s a stretch to make this claim, but that rarely matters in the world of politics.

The CBO estimated the government collected $9 billion more in Social Security taxes.  These additional taxes arose from the additional Social Security taxes collected after January 1, 2013.  The 2% temporary tax holiday was scheduled to expire December 31, 2012, and further extension was never a serious consideration.  Social Security is already headed towards insolvency, and continuing a reduced rate would have only exacerbated the problem.  It’s a stretch, but since Congress could have extended the lower rate, you could make the argument these additional revenues were part of the fiscal cliff deal.

Although the remaining additional $27 billion may have been collected in 2013, most of it is not attributable to the fiscal cliff deal.  The increased tax rates only affected high income individuals on income earned after January 1, 2013.  Most super wealthy people pay their taxes through estimates, not withholdings, and the first quarterly payment is not due until April 15th.  Thus, the first real increase in revenue from the higher 2013 taxes won’t be collected by the Treasury until April 2013.

So where did the money come from?  In all likelihood, most of it was additional 2012 taxes which were paid in 2013.  Quarterly estimated taxes for individuals are due April 15th, June 15th, September 15th and January 15th of the following year.  Based on my experience, most wealthy people pay their fourth quarter installment in January of the following year.  Odds are that most of the additional $27 billion in tax revenues actually relates to taxes paid for 2012, not the increased taxes due for 2013.  It’s a reasonable conclusion, since many high income taxpayers accelerated income into 2012 to avoid the anticipated higher 2013 tax rates.

The additional revenues may be good for the country and the economy.  However, I think it’s a little too early to declare success and victory from the increased tax rates.  I believe the verdict is still out, but to make a fair assessment, you have to understand where the money comes from.

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Avoiding the Cliff but what about the Abyss?

US Capitol-WinterCongress and President Obama finally reached an agreement to solve the “fiscal cliff.”  The compromise, the American Taxpayer Relief Act of 2012, was reached in the early morning hours of January 1, 2013.

Many of our illustrious leaders in Washington tried to sound reasonable by saying no one got what they wanted but it was the best deal they could reach.   Essentially, they were saying you may not be happy, but be satisfied.

It’s a sad day if this was the best they could do.  I have two primary contentions with the deal they reached.  First… the timing and process of the solution, and secondly, the absence of any meaningful changes in federal spending.

The process was extremely political, and the American electorate should expect more… no demand more… of our leaders.  The fiscal cliff was primarily created by two pieces of legislation.  In December 2010, Congress temporarily extended the “Bush tax cuts” until December 31, 2012.  Thus, they have known for two years tax rates would increase unless they passed legislation to extend or change the rates.  The other part of the equation was the spending cut provisions agreed to in August 2011 to settle an impasse on increasing the debt limit.  Thus, Congress and President Obama have known for 18-24 months the fiscal cliff was coming but didn’t resolve it until after the deadline passed.

I have many smart and successful clients.  It has been exceptionally frustrating and difficult for them to make business and financial decisions without knowing what the future tax rates and rules will be.  Even on December 31st, no one knew what the rules would be the next day.  In my opinion, it was an absolute lack of leadership and prudence on behalf of both branches of government, both houses of Congress and both political parties.

Although the process was frustrating, the most upsetting part of the compromise was the complete absence of spending cuts.  The tax increases are projected to raise over $600 billion of additional revenue over the next 10 years, and all spending cuts are postponed, at least for another two months.

Fiscal Cliff statementPresident Obama campaigned on a balanced approach to deficit reduction.  How can you consider $620 billion of additional revenue and no spending cuts a balanced approach?  Our political leaders have promised the spending cuts will come soon, but that’s what they promised when they passed the law in August 2011.  It was easy to promise future cuts, but when it came time to actually implement a spending reduction, they postponed them once again.

Don’t be deceived into thinking the new tax revenues will make any significant dent in our debt or deficit.  $620 billion is a lot of money, but it’s over the next 10 years.  The U.S. Government is currently overspending by $1.3 trillion each year.  The additional revenues will help, but we’ll still rack up an additional $10+ trillion in debt over the next decade, based on current spending.  The exclusion of spending cuts in this deal was another missed opportunity.  Spending cuts are never easy or popular, but I’ll offer two guarantees; 1) spending cuts will come and 2) the longer we wait, the more painful they will be.

There may have been some political winners from the whole fiscal cliff debacle, but I believe we, the American public, were the real losers.  The deal cut may have averted the fiscal cliff, but the absence of any real spending cuts pushes us closer to a financial abyss.