Is that Wile E Coyote I See?

Well, the elections are over, Congress is back in session, and the whole lot of them are staying up late, ordering in Dominos, and working side by side to come up with a tax and spending compromise to keep us from going over the fiscal cliff.  And if you’ll believe that….

 

I haven’t heard any reports of happy resolution yet, but I’m glad to see Congress and the president at least bringing up the subject and beginning to talk about what should be done.  For those who aren’t quite sure what they mean by “fiscal cliff,” it’s a term used to describe the coming automatic tax increases and spending cuts, that if all happen as planned, could cause a severe downturn in our already struggling economy.  We could see the expiration of the Bush tax cuts for all taxpayers, the return of the regular 6.2% Social Security tax, the imposition of the new Obamacare taxes, and $109 billion in cuts to spending across the board.

I’m a big fan of the “what if” game, so I’ll lay out my ideas of what could happen as the issue gets settled.

1.  Congress decides once again to “kick the can” and passes a short term extension of the Bush tax cuts and delays the automatic sequestration cuts.  When the new session convenes in January they’ll come up with a comprehensive overhaul of the tax code.  Which I recall by the way, is what they said they were doing two years ago when the Bush tax cuts were originally scheduled to expire.

2.  Bush tax cuts are allowed to expire only for taxpayers earning $250,000 or more, coupled with a reduction in spending (but not cutting as deep as the sequestration).

3. Bush tax cuts expire for all, coupled with a reduction in spending.

4.  We have a standoff and the ball drops in Times Square on New Year’s Eve with no deal.  We go over the fiscal cliff, and after much weeping and gnashing of teeth, Congress finally comes up with a long term, workable solution to our debt and deficit crisis.

(In all of these scenarios I expect the 2% Social Security tax cut we’ve enjoyed for two years to go away, and since the Obamacare taxes are not up for negotiation they will stand.)

My prediction?  I believe we’ll see either #1 or #4.  Door #4 is the one everyone is dreading, but I have to wonder if, although it will be painful to go through, perhaps it will be like finally ripping off the band aid we’ve been slowly pulling off for 4 years now.  Perhaps there are painful changes we need to go through that we’ve avoided by kicking that can, and we won’t find real healing until we finally get it over with.  Personally, I hope we go with #1, but only if there’s a guarantee of real reform to follow by summer.

What are your predictions?

 

photo by: flavouz

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