I caught the debate Monday night between Mitt Romney and President Barack Obama. For me, it was sort of a yawner. That is, until the President blurted out “it will not happen,” referring to the coming automatic cuts known as sequestration.
“Where did that prediction come from,” I said to my wife. “It’s not going to be that simple. It’s only part of the whole ‘fiscal cliff’ that needs addressing.” You see, I’m thinking the coming post-election battle in Washington over finances could make World War II look like a lawn party. Moreover, it’s a very serious concern for us in the business of selling high-ticket consumer products. Clearly, such a fight will keep consumer confidence and spending trapped in a cloud of uncertainty.
Sequestration (automatic across-the-board spending cuts) is one-half the impending “fiscal cliff,” a well-worn but accurate catchphrase that also includes laws set to expire (Bush tax cuts) that will cause large tax increases. Sequestration, if left intact, will likely cost thousands of jobs (especially for defense contractors.) That would be bad enough.
But for us the biggest issue is the expiring Bush tax cuts. While they officially expired two years ago, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended them through the end of 2012. If they do expire, another recession would surely result as billions of dollars in tax increases leave consumers and businesses for Washington. Starting in January:
• All individual marginal rates, currently 10 to 35 percent would rise to 15 to 39.6 percent.
• Capital gains tax rate will increase from 15 to 20 percent and dividend income will be taxed at ordinary income rates
• The alternative minimum tax calculation will revert back to the threshold it was in 2000 and will not be adjusted for inflation, meaning millions of middle-income taxpayers will be hit with the AMT.
• Household incomes above $175,000 will have their allowable itemized deductions significantly reduced.
• The estate tax rate will rocket back up to 55 percent, with a reduction in the current allowable exclusion of $5 million down to $1 million.
While not a Bush tax cut, also set to expire is the Middle Class Tax Relief and Job Creation Act of 2012. This means an increase in the Social Security payroll tax by 2 percentage points, raising taxes on anyone who earns income. At the same time, the Medicare Sustainable Growth Rate formula controlling doctor reimbursement rates, previously postponed, will hand doctors a 27 percent drop in Medicare payment rates next year.
And speaking of things medical, new tax provisions for Obamacare go into effect. In addition to the loss of the 2 percentage point payroll tax deduction, the Medicare tax will increase from 1.54 percent to 2.35 percent for some taxpayers. And tax provisions of the Health Care and Education Reconciliation Act of 2010 will be implemented. This law increases the Medicare portion of self-employment taxes from 2.9 percent to 3.8 percent on earnings in excess of $200,000 for individuals, $250,000 for couples. It also creates a new Social Security tax of 3.8 percent on investment income.
Finally, specific provisions of laws aimed at helping small business will disappear. For example, the “bonus depreciation” allowing $560,000 in extra deductions for equipment will be gone. And a cap of $25,000 will replace the current $139,000 for Section 179 deductions.
Obviously, the only way anything good can happen is through bipartisan cooperation. It’s hard to believe anyone in Washington would want to push the country into another recession. Heck, we’re not that far above the last one now.
Moreover, how any deal might look depends on whether Romney or Obama wins. If Obama, it seems likely an emboldened president will push through higher taxes in a variety of ways, not to mention on families above $250,000. If Romney wins, Congress will likely come up with some short-term continuing resolutions, if for no other reason than to give the new president time to develop a compromise deal of his own making. But with today’s polarization, anything could happen. It makes the economic impact of this election pretty big, doesn’t it?