Fiscal Cliff

We are fast approaching the new fiscal cliff discussions which will be a significant news item over the summer. To understand the issue we face as a country, I give you two quotes:

“The President is clear that he will not address our entitlement crises unless we’re willing to raise taxes. I think the tax issue has been resolved [with recent tax code compromise]. So at this point, I don’t know how we’re going to go forward.”

House Speaker John Boehner, March 2013

“”It is almost a false argument to say that we have a spending problem.”

House Minority Leader Nancy Pelosi, February 2013

The conflict and issues are not only huge but the differences in how to resolve our deficit problem are very wide apart between the two parties.

As for our leaders in Washington, I don’t think the word “permanent” means what they think it means. Because earlier this year we heard that they were going to permanently extend the Bush tax cuts that were getting ready to expire. The Republicans understood that to mean that they negotiated tax increase on the rich then and that the next rounds would be focused on spending cuts. We now know that President Obama and the Democrats in congress are calling for even more tax increases.

As of the last quotes from our leaders in Washington, here is what we can deduce is being proposed by the three main parties involved.

Republican Budget Plan:

• Balance the budget over 10 years
• Contains no new tax revenues
• Changes Medicare to a “voucher” system which allows recipients to choose among private and public plans
• Premium on the Medicare voucher system will be based on income, thus means testing at a start for Medicare
• Repeals the Affordable Care Act

Democrat Budget Plan:

• Does not balance the budget
• Every dollar of spending cuts must be matched by a new dollar of tax revenue
• Does not have any changes to Social Security or Medicare
• Cuts defense spending

President Obama’s Budget Plan:

• Reduces CPI increases for Social Security
• Means testing, at some level, for both Social Security and Medicare
• Limit deductions for affluent families including charitable contributions and mortgage interest deductions
• Make the permanent Bush tax code no longer permanent by lowering the estate tax exemption to $3.5 million and the gift tax exemption to $1 million.
• 45% tax rate for both the estate and gift tax.
• As reported by the media already, max out retirement accounts to $3.4 million in accumulation
• Remove many “loopholes” including carried interest, “stretch IRAs,” sophisticated wealth transfer techniques, oil and gas tax preferences, and LIFO accounting.

What actual budget plan results from the negotiations, will be much different than any one of these plans and will most certainly be a combination of each. This is setting up to be some very heated negotiations, with sound bites and grandstanding at an all-time high. We should expect some market volatility as well once this is played out over the media.
Best Regards,

The Washington Update by Andy Freidman was a major source to the above written article.