Winners and Losers in the Fiscal Cliff Deal

“Some gotta win, some gotta lose” is more than a line in an Elvis Presley song – it’s the government’s rendition of the Fiscal Cliff Deal. What exactly is the fiscal cliff? Is the fiscal cliff sheer media hype or a real crisis?
The fiscal cliff refers to a perfect storm of tax increases and spending reductions that was scheduled to begin in January 2013. Late last year, the Congressional Budget Office (CBO) forecast a recessionary 4% loss in GDP and the loss of another 2,000,000 jobs if Congress and the President failed to act.
Why the gloomy forecast from the CBO? Two-thirds of our economy is driven by consumer spending. Consumers who lost their jobs would have NO discretionary income to spend. Even consumers who kept their jobs would have paid thousands more in taxes, resulting in sharp drops in national consumer spending. Add one more ingredient to the recipe – cuts in government spending – and you have the potential for a grave recession.
A colleague and friend described the recent joint action of Congress and the President as an act of “enlightened self-interest” aimed toward their re-election. He may have called that one perfectly. Whatever their motivation, it appears that the crisis is averted for now.
Here’s a select summary of how the crisis-driven legislation shakes out:
Wage Earners | |
Wins | Losses |
98% of working Americans will be spared an increase in their income taxes. | 2% more in Social Security taxes will be paid by employees. |
Investors | |
Wins | Losses |
Investment-related taxes will not increase for 98% of taxpayers. | High income taxpayers will shoulder a much heavier investment tax yoke:
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The Prosperous and the Wealthy | |
Wins | Losses |
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We conclude with a final bit of good news.
Over twenty million taxpayers will be freed from the oppressive Alternative Minimum Tax (AMT) when filing their 2012 income tax returns. The AMT was FINALLY indexed for inflation. Depending upon whose numbers you believe, as many as 25 million taxpayers would have been caught by the AMT trap in 2012 – up from an estimated 155 taxpayers in 1969.