Definition of 'Fiscal Cliff'
A combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective Dec. 31, 2012. The idea behind the fiscal cliff was that if the federal government allowed these two events to proceed as planned, they would have a detrimental effect on an already shaky economy, perhaps sending it back into an official recession as it cut household incomes, increased unemployment rates and undermined consumer and investor confidence. At the same time, it was predicted that going over the fiscal cliff would significantly reduce the federal budget deficit.
Investopedia explains 'Fiscal Cliff'
Who actually first uttered the words "fiscal cliff" is not clear. Some believe that it was first used by Goldman Sachs economist, Alec Phillips. Others credit Federal Reserve Chairman Ben Bernanke for taking the phrase mainstream in his remarks in front of Congress. Others credit Safir Ahmed, a reporter for the St. Louis Post-Dispatch, who in 1989 wrote a story detailing the state's education funding and used the term "fiscal cliff."
How Big Are We Talking?
The Tax Policy Center reports that middle-income families will pay an average of $2,000 more in taxes in 2013. Many itemized deductions will be subject to phase-out, and popular tax credits like the earned income credit, child tax credit, and American opportunity credits will be reduced. 401(k) and other retirement accounts will be subject to higher taxes.
Your marginal tax rate is the tax you pay on each additional dollar of income you earn. As your income rises, your marginal tax rate (better known as your tax bracket) rises. For 2012, the tax brackets are 10%, 15%, 25%, 28%, 33% and 35%. If Washington does not act, those rates will go up respectively to 15%, 28%, 31%, 36% and 39.6%.
The Tax Policy Center reports that middle-income families will pay an average of $2,000 more in taxes in 2013. Many itemized deductions will be subject to phase-out, and popular tax credits like the earned income credit, child tax credit, and American opportunity credits will be reduced. 401(k) and other retirement accounts will be subject to higher taxes.
Your marginal tax rate is the tax you pay on each additional dollar of income you earn. As your income rises, your marginal tax rate (better known as your tax bracket) rises. For 2012, the tax brackets are 10%, 15%, 25%, 28%, 33% and 35%. If Washington does not act, those rates will go up respectively to 15%, 28%, 31%, 36% and 39.6%.
Is There a Bright Side to This?
There are principally two bullish arguments regarding the fiscal cliff - first, that the Congress won't allow it to happen, and second, that maybe it wouldn't be so bad if it did.
Taking a very different track, there's also an argument that the cliff itself would be a long-term positive. Few argue that the U.S. has to tackle its deficits at some point, and this sort of "bitter medicine" would be a harsh, but definitive, step in that direction. Although the short-term impact could be severe (recession in 2013), the bullish argument would hold that the long-term gains (lower deficits, lower debt, better growth prospects, etc.,) would be worth the short-term pains.
There are principally two bullish arguments regarding the fiscal cliff - first, that the Congress won't allow it to happen, and second, that maybe it wouldn't be so bad if it did.
Taking a very different track, there's also an argument that the cliff itself would be a long-term positive. Few argue that the U.S. has to tackle its deficits at some point, and this sort of "bitter medicine" would be a harsh, but definitive, step in that direction. Although the short-term impact could be severe (recession in 2013), the bullish argument would hold that the long-term gains (lower deficits, lower debt, better growth prospects, etc.,) would be worth the short-term pains.
According to the Congressional Budget Office, by 2022, the US budget deficit would fall to $200 billion from its current level of $1.1 trillion. That would all be welcome news, but in order to get there, the nation would face almost certain financial turmoil.
Indices:
The Australian All Ordinaries Index has moved up increasing +35 points (or +0.7%) since closing last Friday to 01:40 pm today.
The rest of the world as measured by the MSCI index increased +2 points (or +0.2%) in A$ from closing last Friday to end of trade Thursday.
No comments:
Post a Comment