Watch Out For The “Fiscal Cliff”

August 2, 2012 — 1 Comment


The U.S. House of Representatives Wednesday passed a one-year extension of the Bush tax cuts, as Republicans squeeze in one of the last votes before lawmakers take a five-week recess to rally constituents around the election-year issue.

The $403 billion measure passed by 256-171. Nineteen Democrats supported the plan, and only one Republican voted against it. It reflected sharp differences over whether higher-income brackets should return to the tax rates former President Bill Clinton signed into law.

Shockingly, the two parties disagree; Republicans want to keep all of the tax cuts. Democrats want to keep the tax cuts for the first $250,000 of household income, depicting their plan as a compromise that would both help the deficit and allow everyone to keep some of the low tax rates instituted under former U.S. President George Bush.

The vote is at odds with the Democratic plan that passed the Senate 51-48 last week and leaves Congress gridlocked on a major component of the “fiscal cliff” we are apparently about to fall off. 

So what exactly is this “fiscal cliff” and what happens if go over the edge?

If Congress fails to act at all, the U.S. economy would probably contract at a 1.3% annual rate in the first half of 2013, the Congressional Budget Office has estimated. Liberal groups have noted the contraction wouldn’t occur immediately, leaving room for both sides to keep negotiations going after the Bush tax cuts expire at year-end.

Republicans want to preserve the Bush tax cuts across all six income brackets, ensuring the top two rates remain at 35% and 33% next year. The party also wants to keep dividend and capital-gains tax rates at 15% and the estate tax at 35% after the transfer of the first $5.1 million. The Republicans also tacked on a two-year extension of relief from the alternative-minimum tax, which was intended to apply to the rich but is threatening to ensnare more Americans because it was never indexed for inflation.

One key feature of the Republican plan: the lost tax revenue isn’t offset by tax increases or spending cuts elsewhere. “We don’t believe that keeping tax rates as they are now costs money,” Rep. Tom Price (R., Ga.) told reporters Tuesday. Mr. Price said the Joint Committee on Taxation price tag of $403 billion didn’t account for what he sees as higher growth due to lower taxes.

Republicans are citing Mr. Clinton to make their case. Mr. Clinton inadvertently became a big figure in the tax debate in June when he suggested Congress should temporarily extend the Bush tax cuts on the tenuous economic recovery. A spokesman for the former president later said Mr. Clinton didn’t believe the tax cuts for the wealthiest Americans should be extended again. Republicans have ignored the latest statements and continue to cite Mr. Clinton.

Democrats want to continue the tax cuts for the first $250,000 of household income, but allow the top rates to revert back to a maximum 39.6%–the level in place under Mr. Clinton. The top rate is currently 35% for household income over $388,350. Democrats note the economy boomed under Mr. Clinton and use that to make their case as well.   

Both the Republicans and Democrats suspect they will have the upper hand with voters. Only time will tell, but let’s just hope we don’t trip over our own two feet and fall off this cliff.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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  1. Watch Out For The “Fiscal Cliff” « The Joy of Tax Law | Tax Attorney - August 2, 2012

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