While many are declaring the going over the fiscal cliff into January will have very little impact on the economy and would actually help Barack Obama's agenda, the reality is something quite different. Senator John Barrasso (R-WY) believes that Obama is "eager" to run the country right off the fiscal cliff. For the past couple of weeks he has been engaged in playing a game of "chicken" with the GOP House leadership led by Speaker John Boehner, but has failed to compromise to any of the plans put forward from his opposition, including one supported by House Minority Leader Nancy Pelosi.
Sudeep Reddy, at the Wall Street Journal, reports,
If the U.S. goes over the fiscal cliff—the $500 billion package of tax increases and government-spending cuts set to take effect in early January—the likely consequences include a sharp decline in consumers' spending and confidence.
"If it lasts three weeks, I'm pretty sure we get a recession out of it," Princeton University economist and former Federal Reserve Vice Chairman Alan Blinder said Friday. "Once you start sliding downhill, once confidence is shattered…it takes a while to right the ship."
Investors still appear to be counting on a relatively swift resolution to the fiscal cliff, a mood that could limit the direct economic damage from the most recent hiccup in negotiations. The Obama administration and lawmakers are preparing for the possibility of a protracted fight stretching well into January, despite pledges to resume talks in Washington late next week.
"Markets are putting a very low weight on the notion that we actually go over the cliff for more than three days," Mr. Blinder said. A delay beyond that "would really kick the chair out from under the markets' current belief" and trigger a wider reaction among investors and then consumers.
A letter was sent to Capitol Hill by acting Commissioner for the Internal Revenue Service Steven Miller urging for serious contemplation by legislatures of the consequences of going over the cliff. The letter reads in part:
As you know, the exemption amount for the AMT is not indexed to inflation. As a result, Congress has in the past enacted temporary patches to ensure that the AMTs reach does not unintentionally expand to more taxpayers at lower income levels.
The most recent AMT patch, and the exemption amounts of $74,450 for joint filers and $48,450 for single taxpayers, expired at the end of 2011. For 2012, the current-law AMT exemption amounts are much lower: $45,000 for joint filers and $33,750 for single taxpayers. This means that, absent enactment of a new patch in the near future, nearly 30 million additional taxpayers will become subject to the AMT on their 2012 income tax returns.
As I stated in my letter dated November 13, 2012, the IRS has maintained the programming of its systems assuming that the AMT will be patched as it has been in previous years. I also indicated that if an AMT patch is not enacted by the end of this year, the IRS would need to make significant programming changes to conform our systems to reflect the expiration of the patch. In that event, given the magnitude and
complexity of the changes needed, I want to reiterate that most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later.
This situation would create two significant problems: lengthy delays of tax refunds and unexpectedly higher taxes for many taxpayers, who will be unaware that they are newly subject to AMT liability. Moreover, if Congress were to act at some point next year to enact a new AMT patch, the time and substantial expense necessary for the IRS to reprogram its systems to reflect expiration of the patch would ultimately be wasted.
As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers - 80 to 100 million of the 150 million total returns expected to be filed - may be unable to file.
Indeed, the Democrats believe they have everything covered with a fallback plan. That plan is S.3412, which the Senate passed earlier this year. However, that bill merely extends the current tax rates for everyone except the top two brackets. It says nothing about what the above letter points out, like the AMT, defense sequester, the estate tax or the payroll tax cut.
The Republican led House passed it's own bill earlier as well earlier this year. HR.8 passed 256-171 and 19 democrats voted for it. This bill contained the Job Protection and Recession Prevention Act and the Pathway to Job Creation Through a Simpler, Fairer Tax Code Act. So far this isn't even making it to the negotiation table so far. While Boehner is flip flopping all over, conservatives have sought to stand their ground.
Meanwhile, it's Christmas and Obama, as usual, is not taking seriously his office as he and his family are off in Hawaii. We're either going over the cliff or someone is going to serve. I'm guessing we're going over the cliff.
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