Tax Policy

Taxmageddon Looms

Based on my research, it seems that on February 18, 2012 the Washington Post coined the term “Taxmageddon,” derived from “Armageddon,” the site of the battle during the “end times,” according to the Bible’s Book of Revelation.  The term is pervasive in the financial press now.  Taxmageddon is scheduled to occur on January 1, 2013. 

Federal Reserve Chairman Ben Bernanke identified the beginning of 2013 as a “massive fiscal cliff.”  Around the end of 2012, TheHill.com says the United States will face “the Unholy Trinity.”  The Bipartisan Policy Center sees a “Scheduled Policy Train Wreck” occurring.  Absent change, the Congressional Budget Office (“CBO”), the budget and economic analyst for Congress, predicts that the first six months of 2013 will see a recession and that economic growth for all of 2013 will be around an anemic 0.5 percent.

Let’s briefly unpack the underlying issues that cause these dire predictions.  First, remember that the U.S. economy is shakily wandering out of a recession.

The “Unholy Trinity” is defined by TheHill.com as being comprised of (1) the expiration of the “Bush Tax Cuts” (“Taxmageddon”), (2) debt-ceiling negotiations and (3) automatic budget cuts.

Last year, the Budget Control Act of 2011 created a “Super Committee” to devise for Congress reductions in the Federal deficit of $1.2 trillion over ten years.  If Congress failed to act before the end of the year, automatic spending cuts of about $110 billion per year would begin in 2013 and continue for a period of ten years.  The Super Committee failed to recommend deficit reductions; the automatic cuts are scheduled to begin.  One might be able to find even some economists outside of the Keynesian camp who would agree that significantly cutting government spending as the country struggles to exit a recession could pose some problems.

Basically, until last year the act of increasing the ceiling on the amount of debt that the Federal government could issue was fairly routine.   In the summer of 2011, partisan disputes rendered that process anything but routine.  The worldwide financial markets quaked as opposing Washington combatants postured.  The debt ceiling was raised just in the brink of time to avoid default on U.S. obligations.  The debt ceiling needs to be raised again around the first of 2013.  We can expect more partisan battles.

Taxmageddon is actually more than the expiration scheduled for the end of 2012 of the 2001 and 2003 Bush Tax Cuts. Among other items also contributing to Taxmageddon are the expiration of the “AMT patch” (actually expired at the end of 2011), the end of the temporary payroll tax cut, the expiration of various “tax extenders” (some actually expired at the end of 2011), and the initiation of various tax provisions under “ObamaCare.”  The cumulative result of these scheduled tax increases is predicted to raise taxes by almost one-half trillion dollars in 2013 alone!  This is the largest tax increase ever.  To put it into perspective, consider that all of the tax increases under ObamaCare – massive in their own right – for a ten year period total about the same as the pending 2013 tax increase.

So, in a nutshell, that is why everyone from the media, the CBO, and Chairman Bernanke to Senator Orrin Hatch (R-Utah) sounds like Chicken Little.  The threat is real.

Will Taxmageddon occur? Will the Unholy Trinity trigger the end of time? Not likely.  My take is as follows.  Wise long-term solutions will not be enacted anytime soon.  The general tenor of the temporary fix will depend on the November elections.  The timing of the actions will be too late in 2012 (or in early 2013) to do much tax and financial planning for 2012 based on those changes.   During late 2012, the financial markets will reflect the fear caused by the uncertainty.  Investors and businesses will be cautious as they await actions and, by being cautious, further weaken the economic recovery.

I wish I had a rosier outlook.  But, hey, I am an accountant.

Vance

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