On December 31, 2012, a number of significant tax hikes and budget cuts simultaneously go into effect due to prior legislative requirements, creating serious challenges for the U.S. economy. In the Congressional Budget Office’s report released last Tuesday, CBO projects that these changes would push the U.S. economy back into recession, resulting in a 1.3% contraction of GDP in the first six months of 2013 and a 9.2% unemployment rate by year’s end.
Debt ceiling - The current debt ceiling of $16.4 trillion was expected to safely carry the Treasury Department into early 2013. However, the extension of the payroll tax holiday was not offset, so Congress is expected to have to raise the debt ceiling in late 2012. The last time we had a debt ceiling debate, Congressional gridlock resulted in Standard & Poors lowering the long-term rating of the U.S. government for the first time in history.
Sequestration cuts - As a result of the failure of the Super Committee to reach an agreement, the “automatic” budget cuts of $1.2 trillion, split between defense and nondefense spending will occur immediately in the new year.
Personal tax rates - Everybody’s, let me repeat, everybody’s personal taxes will go up in 2013 by thousands of dollars. The lowest 10% individual income tax bracket will expire, reverting to 15%. The highest 35% individual income tax rate will rise higher to 39.6%. People in between will see a 3% hike in their tax rate, on average. The overall heightening of taxes – income, payroll, health care taxes, etc. -- will suck $399 billion from the economy and into the government coffers.
Capital gains and dividends rates - The 0% and 15% tax rates on long-term capital gains will expire, rising to 10% for lower tax brackets and to 20% for higher tax brackets. The current qualified dividend tax rates of 0% for lower tax brackets and 15% for higher tax brackets will rise to ordinary income tax rates for all individuals. Higher capital gains taxes means less investment, which means fewer jobs.
Confiscatory taxes - The estate-tax exemption will drops from $5 million back to $1 million and the maximum estate tax rate rises to 55%. We can argue if it should be higher or lower, but everyone agrees that the new level of taxes is confiscation.
If Congress acts responsibly to cancel these spending cuts and tax increases before the end of the year, the CBO estimates the economy would grow 4.4% by 2013 and employers would add two million jobs.
If Congress fails to act, the entire economy is on the line. Uncle Leo and all Americans will see the biggest train wreck in history.
Bartlett is president and CEO of The Financial Services Roundtable.