Deal or No Deal

It’s time to play Fiscal Cliff “Deal or No Deal!” The rules of the game show are simple: take a deal early on and guarantee yourself a prize or hold on as long as possible and hope you win the grand prize. In the last round of fiscal cliff negotiations, each side held on as long as possible hoping to take home the grand prize (i.e. their own agenda). Well, all of the briefcases have been opened and congress is left holding the $.01 prize.

In the 11^th hour, congress voted on a deal to “avoid” the fiscal cliff. Unfortunately, since they waited till the last possible moment once again, we’ve achieved nothing more than prolonged uncertainty. Here’s a rundown on the specifics of the fiscal cliff deal:

Payroll Tax Cuts

Unfortunately, the payroll tax cuts will not be extended. This means that most working Americans will see their paychecks drop by about 2% as the temporary cut in Social Security tax expires.

Bush Tax Cuts

Nearly all of the Bush era tax cuts will continue for those making less than $400,000 ($450,000 for couples). The Alternative Minimum Tax will be permanently increased to reflect inflation and the Estate Tax exemption will remain at $5,120,000 and will increase with inflation, however the tax rate above this threshold will increase to 40% up from 35%. Other important middle class exemptions including the American Opportunity Tax Credit, Child Tax Credit and the Dependent Care Credit will continue as well.

High Income Americans

Individuals with income over $400,000 ($450,000 for couples) will see their taxes go up. The highest tax rate will now be 39.6% up from 35% and their tax rate on dividends will increase from 15% to 20%. The new law will also limit how many exemptions and itemized deductions those making over $250,000 ($300,000 for couples) can take.

While the tax increases could have been a lot worse, and this deal will at least keep our economy from going completely over “the cliff,” it actually does shockingly little to address the biggest concerns of our nation. The new deal doesn’t mention the debt ceiling (which we officially reached on Monday 12/31/12) or the looming sequestration (the mandatory sweeping spending cuts for all defense and non-defense departments). Our government and our nation are facing some very serious issues that need to be dealt with in a controlled and civilized manner. Waiting till the last possible minute and passing angry “Band-Aid” deals will never get us to a balanced budget. Unless our leaders take the time to craft a long-term plan for our country, we will continue to fight with uncertainty and unrest. Even foreign governments can see that we have a problem. After hearing about our fiscal cliff “deal” Xinhua, a Chinese state news agency, gave this quote, “So the politicians have chosen to kick the can down the road again and again. But economics and common sense do not lie. People or governments can overspend for some time, but they simply cannot live on borrowed prosperity forever.”[1]