By Mark F. Seruya
Perhaps somewhere in America there is a hermit living deep in a cave in the most remote reaches of the Rocky Mountains who has not heard the terms “Bush Tax Cuts” or “Fiscal Cliff.”
But these terms likely are familiar to most people, although their true meanings may be somewhat obscure.
It may be helpful to start out by noting that President Bush did not order tax cuts in the classic sense back 2001 and 2003, but rather convinced Congress to enact temporary reductions in taxes. Essentially what he did was lower the percentages of taxes paid by most American working families, investors and companies, in an effort to stimulate job growth in the wake of the 9-11 attacks.
The lower tax rates continued through the Bush presidency but they are not permanent, although they also were extended through the Obama Administration. They are set to expire at the end of the year, and a slew of higher rates will go into effect if Congress doesn’t act.
Among the changes in the tax structure that will automatically go into effect on Jan. 1, 2013 if the Bush tax rates expire are: An increase in the Social Security rate from 4.2 percent to 6.2 percent; the 10 percent tax bracket increases to 15 percent; the 25 percent rate increases to 28 percent; the 28 percent rate increases to 31 percent; the 33 percent rate increases to 36 percent; and the 35 percent rate increases to 39.6 percent.
Also, the Earned Income Credit will be eliminated; the child tax credit will be reduced to $500 from $1,000; the Alternative Minimum Tax will revert to 2001 levels; and the long-term capital gains on middle- and upper-income taxpayers will increase from 15 percent to 20 percent.
Despite the increase in the levels of taxation that will result from these changes, the continued existence of the Bush tax rates is in doubt, and they have become the focal point of one of the most fundamental disagreements between economists.
Those who favor extending the Bush tax rates, or making them permanent, say that lower tax rates stimulate job growth and the overall economy. They believe that private sector investment and job creation drive the economy and lower tax rates give entrepreneurs and investors more incentive to grow their businesses, resulting in higher tax revenues.
Opponents of the existing tax structure believe the government can control inflation and deficits by bringing in higher revenues through higher tax rates. This faction believes the economy is driven by government, not the private section.
There seems to be no end to the disagreement on what will happen if the tax rates are extended or expire, including whether the resultant tax increase will be the largest ever in American history or the second largest after the massive tax increases of 1942, during World War II.
Exactly what will happen if the tax rates revert to pre-2001 levels seems to have only one certain factor – taxpayers across the board will be paying more than they do currently.
Analysts, political observers and pundits even disagree on whether there is a possibility of reaching an agreement – some say not at all, while others believe that once the November presidential election is decided there will be movement to a solution.
About the only thing the two sides agree on is that if a solution can't be reached by the end of the year, American wage earners, homeowners, and investors will see a massive tax increase on January 1, hence the term "Fiscal Cliff."
If that is the case, virtually everyone in America will be impacted.
It is clear that no one from wage earners to homeowners to corporate executives and small business owners will escape the financial implosion if Congress does nothing. Except, perhaps, hermits living in caves deep in the most remote sections of the Rocky Mountains.
Mark F. Seruya, who lives in Midwood, Brooklyn, is an executive director and financial advisor at Morgan Stanley in Manhattan. The views expressed here are his own.