Proposals have been made and they have been rejected as the fiscal cliff approaches. The central issue that is dividing Republicans and Democrats? It is whether or not to raise taxes on the top 2% of taxpayers. If an agreement is not reached by the last day of the month, 2013 will begin with tax hikes for everyone. This could be devastating for the middle class and for the working poor that pays taxes.
In other words, that throws the average taxpayer off of the fiscal cliff head first.
The prospect that taxes may raise for everyone is beginning to hurt consumer confidence as the holidays approach. The Black Friday of 2012 was a very successful one, but consumers are realizing that it is possible that the two political parties may not reach an agreement by the deadline. Deadlines have been surpassed before in the past, so faith that an agreement will be reached is very low.
However, progress has been made. For instance, House Speaker John Boehner (R-OH) was able to convince his entire leadership team to sign on a plan that involves the creation of new tax revenue. The plan, agreed upon on December 3rd, says that the Republicans are willing to extract new tax money from those individuals making more than $250,000 per year. This is the group that President Obama has wanted to establish higher tax rates for. But rather than raise taxes, the GOP wants to close loopholes and eliminate deductions for this group in order to create that tax revenue. Boehner has stated that this is a plan that needs to be seriously reviewed by the White House, as it is a middle ground offer. The President, on the other hand, has said again and again that he will not budge on his desire to raise taxes for the upper class.
So if a solid plan is not reached, who are the true winners and losers of the fiscal cliff? As with anything, this is a situation where some people would prosper and others would not.
As mentioned before, the taxpayer would be hit. The increase would affect both income and capital gains taxes. Those that have been paying 10% would increase to 15%, 15% to 28%, 25% to 31%, and so on. The group that the GOP does not want to raise taxes on is the group currently paying 35% because the tax rate will increase to 39.6% and, being that these individuals are the job creators, the GOP fear is that job creation would be impeded to compensate for higher taxes. Other losers if the country falls over the cliff include:
- Medicare providers would suffer a 7.6% cut.
- There would be a 2% drop in Medicare payments to doctors, nurses and insurers.
- Grants to the social services departments of states, farm subsidies, and rehabilitation and vocation programs would be cut.
- Defense spending could see a cut of up to 10%, which means approximately $55 billion less spending in 2013.
- Discretionary programs would see a 40% cut. These programs include the Department of Energy, NASA, international aid, national park funding, the EPA, and a number of others.
- Women, being that so many are disproportionately reliable on government programs, would also suffer more than men. For instance, women on Social Security statistically rely on it more for their primary income. As of now, Social Security is not the major concern, however.
- Investors could suffer, depending upon their type of investment. Private equity is something that could suffer simply based upon the tax issue, but the private equity executives are not getting too worried quite yet. For others, they know it is very likely that the Dow Jones Industrial Average will take a significant dive, placing it closer to 10,000 than 14,000.
The programs that would be exempt from any cuts include Social Security, the remainder of Medicaid and Medicare, children’s health programs, Pell Grants, veteran’s benefits, and food stamps.
If we go over the fiscal cliff, there will be some winners. In fact, there are already some winners and they are Treasury bond investors. Bond prices have been increasing as Washington tries to figure out what to do. The reason for this is because Treasury bonds are safe investments. The price increase is due to some individuals flocking to safety by placing their money somewhere they know will keep it safe. In other words, investors in the bond market are hedging against the uncertainty that a fiscal cliff will happen.
However, it is not out of the question that Treasury yields could drop if a solution is reached. Still, there is the current increase in the number of bond purchases and this currently has the Fed selling notes that are shorter-dated so that they can use them to buy longer-dated bonds that are for the sole purpose of keeping the yields longer-dated. This is done to help encourage consumer confidences and investments by businesses.
If a deal is reached by the last day of the year, then everyone wins. The Democrats and Republicans will have reached a deal, meaning they finally worked together to find a solution that would keep the United States from possibly entering into another recession. If the deal is not reached, President Obama and fellow Democrats will be winners, as the middle class will focus an evil eye on the Republican Congress for refusing to raise taxes on those individuals making $250,000 or more annually. At the same time, there will be those that will view President Obama as stubborn for not giving in to the closure of loopholes and elimination of deductions.
And while the stock market may be a major loser if we go over the fiscal cliff, there are some individual stocks that may be winners. Stores, such as Dollar Tree, that offer consumers an alternative way to spend money through steep discounts on many necessary items, are major winners. In 2008, Dollar Tree actually collected some significant dividends when the stock market crashed because American families were in desperate need to control spending.
Now We Wait
So now we wait to see if an agreement is reached between the two parties. If there is no agreement to raise taxes on those making $250,000 or more a year, the country falls over the hill and taxes go up on those individuals anyway, as well as on everyone else. Perhaps this means it is time to invest money into something that you know will give you returns, such as bonds and Dollar Tree. Regardless of how you look at it or how it would affect you personally, Washington is the place to watch right now so that preparations can be made to cushion the blow that higher taxes and program cuts can give.