What could play out in the near future?
Presented by Reeve Conover
Will 2013 be as severe as some economists think?
The fiscal cliff is getting closer and closer. How will Congress respond?
In the worst-case scenario, Congress argues and deadlocks. Tax hikes and roughly $109 billion in federal spending cuts take a
bite out of GDP and another recession becomes a possibility.1
There are other possibilities, however. The fiscal cliff may yet be averted, or at least we might back away from its edge. One of
several scenarios might come to pass.
Scenario A: Congress buys time.
Many analysts think this is exactly what will happen. Congress is in a
lame-duck session. The option for legislators to “pass the buck” may prove
tantalizing. So we could see a short-term, stopgap deal with the idea that the
next session of Congress will tackle the problem later in 2013. The debt
ceiling could be raised, and a “down payment” might be made on longer-term liabilities.1
Scenario B: Congress can’t make a deal.
This may not be so improbable; if you remember the “super committee” assigned
to craft a deficit reduction plan in 2011, you will also remember that it
didn’t accomplish the set task. In fact, we are facing the fiscal cliff because
of that committee’s failure.2
The “fiscal cliff” already amounts to Plan B. When
Congress and the White House reached an accord to raise the debt ceiling back
in August 2011, $1 trillion in federal spending cuts were greenlighted and
Congress was told to find $1.2 trillion more to slash. As that didn’t happen,
$1.2 trillion in automatic cuts are set to begin next year. So Congress would
actually be following federal law if it did nothing to respond to the issue.2
Doing nothing seems unsuitable, but there is the
risk that history could repeat itself. Election outcomes may alter political
assumptions and interfere with consensus. If it looks like we will go over the
cliff in the waning days of 2012, there is a strong possibility that the
incoming 113th Congress could vote quickly to reinstate select spending levels
and tax breaks. That might mute some of the clamor from global financial
Scenario C: Middle ground is reached.
Some degree of compromise occurs that leaves no one particularly satisfied. Certain
short-term provisions are phased out, such as the payroll tax holiday, the
recent increases for small business expensing, and assorted tax credits and tax
breaks for education. The Bush-era tax cuts are preserved (at least
temporarily) for the middle class, but rates rise for those making $1 million
or more per year. The clock turns back to 2009 with regard to estate taxes. The
rich face higher taxes on capital gains and dividends. Perhaps some defense
cuts are postponed.
Scenario D: The “Grand Bargain.”
Congress and the White House boldly arrive at a something more than an
incrementally enacted deficit reduction plan. They reach a “grand bargain,” a
deal designed to cut the deficit by $4 trillion by the mid-2020s, after
historic, long-range compromises are made to reach stability on assorted tax
and spending issues. With a lame-duck Congress, this may be a longshot.1
Scenario E: The “Down Payment.”
Legislators could always tear a page from another playbook in trying to solve
this problem. The Bipartisan Policy Center, for example, thinks a “grand
bargain,” or anything approximating a real deal on the fiscal cliff, is
unlikely given the short interval between the election and 2013. It recommends
a “down payment” of deficit cuts that could be approved by a fast-tracked
simple majority vote. If Congress didn’t take further steps to cut the
deficit next year, then certain tax breaks would disappear and cuts would hit
social welfare programs (excepting Social Security).2
Whatever happens in Washington, this is a prime
time to consider financial moves with the potential to lower your taxes and
insulate your wealth. Explore the possibilities before 2013 arrives.
Reeve Conover can be reached at firstname.lastname@example.org or 877-423-9990
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1 – articles.marketwatch.com/2012-10-25/economy/34719282_1_fiscal-cliff-tax-cuts-defense-cuts
2 – thehill.com/blogs/on-the-money/budget/262893-bipartisan-policy-center-floats-fiscal-cliff-solution