The New Year is just getting started and it’s been an amazing year already.
First, we went over the Fiscal Cliff but then we really didn’t when Congress imposed the December 31st deadline. The President signed the bill into law in August of 2011, yet nothing was done to avoid the Fiscal Cliff until after the country missed that deadline. Then the solution to the $110 billion in automatic spending cuts was to push the deadline out for two months. A cynic might think that it seems like the rules don’t always apply to the guys who write them.
In the first week of the New Year, stock markets rallied around the world with the U.S. gaining an average of 4 percent. Then last week the markets slipped as investors realized that while we temporarily averted the automatic cuts, taxes for the vast majority of all Americans actually INCREASED! The biggest culprit responsible for that was the increase in payroll taxes. Everyone with earned income will pay an extra 2 percent Social Security tax in 2013. If you earn $50,000 a year, that extra tax is estimated to be about $1,000. We’ve paid the higher tax before. There was just a reduction last year in hopes it would help boost consumer spending. It worked.
Capital gains and dividend taxes jumped from 15 to 20 percent for most Americans. That’s a 33 percent increase but still not as much as had been threatened. Congress kept even lower capital gains taxes for lower income earners. Unfortunately, most people who fall into those lowest of tax rates typically don’t earn a lot of income from capital gains and dividends. In 2010, the top 1 percent of households by income collected nearly 50 percent of all dividends paid. That was approximately $63 billion.
The Congressional Budget Office (CBO), the offici`al bean counter for Congress, estimated the Fiscal Cliff “deal” would ultimately increase our deficit by $4 trillion dollars! If the mandatory spending cuts and tax hikes had gone into effect on January 1, 2013 as the law stated, the CBO estimated that our 2013 budget deficit would have been slashed by more than HALF!
It’s going to take a long time to forget the image of politicians slapping each other on the back for the 153 page deal. It’s going to take even longer to forget that the U.S. House of Representatives took all of 20 hours to research, study and debate the new legislation. Perhaps they missed the parts of those 153 pages that gave sweetheart deals to the tuna industry, ceiling fans, Puerto Rican rum, NASCAR, Hollywood, billions to extend overseas corporate tax breaks and many other loopholes.
After the deal was announced, the CBO estimated our 2013 deficit would exceed $1 trillion for the sixth consecutive year. It shouldn’t surprise anyone though since we’ve gone more than 1,100 days without the Senate introducing a budget. If you don’t have a budget, how in the world would you ever know how much you can spend?
We do have to give Congress credit though because the CBO reported that the triumphant deal included $2 billion in cuts for 2013. So they actually are slashing spending. Kudos! To put that in perspective, that’s the same amount of debt that our government accumulates every 10 hours and 38 minutes.
Last week, news leaked from AIG that they are considering SUING the US government for the unfair terms of the bailout they received in 2008. “We the People” gave AIG $182 billion to save their rear ends. They would have gone bankrupt if they had not been bailed out. Now their former CEO Hank Greenberg has actually filed suit and is trying to coerce his former company to join him. This is the same man who ran the company for nearly four decades and owned stock valued in excess of $30 billion at its peak.
One thing I always tell my clients is that making money in the markets without taking too much risk really isn’t that tough. Two things we have to avoid are greed and stupidity. Because today, it seems there is plenty of that to go around in Washington, DC and on Wall Street.
Kevin Powell can be reached at email@example.com.