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In April, The Heritage Foundation advised that action be taken in addressing what is known as “Taxmageddon,” a mammoth and unprecedented tax increase that will hit taxpayers beginning on January 1, 2013. Ben Bernanke, Federal Reserve chairman, has referred to it as a “massive fiscal cliff.”
The Heritage Foundation’s warning, back in April:
This impending tax increase is mostly the result of the expiration of many long-standing policies that all expire at the end of 2012. President Obama and Congress should start working together now to prevent this massive tax increase rather than waiting until the end of the year. That would assure families, businesses, and investors that their taxes will not rise sharply as the economy is still staggering to its feet and show the voters that Washington really can get important things done—even in an election year.
Taxmageddon Is Huge
Taxmageddon is a $494 billion tax increase that strikes at the beginning of 2013. Under current law, tax policies in seven different categories will expire, and five of the 18 new tax hikes from ObamaCare will begin.
So, unless President Obama and Congress act to avert Taxmageddon, a one year, $494 billion tax hike will ensue.
Due to the unpredictability of the Taxmageddon situation, economic growth has been choked and the weak economy persists. Consider this latest of jobs reports: Heritage Employment Report: Jobs Do Not Bloom in April. The combination of a bad economy and the ambiguous nature of a lame duck session produces more than enough reasons for the president and Congress to move forward with a plan of action.
Mohamed El-Erian, CEO of Pimco, which is the world’s foremost bond investment firm, urges that action be taken:
…few think the fiscal cliff will materialize. After all, the deadline was always meant to act as a catalyst for serious revenue and expenditure reforms — including revamping the federal tax code, streamlining entitlements and realigning incentives to favor production and investment rather than consumption and operational avoidance of U.S. tax jurisdictions. But complacency has continued to reign, leaving the country exposed to unnecessary economic trauma and renewed political dysfunction.
Markets are discounters of the future, and prolonged political inaction is likely to encourage companies to postpone building plants and purchasing equipment and to discourage them from hiring.
All this speaks to the importance of acting now to avoid getting too close to the cliff’s edge. (emphasis added)
Peter Orszag, writing for Bloomberg, outlines three possible outcomes, in regard to Taxmageddon:
- If Mitt Romney wins the presidency, it is likely that a temporary deal to reinstate the tax cuts and raise the debt limit would be made
- If Barak Obama wins, a deal could be agreed upon prior to January 1, 2013
- The tax cuts would expire during a lame duck session, if an agreement is not reached
The potential increases would:
- Cost US households an average of $3,800
- Increase taxes from a bottom rate of 10% and a top rate of 35% to a bottom rate of 15% and a top rate of 39.6%
- Decrease the child tax credit by half, from $1,000 a child to $500
- Usher in the return of the marriage penalty
- Significantly increase tax on dividends, which a lot of seniors depend on, from 15% to a potential 39.6%
- End a $124 billion cut in the payroll tax
- End the temporary fix to the alternative minimum tax
“With all that facing the economy, wouldn’t Congress act? Ordinarily, yes — but this is a presidential election year.”It’s my guess that nothing will happen on any of these issues until after the election,” Hodge said. “Here we have a case where many in Congress will be retiring, maybe even a president. How do you fix system with that uncertainty?”And Capretta adds, ‘it’d be hard for an old … outgoing Congress to make decisions when a new Congress is about to come in. And I think the public might react a little badly to that as well.’ Nevertheless, one congressional source says the chances of a lame duck session are 100 percent: Congress can’t afford to take the end of the year off.
All this raises the stakes for the economy, because until Congress acts, businesses can’t know what their tax rates are going to be, making it hard to hire more workers or plan for the future and leaving both taxpayers and the economy awash in uncertainty.”