The “fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government faces at the end of 2012, due to the expiration of hundreds of billions of dollars worth of tax cuts and the triggering of $109 billion in across-the-board spending cuts set to go into effect.
The non-partisan Congressional office has said that this scenario could throw us back into a recession. Cumulatively, the country would see a 5 percentage point jump in its average tax rate, which works out to taxes on the top 1 percent jumping by more than 7 percentage points and about 4 percentage points for most people earning below $100,000 a year. Long term capital gains tax would jump from 15 percent to 20 percent and qualified dividends that are currently 15 percent would now be taxed at your marginal tax rate.
Can a compromise be reached? The oncoming cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This isn’t anything new; after all, this problem has been lingering for three years now. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. The most likely result is that the problem will linger until after the election, and there’s a strong possibility that Congress won’t act until the eleventh hour. However, the U.S. Congress may be arriving at a consensus on how to avoid falling off the “fiscal cliff” by simply putting off its own deadline for most major year-end budget and tax decisions and push this decision into 2013 before a compromise is finally completed. We look for volatility to increase towards the election and year end in the overall market.
If I can help with your investment management and help guide you through these changing times, please come see me at City State Bank or call me at (515)986-2265 to set up a meeting.
Not FDIC insured, not a bank deposit or product, not guaranteed by bank, may lose value and is subject to investment risk including possible loss of principal.Information provided by Wade Lawrence, City State Bank, 100 N.E. Jacob St., Grimes, 986-2265.