Movement in the Right Direction for the Economy

By: Victor Normand
Published: January 2013

Like the Y2K experience, the fiscal cliff had the potential to damage the economy, but was the threat overstated in both cases? Has the recent preoccupation with a looming economic doomsday been mostly the work of journalists and political operatives?

Both events were triggered on the start of a new year and both potential disasters did not happen. The threats were not imagined, but did they deserve the hype? It is impossible to know the answer. But what is real is the fact that the “chattering class” of government types and media folks will always find something to chatter about, and their chattering does have a psychological effect on consumers and businesses.

So, emotionally and practically, we have pulled back from the cliff for now.   In February, the national debt ceiling will be reached.  It is hard to believe the government will allow the country to default on its debt.  Then soon after that, automatic spending cuts are scheduled to occur.  Hopefully, the drama associated with the spending side of the deficit will have less of an impact than the revenue or taxing side. Not everyone is directly affected by federal spending cuts, but nearly everyone is directly affected by taxes.

Considerable uncertainty on several tax issues have been removed by the new law and that is a very good thing. Higher income individuals and families will face some big tax increases, but for most Americans, taxes will increase only slightly. More important for the economy, tax rates previously in place have been made permanent: they will not expire at some future date as they were designed to do under the old law.

Certainty, which markets love, was also included in two other forms of taxation. The old exemption limit of $5m was restored to the inheritance tax law and along with the Alternative Minimum Tax; the limits will increase with inflation. Unfortunately, the increased rates for the capital gain tax, including the gain on residential real estate, were not similarly indexed to inflation.

In any event, the hype associated with the fix to the fiscal cliff could be all that the economy needs, to finally get back on track and begin creating significantly more good jobs, the event we have all been waiting for.  So, let’s hear some more positive chattering.