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Tags: The Fiscal Cliff

What if There's No Fiscal Cliff Deal?

By Diane Alter, Contributing Writer, Money Morning • December 31, 2012

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Just hours remain for Democrats and Republicans to come up with some kind of fiscal cliff deal to avert the $600 billion in tax increases and spending cuts that are set to kick in tomorrow, Jan. 1.

With both parties still at odds, a tumble over the cliff looks likely.

The only thing that's likely to happen is a very rushed deal that fails to deliver significant changes to the pre-programmed tax hikes and spending cuts.

There were small signs of optimism out of Washington.

"The discussions are going very well," Republican Sen. Bob Corker told CNBC's "Squawk Box" early Monday morning, adding though that the agreement probably won't include significant moves on deficit reductions.

But Senate Majority Leader Harry Reid, D-NV, maintains that a deal is not likely.

"There is significant distance between both sides," Reid said Sunday night.

Lawmakers reconvened today (Monday) and will remain holed up on Capitol Hill perhaps late into the night.

Here's what to expect if we fall off the fiscal cliff.

What No Fiscal Cliff Deal Means

  • Income taxes

The top rate on wages and other ordinary income would rise from 35.9% to 39.6%. The 10% lowest rate will be eliminated. A number of expanded child credits would lapse, and the Clinton-era limits on deductions and personal exemptions would expire for higher-income taxpayers. In addition partial fixes to the so-called marriage penalty would also end (currently couples get a standard deduction that is twice what individuals do).

  • Investment Taxes

Taxes on capital gains (investments held longer than one year) would increase to 20% from 15%. Dividends would no longer be taxed at the same rate as capital gains; they would instead be taxed as wage income.

  • Payroll taxes

Lost in all the fiscal cliff melee has been any hopes for an extension of the payroll tax holiday. Workers will see their Social Security tax rate rise two percentage points to 6.2% on wages up to $113,700. That amounts to some $200 a month for workers earning the maximum.

  • Estate and Gift Taxes

The $5.12 million per individual lifetime gift/estate exemption would be slashed to $1 million. Plus, the top tax rate on transfers above the exemption would rise to 55% from 35%.

  • The Alternative Minimum Tax

The "patch" to adjust the AMT for inflation expired at the start of 2012. If Congress fails to act, the number of taxpayers walloped by this charge, enacted to prevent wealthy Americans from using tax benefits and deductions to avoid paying their fair share of taxes, will jump from 4 million to 34 million.

  • The Doc Fix

Yearly, Congress has moved to avert steep declines in payments to doctors treating Medicare patients. Called the Doc Fix, this fix expires Dec. 31, and could increase physician payments in 2013 by about one-third. According to CNBC, the American Academy of Family physicians estimates that without a Doc Fix, the 2013 cutswould cost the average family physician a $27,000 drop in Medicare payments, and an average of $80,000 for a practice of three primary-care doctors.

  • Unemployment Insurance

Since the Great Recession, jobless benefits have been generously extended. But with a number of federal programs due to terminate on Dec. 31, unemployment insurance benefits for more than 40% of roughly 5 million Americans could cease.

  • Corporate Tax Breaks

A bevy of benefits, known as extenders, which include things such as research and development credits and alternative energy breaks, will also expire, leaving scores of companies with fewer funds for operation.

  • Sky-High Milk Prices

Dairy subsidies under the 2008 farm bill are set to expire at year's end. Sans a farm bill, a 1949 dairy price-support law that uses a complex formula to keep milk prices stable through large government purchases would take effect. The result could be a doubling of the price of a gallon of milk.

  • Volatile Markets

Equity and commodity markets could fall sharply if no deal is reached. We got a scary preview over the last six trading sessions when it became clear that a fiscal cliff deal looked iffy. To borrow one of the most overused terms of the year, if lawmakers "kick the can down the road," the uncertainty of what lies ahead will weigh on investors and markets.

Everyone knows both don't like uncertainty.

While it remains to be seen exactly how all of this will affect the recovering U.S. economy and struggling global markets, it looks like we will find out what life with no fiscal cliff deal is like.

Related Articles and News:

  • Money Morning:
    Where Oil Prices Are Headed In The Face of the Fiscal Cliff
  • Money Morning:
    Why a Fiscal Cliff Deal Stands Little Chance by Jan. 1
  • Money Morning:
    Fiscal Cliff Deal Gets Lost in the Blame Game
  • CNBC:
    Republican Sen. Corker Optimistic on "Cliff" Deal
  • CNN Money:
    Marriage penalty could make costly return
  • The Wall Street Journal:<
    Impasse Leaves Employers in the Dark Over Paychecks
  • The Wall Street Journal:
    Cliff's Edge Draws Close

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