Running Up that Hill and Over the Cliff

It seems as if that famed Kate Bush song is the perfect soundtrack to this “fiscal cliff” debate we’ve been hearing about. And finally, on New Year’s Day, the US senate passed a bill that aims to avert catastrophe. The bill will see higher marginal tax rates (39.6% on income over $450,000 (couples) and $400,000 (singles)) on the wealthiest 2% of Americans and the maintenance of current tax rates on the remaining 98%.

Although it is far from the “grand bargain” that is hoped for by President Obama, the piecemeal victory is nevertheless significant to “98% of Americans and 97% of small businesses who will not see their income taxes go up.”

According to Tax Professor, the bill also includes the following:

• Raise the tax rate on dividends and long term capital gains to 20% on taxpayers with income over $450,000 (joint) and $400,000 (single). The top rate would remain 15% for taxpayers with lower incomes.
• Estate and gift tax: $5 million exemption (inflation-adjusted) and 40% rate.
• Permanent and retroactive patch for the AMT.
• Return of the exemption and itemized deduction phase-outs on taxpayers with income over $300,000 (joint) and $250,000 (single).
• One-year extension of 50% bonus depreciation.
• Extension of various tax extenders.

However, and not surprisingly, House Majority Leader Eric Cantor expressed that he does not support this bill. His sentiment is echoed by many other republicans, who are concerned that continued spending on entitlement programs will add up to $4 trillion to the country’s existing debt over the decade.

“At this juncture, it is hard to say,” commented Mr. Satish Bakhda, Head of Operations at Singapore company registration specialist Rikvin. “While it is necessary to stimulate spending i.e. ensure that the purchasing power of ordinary Americans are not limited by higher taxes, macroscopically, it is also important to look at which programs are truly unnecessary and where limited resources are misappropriated or not maximised.”

“However, as seen in the Eurozone, austerity, coupled with strict immigration policies, also add more salt to the wound, and does little to stimulate an already staggering economy. Whatever the US Senate and House decide on will have bearing on the global economy as well. And quite importantly, as part of a larger global community, we should also remember how we got into this extended recession and how we should never let ourselves get into this position again.”