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Are we set to plunge over the fiscal cliff?

Unless Congress acts, $600 billion of spending cuts and tax hikes will take effect in 2013. It could derail the economy and tank your 401k.

By Stacy Johnson Sep 18, 2012 2:09PM

This post comes from Stacy Johnson at partner site Money Talks News.


The Contenders © Red Frog/Vetta/Getty ImagesWithout congressional action, a combined $600 billion of spending cuts and tax hikes will happen in early 2013. Sadly, members of Congress have already supplied ample evidence they can't cooperate on anything, including major issues. So if the spending cuts and tax hikes take effect on schedule, the result will be an economy tumbling off what's become known as the fiscal cliff.


Many are afraid a recession lies at the bottom of that cliff. For example, here's a recent reader email . . .

Hi Stacy:
What are your plans for the coming "financial cliff" the U.S. government is headed towards? Plan on holding on to U.S. stocks? Buying foreign moneys? Gold or silver?
I am probably not the only one worried about this, and an experienced money guy like yourself can provide some much needed advice BEFORE we get to this "cliff."
- Steve

Before I offer my take, let's take a closer look at the potential problem.


The fiscal cliff: tax hikes

The end of 2012 will mark the end of a cornucopia of temporary tax cuts, some enacted during the Bush years, others by the current administration. Unless Congress acts to extend them, the following tax breaks will automatically expire:

Many of these breaks were enacted with the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. The original laws were set to expire on Dec. 31, 2010, but were extended until the end of this year by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the  Middle Class Tax Relief and Job Creation Act of 2012.


Although the automatic expiration of all these tax cuts will return us only to the tax rates of the Clinton years, their magnitude, especially in light of today's anemic economy, has been dubbed "Taxmageddon."


What will it do? According to this Wikipedia page...

Based on figures from the CBO and Joint Committee on Taxation, federal taxes would increase by a total of $423 billion in 2013, if the tax cuts are allowed to expire. The non-partisan Tax Policy Center has estimated that for 83% of households in the U.S. there would be an average tax increase of $3,701, and the Heritage Foundation stated that those impacted by the tax cut expiration are primarily in the middle- and low-income groups, with its research finding that families would experience an average tax increase of $4,138.

While higher taxes will prove valuable in tackling the deficit, it will cost the economy -- and potentially jobs -- because Americans will have less to spend.


The fiscal cliff: spending cuts

Also good for reducing deficits but bad for the economy would be less government spending -- something else potentially imminent.


The Budget Control Act of 2011 was enacted to create a compromise when Congress couldn't agree on raising the debt ceiling. It requires automatic cuts in both defense and nondefense spending to begin in early 2013. While Social Security and Medicare were specifically excluded from the chopping block, nearly every other form of government spending could be subject to cuts that will total $110 billion per year: $55 billion to defense and $55 billion to nondefense spending.


Spending cuts, like tax increases, will go a long way toward addressing our nation's trillion-dollar deficits. But as with the impending tax hikes, automatically slashing government spending would be a shock to an already weak economy. It could also reduce defense preparedness and cut programs critical to helping those in need.


What's going to happen? Nobody knows. The options are:
  1. Washington doesn't act, and both spending cuts and tax hikes come to pass.
  2. Washington reaches a compromise that reduces the severity of both.
  3. Washington kicks the can down the road by extending the deadlines.

While few politicians want to send the economy into a recession, if past is prologue, compromise will be tough to reach. The president and his party will probably try to preserve tax breaks for middle- and low-income Americans, while pushing for tax increases for those with high incomes. Republicans will probably favor not increasing taxes on our nation's high-income "job creators."


Nothing is likely to be accomplished before the presidential election, leaving precious little time to do anything before the end of the year.


What's an investor to do?

Now let's get back to Steve's question: How we can protect our savings from going off a cliff along with the economy? He asks, "Plan on holding on to U.S. stocks? Buying foreign moneys? Gold or silver?"


My answer: Yes.


If you look at my personal portfolio, you'll see that I have money in stocks and also in a proxy for gold, SPDR Gold Shares. While I don't have money in foreign currencies, I've invested in companies dependent on international sales. I probably won't change that mix as we head into these dangerous waters.


There are three reasons I'll likely leave my positions unchanged.


The first is that I think the problem will be addressed, albeit only temporarily, by Congress extending the deadlines.


The second reason I'll leave my portfolio intact is that I can't predict the future. While what's ahead looks scary, if our nation manages to avoid the fiscal cliff, the market could rally -- and I don't want to be on the sidelines if that happens.


The final reason I'm staying the course is the most important: The money I have in the market isn't all the money I have. I'm diversified -- some in stocks, some in cash savings and some in real estate. That makes it easier to ride out storms like this one.


Don't think my attitude toward staying invested means I'm complacent, or that the amount I have in the market is immaterial to me. I think this potential self-inflicted fiscal wound is deadly serious, and the money I have in stocks is critical to my financial future. But this is the way I manage money -- I take what I consider appropriate risk, diversify, then hang on for the long-term.


If that's not you, Steve -- if you'll need the money you have in stocks within a year or two, or stocks are too risky -- I'd recommend you be wary and keep your savings somewhere safer. You're right to worry.


More on Money Talks News and MSN Money

52Comments
Sep 19, 2012 8:02AM
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"While higher taxes will prove valuable in tackling the deficit....

 

If you believe that, you'll believe anything.  Raising taxes will not do ANYTHING to lower the deficit because the idiots in congress will never stop spending more than they take in.  Taxes are NOT the problem SPENDING is the problem.

Sep 19, 2012 8:09AM
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2% payroll deduction - NEVER SHOULD HAVE HAPPENED - SHOULD HAVE STOPPED LAST YEAR
Earned income credit - SHOULD BE ABOLISHED
Mortgage forgiveness - NEVER SHOULD HAVE HAPPENED - YOU DON"T REWARD IRRESPONSIBILITY

Sep 19, 2012 4:47AM
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The federal government has a spending problem, not a revenue problem.
Sep 19, 2012 1:44AM
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None of these politicians care.  The election is around the corner.... that's what they're worried about.  You can always spin the fault to the other party.

Incompetent leadership.  Starts at the top.

More people becoming poorer = Government dependence.

Sep 18, 2012 11:59PM
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We are headed off a fiscal cliff.....no way.  This sounds pretty important but all I see on MSN is how great the president is doing with the economy and how we should give him 4 more years.  He is on David Letterman and oh yeah let's not forget Jay Z and Beyonce who he will see next after all they are sooooo much more important than the economy.  Oh and lets not forget the craziness happening right now in the middle east, and I almost forgot Obama's recent DISS of Netanyahu of Israel.  I know we all must have our priorities and obviously Obama's are defineitly on what REALLY matters.  The fiscal cliff is looming ever larger but Obama's celebrity friends are soooooo much more important than our solvency!

Sep 19, 2012 6:37AM
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I believe it was the wise old sage Barney Frank that said"money doesn't belong to the people,it belongs to the government" and it seems like the current administration has made this its plan of action, to get it all back through taxes.  This country fell over the fiscal ledge years ago,we are just starting to fall faster. The bottom is near so stand by for the collision..
Sep 19, 2012 10:33AM
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As everyone with a brain understands doing nothing is what will plunge us over the fiscal cliff.

Any plan to address this enormus problem will most likely have some short term pain associated with it.  A large section of the U S population act like whinning children that can't find their pacifier so the politicians placate them with more goodies that they won't pay for

This is a pathetic and very dangerous situation

Sep 18, 2012 10:13PM
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This is an author who has no idea about the depth of US insolvency, how compromise got US to this nightmare, the true tax rate Americans suffer under no matter what their social station, the effect of tax on an economy, the quadrupling worse effect of increased taxes on the economy, how the fed,gov made the US dollar worthless, the royal lifestyle of public office holders, their families and their crony friends, the huge sums of foreign aid (graft by any definition) paid to undeserving nations while kids sleep hungry in every metropolitan district, and has no reasonable concept of the meaning or purpose of "a budget". 

The power to tax is the power destroy; I present our economy/nation. Nominal tax rate for all US citizens harbors around 70-72%. There is no room to give anymore; period. Severely cutting the federal budget must be done. Simple. Whatever came in last year, allot 50% for this year, eliminate all pork and adjust the budget items accordingly. Nothing new gets funded until what is owed is paid off. (That will take about 98 years with 50% cuts for the next 99, BTW) The era bipartisan compromise is over. The only acceptable words out the ten-sided mouths of politicians is "Cut, cut, cut!" If the two majorly inept parties cannot take it or don't get it, get out of government. They are not needed. Not wanted.

Don't want to take the tough medicine like this lame brain author, then welcome to the new Greece. There is no free lunch and certainly not for federal actors. 

The cliff? Well it has passed; you are in free fall as you read. Yeah, the politicians flocked you good.
Sep 19, 2012 11:45AM
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By show of hands, who agrees that we have already gone over the cliff? From where I am looking, we have already hit the ground, and have splattered in grand fashion. This economy, and our government, are both epic f*cking failures.
Sep 19, 2012 7:40AM
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Funny how they couldn't arrive at an agreement but they were able to put together the Budget Control Act and the fiscal cliff.  Now why did they bother to set up the Cliff if they weren't going to use it?    So now, if they do nothing it gets passed and both sides can blame it on the other.   It's the perfect way to pass unpopular legislation.

 

   

Sep 19, 2012 9:51AM
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maybe its time to put some taxpayers back onto the roles of 'taxpayers'.  47% paying no federal taxes is not what tax fairness is all about in the modern day of federal largesse.  if you enjoy the benefits of government maybe one should pay in a little.  whatever happened to shared sacrifice?  even token payments by all make everyone feel a sense of fairness in the tax code.  when so few actually pay in to the system it engenders a feeling of unfairness and INVITES those that do pay in to say ENOUGH and seek loopholes and investing out side this country(bad for everyone).

 

i'm not so afraid of the fiscal cliff as i am the federal debt.  the debt is more of a threat to our national security than any thing we now face.  sure it will cost me more but what price do you put on the future health of the nation.  the fiscal cliff may just be the SHARED SACRIFICE  of the modern political age.  giving up benefits and paying more seems the responsible way to rescue the country.

Sep 18, 2012 10:47PM
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What.....you mean to tell me that there's going to be a tax hike, any way....but prez promised us there wouldn't be. He wouldn't lie to his faithful, would he?

Truthfully, we all need to dig deeper into our pockets because, prez has big, big plans for his social programs in 2013. Since he will drop kick the rich, they'll have to cut more jobs so they can pay that extra tax....oh whoops, I didn't say that fast enough.....american airlines is already announcing massive cuts to it's work force....I wonder who will be next? I'll have to ask someone else cuz obama doesn't have a clue....and probably couldn't care less!

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I'm starting to believe that we need to let it happen. It won't be fun, it will be painful, but I think it needs to happen to reset our entire monetary system back to where it needs to be and NOT where all Wall Street cares about is the next influx of QE that the Fed is willing to print.
Sep 19, 2012 2:02PM
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We can only hope it leads to the REVOLUTIONARY WAR of 2013. Withdraw from NATO, cease all foreign aid, deport all the illegal aliens, bring all US militrary back home, send all the lawyers/politicans packing, no foreign back accounts for any US company or citizen, and get politics out of military affairs. Start the process of rebuilding the United States from the morally corrupt sewer it has become.
Sep 19, 2012 7:41AM
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I HOPE WE FALL OFF THE FINCAL CLIFF.  MAYBE THEN WE CAN REDUCE GOVERNMENT AND STOP GIVING BIG BUSINESS FREE MONEY.  LIFE IS ALREADY TOUGH FOR FOR EVERYONE IN THE MIDDLE.  THIS MAY BE A GOOD THING TO PUT EVERYONE ON TOP IN CHECK
Sep 19, 2012 1:40PM
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Government creates nothing, it only costs. More government more cost to us the taxpayer. You can't have more people taking money than you have people putting the money in. Our government spends too much money. They can raise the tax rate to 50% and they still won't have enough. It's a sad state of affairs. This is the type of government that everyone was trying to get away from when they came to the new world and created the United States.  These politicians are killing this country. Who spends hundreds of millions of dollars to win a job that pays 500k for 4 years?  Do you think there will be some special interests to take care of after the election?  (both sides)

I wonder?
Sep 19, 2012 12:05PM
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Let it happen. Sooner or later it will happen anyway and the longer we are in denial, the worse it will be.
Sep 19, 2012 12:45PM
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Obama wants it to happen ande it will. Be happy Obamas people.
Sep 19, 2012 6:58AM
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Great...Stacy Johnson giving national debt advice.  What a legitimate follow-up to her cats and dogs money advice...are you kidding me?  Listen folks, just go to www.zero hedge.com and ger REAL expert writing and advice, not here on the "corporate bias news".

Sep 19, 2012 1:53PM
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Don't tell the dems and hollywood prezbo ain't worth a sh*t, he's the greatest thing since

penecillan, he's so transparent. Not long ago Bill Clinton said he was in over his head, now he's

saying 4 more yrs. of this clown. Show's what the democrats believe, MORE GOVERNMENT...

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