Industry News

Rivkin’s Review of the Fiscal Cliff

Now that the saga that has been the fiscal cliff ordeal of the United States has finally been resolved, most are left unsatisfied by the drama, if not completely confused by the jargon and results of what many saw as a cat fight among politicians.

In fine governmental fashion, the House and Senate waited until the last minute (literally three hours before the January 1st deadline) to reach a deal, and United States President Obama signed into law a bill preventing this so called fiscal cliff, which has been a term used when referring to the potential dilemma that would be encountered at the end of 2012, when the terms of the Budget Control Act of 2011 were scheduled to take effect. But what does that mean?

The Fiscal Cliff, as defined by refers to the expiring tax cuts and government spending cuts which were to take effect at the end of 2012. Many felt that if these two events proceeded as planned, the effect on an already weakened economy would be devastating to the point of an even deeper recession due to reduced household incomes, increased unemployment rates and tarnished confidence among both consumers and investors. It was also believed that going over this fiscal cliff would greatly reduce the federal budget deficit, which is just one reason why some thought stepping over the edge would have actually been beneficial.

The bill makes permanent the Bush administration’s tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000, while raising rates on those who make more than that from 35% to 39.6%, bringing back a top tax bracket from the Clinton administration. The bill will also extend unemployment insurance as well as delay automatic, across-the-board cuts in federal spending, otherwise known as sequestration, for a mere two months. In addition to providing taxpayers with greater certainty in regards to the alternative minimum tax, the deal will also keep in place many popular tax breaks. But it should be noted that American taxes will go up despite the fact that increased taxes were a primary theme of the debate, if that makes any sense at all, and the deal hardly addressed the country’s enormous debt issues.

The first day of trading after the last-minute deal was passed the S&P 500 rose 2.5%, the most significant one-day jump since December 2011, so it’s no surprise that the stock market was pleased with the fiscal cliff deal. But financial advisers aren’t as enthusiastic, and found that many are reluctant to believe that the deal will lead to long-term changes to government spending, the national debt or tax reform. A great majority of nearly 1,500 advisers Polled by InvestmentNews felt this way because Congress neglected to address any spending cuts in the fiscal cliff deal.