Washington’s Thelma & Louise: The Political Cliff
Remember the ending to the 1991 film Thelma & Louise? In a commentary commemorating the films 20th anniversary, NPR's All Things Considered said
"The movie became famous as much for its ending as its cliche-busting. In the closing scene, the women decide not to face justice, but to "just keep going," gunning the green T-bird over the edge of the Grand Canyon, into a soaring freeze frame."
In case it's been a while, re-watch that final scene
The Political Season is now open and everyone is abuzz with predictions and concern over the Presidential race. This week we had the first Presidential Debates, but last week I had the good fortune of hearing Andy Friedman of The Washington Update provide his political insight, predictions, and analysis. Yes, he did make predictions on the election and then spoke about the impact his predictions for both the White House and Congress, but I was more interested in hearing his views on the so-called Political Cliff; our present day Washington version of the ending to Thelma and Louise.
As tax issues have presented and Congress sought legislative compromise, our politicians have settled for short term solutions to long term problems and have metaphorically kept kicking the can into the future. Well, unless the Mayan's are correct, the future is almost here and according to White House Chief of Staff Jacob Lew, this sets up a "perfect storm for December 2012." The term Political Cliff refers to the expiration of the Bush era tax cuts. Unless Congress acts, the top income tax rates will rise from 35% to 44% for ordinary income, from 15% to 24% for capital gains, and from 15% to a whopping 44% for dividends. Additionally, the estate tax which is currently sheltered for estates under $5 million will see the exemption decrease down to $1 million while the top estate tax rate will simultaneously increase from 35% to 55%.
At the first debate, moderator Jim Lehrer announced his intent for the candidates to point out their differences. In the process, some similarities were discovered. Neither candidate nor our officials in Congress deny that there needs to be an increase in revenue. The disagreement is on how to get it. The majority consensus is to let the Bush era tax cuts expire on the "wealthy" but no one can seem to agree on who is wealthy. Additionally, the Republicans are bound by their pledge to "never raise taxes". If they were to agree to legislation which extended the Bush era tax cuts for some, but not all, that would violate their pledge. Instead, Andy Friedman predicts that the Republicans would rather let the tax rates increase through the expiration of the Bush era tax cuts and then, in early 2013, they can ride in like a knight in shining armor and lower taxes for the majority of taxpayers. Keep in mind the net effect is the same, but through Washington colored glasses dealing with the issue in 2012 is a tax increase, and waiting to 2013 to do the same thing is a tax decrease.
I, personally, am not too concerned about the economic effects of the fiscal cliff. It would be a burden to the economy; tax increases always are. I do worry that our economy is growing so slowly right now that any additional slowdown could result in a mild recession, but it would not be systemic and would likely recover as fast as Congress could act. I am concerned over the market's reaction to a fiscal cliff. I fear that the market may correct in a panic. It would be an over-reaction and I believe the market would likely recovery quickly, but the wounds of the 2008 financial crisis are not fully healed and one over-reaction could lead to others.
The news is not all bad. Once the election is over and the tax environment is no longer uncertain, I think the economy will finally break free of the bonds holding it back.
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