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Tuesday, January 1, 2013

Happy New Year? Now What?



As the end of the year approached, I wondered if the Mayan calendar makers and the folks in Washington had the same playbook. But at midnight, the ball descended onto Times Square and ushered in 2013 and the last second fix on the Cliff. The critical question is: Now what?

The President and Congress (the Senate actually, as I write the blog), in a paragon of diligence and virtue, passed a last minute “fix” on the Fiscal Cliff. The fix, as predicted, is a combination of spending cuts and tax increases on the upper brackets. This fix is minor to the overall economic situation (it appears to be about 10% of the deficit), but it does avert the prospective recession and turmoil caused by the full cliff. The Devil is in the details (and in the House voting on the deal), so we’ll reserve full judgment on the new Bill until we see the full provisions.

The fix cleared the Senate on an 89-8 vote early Tuesday, hours after Vice President Joe Biden and Senate Republican Leader Mitch McConnell of Kentucky sealed a deal.

It would prevent middle-class taxes from going up but would raise rates on higher incomes. It would also block spending cuts for two months, extend unemployment benefits for the long-term jobless, prevent a 27 percent cut in fees for doctors who treat Medicare patients, and prevent a spike in milk prices. Taxes on upper-income individuals (over $400,000 single and $450,000 married) go up. The estate tax changes to a 40% rate (up from 35%) on estates over $5 million ($10 million for couples). The budget sequestration cuts are delayed by two months. The tax rate on capital gains and dividends for high brackets individuals goes up to 20%.

In addition to the fix, we should note that the Affordable Care Act (ACA) now imposes a tax of 3.8% on dividends, interest and capital gains starting in 2013. This tax is imposed on single filers making over $200,000 and married filing joint filers making over $250,000. So individuals with incomes over $450K will have a tax of 23.8% on dividends and capital gains. It further appears that the payroll tax holiday has expired, and the FICA employee contribution has returned to its original rate.

As for me, it has been frustrating to watch the machinations of Washington, particularly when it appears that we, as citizens, are pawns in the game and our economy and well-being seems to take a second place to ideology. I’m happy we have a fix, although I would prefer it not be done like term papers at Michigan State—at midnight on the due date. The cliff seems to be averted, but the game is not over, and more than likely just getting started. Stay tuned.

Happy New Year?

Leon