Uncertainty Worst Part of Fiscal Cliff
No decision is a decision. There’s never been a time in our nation’s history when that expression means more. The lack of a decision by President Obama and Congress has sparked the doom and gloom of the pending "fiscal cliff." Yet for the vast majority of us, the real issue is fear of the unknown.
It is the complexity of all the potential changes that makes the fiscal cliff so dangerous to our economy. This complexity makes it incredibly difficult for the average family to anticipate what 2013 has in store — and be able to plan for it.
Businesses, by the same token, are faced with the exact same level of uncertainty. The business owner has no idea what is going to happen, when, why and to whom. It is this uncertainty that is far more dangerous than the fiscal cliff. The cliff, in and of itself, is somewhat manageable once the rules of the game become clear.
The fiscal cliff refers primarily to automatic spending cuts, expiring tax cuts (commonly referred to as the Bush tax cuts) and expiring Social Security rate reductions.
The expiration of the tax cuts will occur because legislators agreed at the time the laws were passed to "sunset provisions." This means that the tax cuts automatically expire on Dec. 31.
Urban legend has it that the tax rates will increase only for taxpayers at the higher income levels with rates going up to 36 percent and 39.6 percent for the wealthiest Americans.
In reality, the tax brackets start increasing for all Americans due to the re-establishment of the 15 percent bracket for all taxpayers as the lowest tax bracket. This is up from the current 10 percent lowest tax rate. For all other taxpayers, tax rates will go up for virtually every level of taxable income.
Another major provision of the fiscal cliff includes the expiration of the 2 percent reduction in Social Security contributions. This means that every worker will see a cut in disposable income on Jan. 1. Reinstating this cut, however, will be felt in years ahead because it means less money for Social Security.
The third major aspect of the fiscal cliff is the alternative minimum tax. The AMT, as it is commonly known, will affect more Americans than people realize. The AMT is designed to ensure that taxpayers pay some tax. It was intended to affect only the wealthiest. However, with the inflation since the 1970s, the AMT reaches many more Americans itemizing deductions than intended.
The fourth major provision of the fiscal cliff are the sequester cuts that call for a 10 percent reduction in Department of Defense spending and an 8 percent reduction in certain domestic programs.
The total impact of these cuts is estimated by the Congressional Budget Office to be $78 billion. Millions of Americans will be adversely affected. While there are many of us who see the expiration of the tax cuts as problematic in the middle of a recession, most also will acknowledge that the uncertainty of what is going to happen is equally as bad.
The president’s current strategy — holding the American people hostage for the artificial and psychological victory of taxing the richest Americans — is equally problematic. The taxes that will be raised from taxing the wealthy will make little dent in the deficit.
The best solution might be to allow the fiscal cliff to arrive because then the excesses of our government since the 1930s will have to be dealt with. While this might sound harsh, kicking the problem down the road to future generations will only make the next fiscal cliff more difficult to deal with.
The American people are a resourceful people. Just tell us the rules of the game. We will adapt. However, the admonition that I would give to both parties is that it is not just your decision. Once Congress and the president decide the rules, the American people will decide whether those rules are acceptable. If they decide to attack the wealthy, be prepared for what the wealthy might do in response. If they decide to attack the poor, be prepared for what the poor might do.
And this fiscal cliff is but one fiscal cliff. There are more fiscal cliffs in our future, including Social Security, unfunded pension obligations, unfunded health care costs and a problematic recession.
The way the current fiscal cliff is decided will determine whether the other fiscal cliffs can be avoided or merely postponed. The stakes are real. The future of our nation is at stake. Brace yourself. It will be an unbelievable next three months. I pray that calmer heads prevail.
Col. Frank Ryan is a certified public accountant and a retired Marine. He specializes in corporate restructuring and lectures on ethics for state CPA societies. On Twitter @fryan1951.
