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As students, we have a lot on our minds with the end of the year getting closer. Studying for final exams, what gifts to buy for whom, where to spend our holiday — these are examples of what we concern ourselves with in the coming weeks.
But this list excludes one important concern that we should all be mindful of this year in particular: the fiscal cliff.
At the end of 2012, the tax cuts imposed by the Bush administration will expire. This means rates on income, capital gains, estate and many other facets of general taxable income will increase.
There is also a separate issue of automatic spending cuts, or sequestration, which will greatly reduce funding for various arms of the government. $55 billion will be cut from defense spending, and an equal $55 billion will be cut from non-defense spending. This reduction of approximately $110 billion in subsidy will occur every year for the nine year life of the sequestration.
These two events make up what is widely referred to as the fiscal cliff. Of the two issues, the latter brings the greatest concern, while the former will be the most difficult to fix.
If the sequester is to run its course, immediate economic slowdown will occur in the primary form of job loss, bringing the chance of another recession into the realm of probability. But the reason this sequester was even passed by Congress was to motivate both democrats and republicans to work together to reduce the current deficit.
This spending cut program was purposely made as ugly as possible so both parties would have no choice but to compromise when the time came. And now, the time is here. There is little chance of the sequestration actually coming to fruition, but the possibility of this catastrophic cut is still enough to cause worry.
Taxes are less straightforward and are instead shrouded by a thick veil of disagreement and argumentation.
It is a general economic theory that when an economy is in or working out of a recession, raising taxes will exacerbate the problem. Limiting the amount individuals are able to spend, more than a recession does by itself, will further decrease GDP growth.
However, regardless of political affiliation, President Obama had been very clear about his plans for taxes throughout his campaign for re-election. His platform included raising the tax level for high-income citizens making an annual amount of $250,000 and above. Now that he has been reelected, he has the general public on his side. Therefore, his administration has the leverage needed to get tax increase legislation passed.
The difficulty stems from the partisan rift that has developed in Washington. Both sides of the aisle have been stubborn in their opinions on the direction of tax rates. The political aspect behind the issue has gotten so twisted that voting for the Obama tax increase would be considered a tenure death sentence for many republicans planning to run for reelection.
The instant their opponent publicizes that they did so, the conservative voters will feel betrayed, and the incumbent will most likely be ousted. This is just one example of the many factors contributing to the impasse in Washington.
It’s unfortunate, but that is the state of the current political environment. Compromise has shifted from the fundamental basis for democracy, to a necessary evil, to just evil.
I feel, as Warren Buffet expressed in his New York Times article “A Minimum Tax for the Wealthy,” that there should definitely be a tax increase in the upper echelon of income, but also raising the criteria to $350,000-$500,000 and above.
This would increase tax revenue which would, although modestly, help the deficit. It would also protect the salaries of the low, middle and moderately high income citizens, promoting spending and GDP growth.
Of course, this is a simplified version of what actually must be done to fix our economic problems, but these are the kinds of conciliations our political leaders must be open to.
The future will call for both fiscal and monetary reform to fix our disjointed economy. There is no perfect plan that everyone will agree with, and it isn’t likely there will be. So for now, it will have to be compromise that bridges this fiscal cliff.
A version of this article appeared in the Nov 30 issue of the Collegiate Times.
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When Warren Buffett says they should increase taxes on the rich, it is important to remember that Buffett uses an army of accountants to pay as little income tax as possible. There just aren't that many people with a taxable income over $250,000 and the increase in percentage will only apply to the money over $250k, not the whole amount.
The wealthy already pay 86% of the federal income taxes while the people who pay no federal income taxes at all are demanding the wealthy pay their fair share. Fine, let's really talk about "fair share" then.
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Buffett doesn't need an army of accountants. His income is derived mainly from dividends and capital gains, which are taxed at a much lower rate than the income would be if it were from wages. (Turbotax could figure that out.) This makes sense for most investors since profits are already taxed at the corporate level. Once you start making enough money to where you can live very comfortably off just your investment income, I think paying that lower rate becomes more of a gray area.
As far as the wealthy already paying 86% of the country's income taxes, that makes sense when you look at how much their incomes have increased over the last couple decades. Income distribution was more equitable when the top tax bracket was much higher, as it was for most of the 20th century. Higher middle class wages would mean more of the country paying more income tax.
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If you haven't already moved whatever you have in the market to safe harbors, you'd better do it in the next few days. At worst you lose minimal income over the next month if fiscal cliff gets resolved. At best you save your money that will get lost when the market tanks. And my bet is, it won't get resolved.
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No, Henry, Buffett advocates taxing every dollar at the top rate for high earners, or at least ensuring that their effective rate is above a certain threshold - like the Alternative Minimum Tax aims to do now (I think he said 30%). http://en.wikipedia.org/wiki/Buffett_Rule
Too much partisan bickering. The GOP wants to change the deductions structure so they can say they're not technically raising rates. The funny thing is that, as it turns out, this would generate more revenue than the proposed Democrat change in marginal tax rates.
"According to the Tax Policy Center, capping deductions at $50,000 per household would raise an extra $749 billion over a decade. That's about $300 billion more than the government would get from raising the top two income tax rates, as President Obama has proposed.
If the cap on deductions were set lower — say $25,000, as Romney suggested — the government would raise even more revenue: $1.2 trillion over a decade. Most of the extra tax would still be paid by the wealthy, but some would be collected from middle-income families." http://www.npr.org/blogs/itsallpolitics/2012/12/03/166368685/pick-a-number-lets-play-cap-those-deductions
So the sticking point is over spending reductions, since both are clearly intent on increasing revenue (surprisingly, the GOP more so than the Democrats).
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The income tax rate is lower now than it was in the late 1950's.
Bush recklessly lowered the tax rates for all and we couldn't afford it. Then he plunged us into 2 illegimate wars that have absolutely exploded our deficit. It's laughable when the GOP talks about fiscal responsibility.
They got what they deserved in November. It's fun to watch them flop all over the floor now trying to figure out what is wrong with their party.
The only thing they have left is their stubborn refusal to raise taxes in the name of their ideology and pledges to Grover Nordquist. Totally assinine.
But remember, what sounds great now as far as slashing the entitlement programs (that we have paid for) will hurt all of us when we need them in later life. GOP don't care, everyone should have mom and dad living with them because they can't afford to live on their own.
These people disgust me.
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