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10 Key Components of the Fiscal Cliff

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Learn about the expiring tax breaks and automatic spending cuts scheduled to take effect at the end of 2012 in the United States, including the forecasted economic impact and where Democrats and …

Learn about the expiring tax breaks and automatic spending cuts scheduled to take effect at the end of 2012 in the United States, including the forecasted economic impact and where Democrats and Republicans stand.

Published in: Economy & Finance

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  • 1. 10 Key Components of the Fiscal Cliff Learn about the expiring tax breaks and automatic spending cuts scheduled to take effect at the end of 2012, including the forecasted economic impact and where Democrats and Republicans stand.“When a nation has engaged in fiscal irresponsibility for decades, it’s extremely difficult for politicians—who gloss over deficits and point fingers at eachother—to reverse course and begin the painful steps needed to redress failed fiscal policies. It’s even more challenging when it calls for shedding deeplyheld positions on taxation and spending reductions.”—Peter Lefkin, Senior Vice President, External Government Affairs, Allianz of America Cliff Component Fiscal Impact Democratic View Republican View Analysis 1 Bush tax cuts $305 billion Expire Extend At roughly $200 billion in 2013, it’s the largest component of the fiscal cliff. If they expire, the top ordinary income-tax rate will rise to 39.6%, from 35%, and the long-term capital gains rate will increase to 20%, from 15%. Dividends, currently taxed at 15%, will be treated as ordinary income. 2 The sequester $160 billion Repeal Repeal The Super Committee’s failed attempt to come up with a viable plan to reduce the deficit triggered $1.2 trillion in automatic spending cuts over the next nine years. It impacts two key areas: Defense spending and discretionary spending—with exemptions on Social Security and Medicaid. 3 AMT patch $225 billion Extend Extend The alternative minimum tax is an archaic tax law aimed at the nation’s highest earners with special rules and rates for deductions. Enacted in 1969, the AMT has been “patched” to offset inflation. Even with the patch, its reach has expanded from 155 wealthy families to 4 million taxpayers, including the middle class. Without new exemptions, taxpayers will pony up an additional $94 billion. 4 Unemployment benefits $30 billion Expire Expire Enacted in February 2009 as part of the American Recovery and Reinvestment Act, these unemployment benefits were extended to an unprecedented 99 weeks. If the extension expires, the benefits will roll back to 27 weeks, representing an estimated $140 billion. 5 Discretionary spending cap $170 billion Expire Extend The Budget Control Act of 2011 placed 2% growth limits on discretionary spending through 2021, excluding the Afghanistan war and designated emergencies. The cap holds appropriations for 2012 and 2013 below its 2011 level. The estimated drag on the economy will be roughly $85 billion in 2013.Note: Two-year cost estimates are calculated off a current law baseline. *Bush tax cuts exclude the estate tax, which is broken out separately. (continued)Source: Committee for a Responsible Budget, Congressional Budget Office, Allianz of America External Government Affairs.
  • 2. 10 Key Components of the Fiscal Cliff (continued) Cliff Component Fiscal Impact Democratic View Republican View Analysis 6 Healthcare law taxes $50 billion Implement Repeal Under the Affordable Care Act, America’s top earners get the biggest bill, including a 3.8% tax on investment income. When coupled with a new excise tax on medical equipment, the economic impact totals $21 billion in 2013 and moves higher each year thereafter. 7 The “doc fix” $305 billion Expire Extend A deferral of cuts to physician reimbursement under Medicare that dates back to the Balanced Budget Act of 1997. Renewed annually since inception, it is expected to detract $20 billion from 2013 GDP if re-upped. 8 Social Security payroll tax $160 billion Repeal Repeal A 2% reduction in the amount employees have taken out of their paycheck for Social Security benefits. Introduced under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, it was extended along with unemployment benefits, but may expire on its own. 9 Estate tax* $225 billion Extend Extend The estate-tax exemption will fall to $1 million from $5 million for any estate not left to a spouse or a recognized charitable organization. Estates above the exemption level will be taxed at 35%. With more than 50,000 estates expected to take a $40 billion hit, it’s an important issue for financial advisors who offer estate planning.10 Tax “extenders” $30 billion Expire Expire Various tax credits related to research and experimentation, local sales taxes, foreign investments and alcohol fuel that are set to expire. Total fiscal cliff hit 6.9% of GDP $1.2 trillion Want more analysis on the fiscal cliff? Our experts on Washington, the economy and the markets weigh in on why the alarm bells sounding over expiring tax breaks and automatic spending cuts could be a red herring for investors, to learn more visit www.allianzinvestors.com/fiscalcliffInformation contained herein has been obtained from sources believed to be reliable, but is not guaranteed.©2012 Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019, www.allianzinvestors.com.AGI-2012-10-10-4826