Tax Increases Next Year May Push the Country off the “Fiscal Cliff”

Posted on October 29, 2021

Tax Increases Next Year May Push the Country off the “Fiscal Cliff”

Next year will bring additional taxes with it. From the first of January, 2013, an increase in income tax, medicare taxes, social security taxes and Obamacare taxes will be seen. Along with that, $120 billion federal government spending cuts are ordered for 2013. The result: it might push the country off the “fiscal cliff”. The logic behind it is simple.

http://www.washingtontimes.com/news/2012/oct/28/williams-falling-off-the-fiscal-cliff/ explains it thus: “If the highest income-tax rate increases from its current 35 percent to 44 percent (including Medicare and Obamacare tax increases) on the wealthiest taxpayers, a family making $500,000 will have $45,000 less to spend. That family may decide to cut out a gardener, a housekeeper, a vacation or even a new yacht. A progressive might say, “So what, they are rich, and they will still have an opulent lifestyle.” Unfortunately, that does not help the newly unemployed housekeeper or gardener find a job.

If the high-income family makes money from a small business, such as a restaurant, the owner may decide not to cut personal spending but to reduce investment in the restaurant. Perhaps the restaurant owner decides not to buy the new $45,000 replacement dining tables. That hurts the table manufacturer who does not need as many workers making the tables, so he lays off an excess employee. Perhaps the restaurant owner will decide to buy the replacement tables and instead lay off a waiter earning $45,000.”

Because in an economy, every service provider is also a receiver of service, if the service provider begins to make cuts in spending, there is the direct effect on those who receive earnings from that person. If the person decides to lay off an employee to cut down on spending, it might directly lead to unemployment. If that person chooses to cut down the spending by buying fewer commodities, it indirectly leads to unemployment. In either case, somebody loses a job.

Along with unemployment, less spending will also affect businesses. If more people are unemployed or have less money to spend, businesses will have lower income. All these effects will mean a reduction in gross domestic product.

Weighting the effect of tax increases, The Washington Times opines: “The economists at the Congressional Budget Office estimate that this tax increase and spending cut could result in an additional 3 million Americans becoming unemployed. They also estimate that the country will have 2.9 percent less income to spend.

There is also a psychological aspect to the fiscal cliff. Many analysts think that individuals, investors and business owners in this country are in economic limbo because they are concerned about the fiscal cliff. The business and financial communities do not like uncertainty. They do not know whether the U.S. will go over the fiscal cliff and enter a recession. They prepare for the worst. Consequently, they save money and do not spend money today because in a recession, cash is king. If the fiscal cliff is eliminated, these individuals, businesses and investors might be more inclined to spend money. This would immediately help stimulate the economy.”

Tax issues are always difficult to handle, but the right fiscal policy could have helped avoid the fiscal cliff. 2013 is the year that will tell how the country will emerge from the fiscal cliff.