You’ve surely heard the term by now, but the premise of the fiscal cliff is that there are several different parts of the tax code expiring and spending cuts set to kick in first thing next year. Conveniently, this occurs right AFTER the next presidential election, so we have to pretty much vote on faith this November that we can elect the right president to actually show some leadership and get something done. But what this has translated into this year, is the “uncertainty penalty”. I’ve had debates on Twitter and at dinner parties about what uncertainty actually does to businesses and consumers which impacts the economy at large (consumer spending, hiring, capital expenditures, etc.). While liberals will usually say it’s BS and Obama’s doing a great job, the data indicates the contrary. The latest report by Goldman Sachs shows that companies are deferring hiring and investing in expansion due to the uncertainty in everything from regulatory requirements to the fiscal cliff to who’s going to be in charge and what direction they want to take the country. There’s also confusion around whether now is a good time to implement a dividend since there’s uncertainty about how dividends will be taxed. Defense contractors have already begun layoffs in anticipation of potential defense cuts next year. As usual, Congress played with fire and now we’re feeling the result of unintended consequences.
This is an administration and Congress who rank reelection higher than any other priority, including actually resolving longstanding issues. It is much easier for them to maintain the status quo and set the country up for a horrific crash (or slow death, but they are CERTAINLY not setting up future generations for success) years down the road than to tackle an issue head-on in the present which might give their opponent in the next election a soundbite or voting record liability.
Nothing has changed and nothing will. The clowns at the helm will structure a poorly conceived last-minute deal which will appease enough voters to give them a decent shot a reelection. On the tough issues that require leadership, we will get none. The can will be kicked down the road. Why do you think the Alternative Minimum Tax has NEVER been fully rectified? Each year, at the last minute, Congress patches another 1 year patch to keep millions of additional Americans from being hit with the tax, since in their infinite wisdom, our prior leaders structured it with no index to inflation.
Remember the scary debt limit increase standoff? Our past few presidents have burnt through multiple debt limit increases during a single term and continue to need a new increase every year or two. This past year, Republicans held firm and postured to block the increase, which would effectively have the US default on its debt obligations, which would have had untold consequences. So, rather than actually reaching a concrete agreement to do things like, you know, restructure the tax code, close loopholes, eliminate special interest giveaways and restructure our entitlements, what did they go? They kicked the can (I called this exactly at the time). They set up a bunch of hypothetical spending cuts which would be catastrophic to occur later in the future, hence the fiscal cliff.
All they will do is kick the can again. This is what they do. And we have no leadership to force them to do otherwise.
So, as an individual, my suggestion would be to just anticipate the outcome and go about life as you normally would. There’s going to be a lot of chatter about cuts, taxes increasing, and all kinds of horrors like granny being thrown over a cliff. But the reality will probably be more of the same, especially if you make a few hundred grand per year or less.