Big Red Car here.

So yesterday, I am over at Green Mesquite Barbecue at the corner of Lamar Boulevard and Barton Springs Road and a cute little Mercedes convertible howdies me and asks:  “Hey, Big Red Car, do you know where I can find the Fiscal Cliff?”

So I’m thinking — is that a new restaurant or a bar?  So I ask her:  “What is the Fiscal Cliff?”

The Fiscal Cliff

The Fiscal Cliff is a combination of expiring tax cuts (the Bush tax cuts and the social security payroll tax “holiday”) together with mandatory spending cuts agreed to when the Congress and White House increased the national debt ceiling the last time around.

You may remember the Super Committee — Joint Select Committee on Deficit Reduction — which was supposed to sort out all of these spending cuts.

The Administration got their debt ceiling increase and promised some “future” spending cuts and if they were not able to complete that work, then the Super Committee would develop the spending reduction program for them.  Which they did.

This nonsense was called the Budget Control Act of 2011 or  was it the Unicorn Preservation and Bigfoot Propogation Act of 2011?  Pure fantasy.

In Washington, DC they call that “kicking the can down the road”.  Make believe “eat our dessert first” legislation.  In the rest of the United States, they call it baloney except for Vice President Biden who calls it “malarkey”.

It all happens on 31 December at midnight.  So it’s like a New Years present for America.

Let me dissect some of this stuff for you.

The Expiring Bush Tax Cuts

So President George W Bush, you know the guy who President Obama blames everything and I mean “everything” on, signed into law reductions in the income tax rates.  To get these deals done, he had to agree to their future expiration — kicking the can down the road again.

These tax rates will increase as follows:

10%  >>> becomes 15%

15% >>> becomes 15%

25% >>> becomes 28%

28% >>> becomes 31%

33% >>> becomes 36%

35% >>> becomes 39.6%

So you can see that everyone will pay more taxes in 2013.  Welcome to the Fiscal Cliff.

Capital Gains Taxes and Dividend Income Tax

In addition, the qualified capital gains rate will increase from 15% to 20% and dividend income will increase from 15% to your new individual tax rate shown above.

If you are a fat cat, like Mitt Romney or Warren Buffet, you will start paying 39.6% on dividend income that you used to only pay 15% on.  I think that may go a long way to assuaging Warren’s sense of liberal guilt as to not paying enough taxes.

But what the Hell do I know?  I’m just a Big Red Car.

Payroll Tax Increase

You may recall that one of the payroll taxes — paid only by folks who receive a paycheck — Social Security will increase from 4.2% back to 6.2%.  We had been on a bit of a payroll tax (Social Security really) tax holiday.

Estate Tax Increase

Currently, if you have an estate of $5,120,000 you pay no estate tax when you die.  If you have an estate greater than $5,120,000 then you pay 35% in estate taxes.

At the end of this year you will pay 55% on all estates in excess of $1,000,000.

Wow, did that get the little Mercedes get excited about the estate tax implications.

Unemployment Emergency Benefits

Unemployment emergency benefits will be reduced by approximately $40,000,000,000 — I wanted you to see what a piddling $40 billion looks like when you write it out.  It is either a lot of money or it is not.   Who knows any more?

Alternative Minimum Tax

The Alternative Minimum Tax was invented by Dante as one of his levels of Hell.  It is also the Accounting Profession Full Employment Act.

The AMT “bandaid” fix — whereby it does not pertain to those folks who were never the intended target of its claws expires at the end of this year.

The bandaid box is empty and the issue has become way too complex.  It needs to be drowned in the bathtub.  A mercy killing really.

Spending Cuts

Well, hate to break it to you but the spending cuts — SEQUESTRATION — are not all that much really.  They are really pretty damn pathetic.

The cuts total $110 billion divided between Defense and non-defense discretionary spending.  To put that into perspective you are talking about 2011 expenditures of $712 billion and $566 billion.

Could you reduce your personal expenditures by less than 10% if you were standing on the edge of the mystical Fiscal Cliff?

New Health Care Taxes

The Patient Protection and Affordable Care Act (Obamacare) imposes an entire new body of taxes which we will discover in another post.  These taxes are not insignificant.

The Law

So all of this nonsense is contained in a series of laws.  Here they are:

• Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (extended the Bush tax cuts for two years and increased unemployment insurance eligibility time period);
• The Budget Control Act of 2011 (the big can that is getting kicked and which included the provisions for the Super Committee and sequestration);
• The Middle Class Tax Relief and Job Creation Act of 2012 (deals with the Social Security payroll tax holiday, the Alternative Minimum Tax bandaid and the infamous Medicare “doc fix”);
• American Recovery and Reinvestment Act of 2009 (expiration of the truly nutty windpower tax credit of $0.02/KWH);
• The Health Care and Education Reconciliation Act of 2010 (new healthcare related taxes); and,
• The Patient Protection and Affordable Care Act ( a slew of new taxes imposed under Obamacare) and the Health Care

So at the end of the day, we are left with a very, very simple proposition — income taxes rates are going up, payroll tax rates are going up, favorable tax programs are being eliminated resulting in substantially higher taxes, substantial new taxes are being imposed and truly miniscule spending cuts are being enacted — forcibly.

Debt Ceiling Negotiations

Just when you thought you had absorbed enough information, you have to remember that come February the Federal government is likely to reach the authorized debt ceiling.  This is like the Big Red Car running out of gas halfway between Dripping Springs and San Antone.  Not a good thing.

Given that we are currently borrowing 46% of every dollar we spend, running up to the credit card limit is not a good thing.

While this is not likely to happen until February or March given the current rate of spending, it will undoubtedly be part of any final Fiscal Cliff solution.

The Obama administration’s opening bid was — hey, how about no debt limit and just an unlimited credit card?  Could that work?  Big Red Car does not think so.

Wisdom

The big issue is really this — when you take more money from the taxpayers through tax increases and have only tiny cuts what impact will that have on the economy?

Most economists see a very negative impact on GDP, an increase in unemployment and another recession.

What Are the Real Problems?

We have a spending problem.  A crack head, meth acne spending problem.

We have a job creation problem.  We have an enormous number of people who are forced to be “takers” because they cannot get a job to return to being “makers”.

However we go over the Fiscal Cliff, this series of actions will not substantially decrease spending or increase jobs.  It will be a jobs killer.

But what the Hell do I know?  I’m just a Big Red Car.

Be kind to yourself.