The results of the 2012 elections are sure to have a profound impact on the American worker and the American mindset. But other factors are almost certain to have an immediate, profound impact on the US economy: the Fiscal Cliff. A dire term coined by Fed. Chairman Bernanke to describe a dire scenario, the Fiscal Cliff refers to the historically-large tax increases and spending reductions which will take affect on 1 January 2013.
On the tax side, the 2001 and 2003 Bush Tax Cuts are set to expire following nearly a dozen years of continuous extension. The 2010 payroll tax cut, which was twice renewed for a year, will also expire. With that comes the expiration of a miriad of other tax-relief measures enacted in the 2009 stimulus. Concurrently, the several new taxes introduced by the Affordable Care Act, a.k.a. "Obamacare, will also take effect in 2013.
With the expiration of the Bush Tax Cuts, taxes on ordinary income will rise from their current rates of 10, 15, 25, 28, 33, and 35 percent to their Clinton-era rates of 15, 28, 31, 36, and 39.6 percent. The impact will be a rate increase at every income level. Capital-gains and dividend taxes will also revert to their former rate, from their current 15 percent to 20 for the former and up-to 39.6 percent for the latter. The "AMT patch" also won't be renewed. The means the threshhold above which taxpayers are forced to comply with our second, less-friendly tax code will be lowered dramatically. A large swath of middle-income taxpayers will likely be subject to the AMT in 2013.
The partial payroll-tax holiday also ends on January 1. FICA taxes, nominally levied to pay for Social Security, Medicare, and Unemployment, Disability, and Survivors Insurance, will revert back from 13.3 percent of wages to 15.3 percent. Several other stimulus measures will also expire. Among them are tax provisions allowing for the full-expensing of capital equipment by businesses. This will force companies and self-employed individuals to revert to traditional depreciation tables when determining the tax-impact of their investments.
The combined impact of allowing these tax-relief provisions to expire and new taxes to be enacted will result in revenue increase of $494 Billion in 2013, according to the OMB. While this is might cut our deficit in half, such aggressive tax hikes are expected to shock our already-fragile economy. There remains the possibility, however, that repairing our long-term fiscal problems in such a manner will boost investor confidence enough to reverse any negative impact on growth. I am doubtful, but not wholly unconvinced, that this is true. If the world is still here on January 1st, I'll can start brainstorming a more definitive answer.