Off A Fiscal Cliff?

In the news we are hearing about a “fiscal cliff” situation for the country if the U.S. Congress does not address some tax issues and some potential federal spending cut issues by the end of this year.
What does it mean? It means that tax rates could increase for all of us, some of us or none of us. It means that there could be automatic federal spending cuts at the beginning of next year.

People who have insight into these things, or at least handicap these things, believe it is unlikely Congress will allow tax rates to rise. This is mainly because higher tax rates at the present time would hurt rather than help our current economic situation. The real debate, and sticking point, however, is about whether tax rates should be raised for only taxpayers above a certain income level: $200,000 for individuals and $250,000 for households. Congress also wants to avoid many, if not all, of the automatic spending cuts scheduled to go into effect at the beginning of 2013. Those cuts would affect many businesses that have contracts with the federal government or whose business is directly tied to federal government spending in some way.

So what? What difference will it really make at a personal or individual level? If tax rates are allowed to rise, the general effect on most people who pay taxes will be an increase in their tax liability for the year (duh!). If there is an impact on employer withholding tables then some folks will see a decrease in take-home pay (after taxes) and, as a result, may have to do a little belt tightening.

The real concern is for those taxpayers who earn $250,000 or more a year. The result of an increase in taxes for people in that category may potentially be job losses among employees of small businesses. Why? If an employer’s taxes go up, the employer may have to reduce some of his or her business expenses. One way of accomplishing that is to reduce employee expenses, i.e. reduce the number of individuals the business employs. That would be bad news for employees of small businesses and bad news for the economy. Of course, if the federal government is forced to make automatic spending cuts, job losses will also result for companies doing business with, or for, the federal government.

A good possibility at the moment is that Congress may allow some of these events to occur and then make corrections and adjustments early next year. Unfortunately, that does not help taxpayer uncertainty.

What to do, what to do? Uncertainty could remain for several months. If you already have your act together, or mostly together, you are being financially conservative regardless of what the federal government is doing. You’re spending wisely and saving money where and when you can. Stay the course.
If you don’t already have your act together, you need to keep working toward saving money and spending wisely and under control. This is a marathon, not a sprint. There are always adjustments to be made. Even though there are signs that things are improving in various parts of the economy and the housing market there are still many problem areas and potential problem areas, both here in the U.S. as well as overseas. We all have to be prepared to ride out the storms that will come and go over the next months and years.

For those who actively engage with their representatives and senators in Washington D.C. you might ask them to do what’s right and best for the country, and do it sooner rather than later. The edge of a cliff is not where we need to be as individuals or as a country.

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