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'Fiscal Cliff' Spawning Widespread Anticipations
November 26, 2012

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A new report out of the White House warns that a projected income tax increase for most of American taxpayers would directly affect consumer spending now, at the beginning of the year-end holiday season. Several prominent retailers reported strong sales in the post-Thanksgiving shopping weekend, but the next few weeks usually see the bulk of the spending that Americans do (up to 20 percent, according to some analysts) in order to buy holiday gifts and a series of reports in recent weeks have pointed toward an economy gaining strength, if slowly. Consumers, the White House warns, will be tempted to put money aside in anticipation of losing revenue next year.

As part of the so-called "fiscal cliff," the package of tax cuts approved by Congress and President George W. Bush will expire. As a result, the White House report says, the average family earning less than $250,000 a year will have to pay $2,200 more in income tax next year than they are now and the overall economy will see a fall in revenues of up to $200 billion. Those concerns were echoed by analysts at the nonpartisan Congressional Budget Office and Tax Policy Center.

The Senate has already approved legislation that would extend those middle-class tax cuts, and President Barack Obama has promised to sign the bill into law. Approval by the House of Representatives would extend the tax cuts for another year.

The "cliff," a double-whammy of higher taxes and $600 billion spending cuts, is to due to hit on the first day of 2013 unless Congress and the President do something about it.

The Budget Control Act of 2011, which averted a government shutdown in the wake of fierce disagreement on whether to raise the country's debt ceiling, stipulates that budget cuts to nearly 1,000 government programs, including Medicare and the defense budget, will automatically go into effect unless changed by an act of Congress. Other cuts would include budgets for public health, homeland security, and school infrastructure. Social Security, Medicaid, children's health insurance, food stamps, and veterans' benefits are exempt.

Among Congress's targets will also be a revision to the Alternative Minimum Tax (AMT). Just as its name suggests, the AMT is an option for taxpayers to pay no more than a certain amount. The AMT generally has a higher rate of exemption and is popular with taxpayers of all income brackets. The current AMT dates to 1982 and has not been adjusted for inflation, as have other tax rates; as a result, those who can opt to pay AMT are getting a considerably better deal than they might otherwise get.

In a related development, many charities are bracing for a drop in giving, as part of a fallout from the "fiscal cliff" or even a deal that Congress and the President make to avert it. A proposed budget put forward by Obama for 2013 limits the value of itemized deductions. Many people give money to charities because they want to help out; however, another attraction is that donations to charitable organizations can be walled off against taxes so that a person's overall taxable income is less than it might otherwise be. A combination of higher income tax rates and a lower amount of income able to be deducted could be a double whammy for charities. A group of hundreds of representatives from charitable organizations will gather on Capitol Hill next week to ask Congress not to alter the existing level of allowable charitable deductions.

Meanwhile, the U.S. Department of Defense, anticipating cuts in its budget, has reported greater reserves of cash, as have several of its largest contractors, including Boeing and Lockheed Martin. Overall, the cash holdings of the five largest contractors increased 71 percent from July to October.

All of these are incentives for Congress and the newly re-elected President to make a deal, something that the Joint Committee on Deficit Reduction (a bipartisan "supercommittee") could not do. The supercommittee, formed in the wake of the debt ceiling crisis of 2011, was tasked with finding ways to cut government spending by $1.2 trillion by 2021. No agreement was reached, and the cuts became automatic. The "fiscal cliff" is the first stage in those automatic cuts.

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