Is It Over Yet? The Latest on the Fiscal Cliff

Who else is ready to stop hearing about the fiscal cliff?

The Most Obnoxious and Self-Imposed Crisis of 2012 is just about over, as both houses of Congress and the president agreed on a last-minute deal to avoid the fiscal cliff.

You can read the whole thing here, but here are the important highlights.


  • Marginal tax rates on those earning $400,000 and up, or $450,000 between married couples, will revert to the Clinton-era rates of 39.6%. The changes are permanent, meaning there is no automatic expiration date (though Congress and the president can change the tax code at any time).
  • All income below $400,000/$450,000 will be permanently set at the Bush-era income tax rates.
  • Taxes on capital gains and dividends will rise from 15% to 20% for those with incomes above $400,000/$450,000. Rates are permanently set at the prior 15% for most other income levels (some low-income brackets are exempt from taxes on capital gains and dividends).
  • The payroll tax cut in place since 2010 will expire. This will raise taxes by about $1,000 for a typical middle-class family. Payroll taxes are levied on the first $113,700 in income.
  • The estate tax will be set at 40%, with a $5 million exemption indexed to inflation (meaning it will adjust upward every year). According to a report by Bank of America's US Trust, there were about 850,000 U.S. households worth more than $5 million at the end of 2011, or roughly 0.7% of all households.
  • The Earned Income Tax credit and the Child Tax Credit get a five-year extension.
  • The alternative minimum tax gets a permanent inflation patch, preventing it from hitting more taxpayers than it was designed for.
  • In aggregate, the tax changes raise tax revenue by $600 billion over the next decade. The economy should produce something close to $220 trillion in GDP during that time, so the tax hikes total less than a third of a percent of GDP.


  • The automatic spending sequester mandated by last summer's debt-ceiling debate will be delayed for two months, likely so Congress and the president can agree on a more bearable way to reduce spending. The sequester was designed to be hated by both parties in order to incentivize a deal. Alas, the incentive wasn't enough, so we chose the next best option: kicking the can down the road again.
  • Cuts to Medicare payments made to doctors will be delayed another year. This so-called "doc fix" has been in place since 1998.
  • Unemployment insurance for those receiving benefits for more than 26 weeks gets a one-year extension. Benefits for the long-term unemployed had been scheduled to expire yesterday. 

The most disappointing part of the deal is that it doesn't do anything to address the self-imposed federal debt ceiling, which was hit earlier this week. The Treasury is taking emergency actions like forgoing payments to federal retirement funds in order to keep the government's bills paid, but it can only do so for about two months. After that the U.S. will either voluntarily default on its debt or (almost definitely) raise the limit, as has been done on average every nine months since 1945. The fiscal-cliff debates were a perfect time to agree to raise the debt limit as part of a broader budget deal. With that option gone, Congress and the president now have to undertake another round of playing chicken with the nation's finances in the coming weeks, which means more opportunity to show global financial markets how utterly reckless our elected leaders can be.

The deal is less ambitious than either party envisioned even a week ago. Bringing negotiations down to the last day possible guaranteed that result. And as I wrote last week, we probably won't see any serious long-term budget reform until markets protest and interest rates rise. There is little incentive to reduce the debt when borrowing costs are below the rate of inflation. Until that changes, expect more tiny, short-term budget deals like this one.

Most of this is a sideshow that shouldn't affect how you invest. Beyond a few daily swings, markets showed little reaction to the fiscal-cliff debates during the last few weeks, because it has always been likely that a deal would be reached, even if the timing and details were unknown. The economy is in increasingly better shape, plenty of stocks trade for good valuations, and those who think in decades, rather than weeks or months, have as much to look forward to as they ever have. If you find yourself tempted to tweak your portfolio based on fiscal-cliff headlines, stop. Dysfunctional politics is no excuse for dysfunctional investing.

What do you think about the deal? Sound off below. 


Read/Post Comments (60) | Recommend This Article (76)

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  • Report this Comment On January 02, 2013, at 10:02 AM, astuber9 wrote:

    Yes, mostly kicking the can down the road one more time. At least they increased the payroll tax (or removed the temporary cut), you have to give them credit for that. I don't want to pay more but I think the middle class needs to be taxed more to realize what the benefits cost. I say keep taxing people until they stop demanding more benefits.

  • Report this Comment On January 02, 2013, at 11:08 AM, LegalizeMe wrote:

    This deal amounts to 41 dollars in tax increases for every 1 dollar in spending cuts. It's impossible to balance our books with such a lopsided ratio.

    The can hasn't been kicked, it's been punted into the stratosphere.

  • Report this Comment On January 02, 2013, at 11:10 AM, TMFMorgan wrote:

    <<It's impossible to balance our books with such a lopsided ratio.>>

    Balancing the books was never the goal. In fact, the deal was to purposely *avoid* balancing the books, as going over the cliff would bring us closer to.

  • Report this Comment On January 02, 2013, at 11:31 AM, sheldonross wrote:

    "Unemployment insurance for those receiving benefits for more than 26 weeks gets a one-year extension. Benefits for the long-term unemployed had been scheduled to expire yesterday. "

    At what point do we call this what it is? Welfare.

    So it was 26 weeks, and add 52 more on top of it? Am I reading this right?

    I realize the economy is still rough, but if you can't find a job after 26 weeks (much less a year and freaking half) you're not trying.

  • Report this Comment On January 02, 2013, at 11:58 AM, TheRealRacc wrote:

    Thanks TMFMorgan. This was the only piece of news that actually has substance. I can now relax and go back to my daily routine.

  • Report this Comment On January 02, 2013, at 12:43 PM, erikinthered100 wrote:

    It's a bad deal but it could have been worse.

    It increases the progressiveness of a tax code which is already the most progressive among western industrialized countries. This makes it even more socialist/redistributionist and further decreases individual economic freedom. Fortunately, it does so to a fairly minor extent but it's still a step in the wrong direction.

    At the same time, it only complicates the tax code further. This also is in the wrong direction of tax code reform.

    The tax increases will predictably not yield the calculated revenues and have no appreciable impact on the overall fiscal outlook. They should hamper economic growth but hopefully to a minimal extent.

    And as the last poster points out, extending unemployment benefits further is extremely bad policy. It adds to our debt and subsidizes unemployment - it will further slow down or cripple our economic recovery.

    As expected, there is no hint of spending restraint so our currency and savings will be further devalued as we continue on an unsustainable path of debt and national impoverishment.

  • Report this Comment On January 02, 2013, at 12:54 PM, eddietheinvestor wrote:

    Getting more revenue in this deal was possible, but the President and the Senate gave in to special interests. The Hollywood film industry got to keep its absurd tax deductions (as a payback for supporting Obama), the railroad industry got to keep their tax deductions (payback to Warren Buffet for supporting Obama), and so did the oil industry (a payback for both parties). The 1% got to keep their tax deductions, but the payroll tax will cost workers more while people not working for 26 weeks get another 52 weeks. So people who aren't working got a break (which is okay), but people who do work did not (which is not okay).

  • Report this Comment On January 02, 2013, at 1:01 PM, CluckChicken wrote:

    Even in a last min deal like this we still end up with so really wasteful stuff:

    3. Cheaper office space for Goldman Sachs

    Okay, it’s certainly not called this. Section 328 of the bill extends tax-exempt financing for the “Liberty Zone,” the area around the former World Trade Center, for another year. As Matt Stoller points out, this tax provision was supposed to help fund reconstruction after 9/11. Yet a recent Bloomberg investigation found the bonds have mostly helped finance new luxury apartments, not to mention the construction of Goldman Sachs’ new headquarters. Developers say the bonds were necessary to revitalize downtown Manhattan, but there’s a fierce debate over how they’ve been used.

    4) Help NASCAR build racetracks

    The so-called NASCAR loophole, in place since 2004, allows anyone who builds a racetrack to receive a small tax benefit through accelerated depreciation. This tax break cost roughly $43 million the past two years and will get extended for another year. Sounds tawdry, right? And yet, supporters claim the break is necessary so that NASCAR can compete on a level playing field with other theme parks. Looks like they got their wish.

    8. Subsidize Hollywood films

    The fiscal cliff bill renews “special expensing rules for certain film and television productions,” at a cost of some $75 million per year. Studios in Hollywood and elsewhere can deduct up to $15 million of their costs if more than three-fourths of the movie’s production takes place in the United States. (They can get up to $20 million in deductions if they produce the film in a low-income community.)

  • Report this Comment On January 02, 2013, at 1:06 PM, mdk0611 wrote:

    Eddie - The 1% didn't get to keep all of their deductions. The bill reinstated the phase-out of itemized deductions for incomes over 250k .

    But if we can't make even a minor change to the amount of INCREASE in entitlement payments we are in serious trouble over the long term.

  • Report this Comment On January 02, 2013, at 4:26 PM, whereaminow wrote:


    I think what is being missed here is the old P.T. Barnum saying:

    "There's no such thing as bad publicity."

    Whether or not the bumbling Washington politician or his puppet masters in the Nation-State oligarchy consciously understand how this never-ending show actually helps them gain power is not clear. But help them, it does.

    Everytime we have these meaningless shows, Nation-State power grows - at our expense. The media runs story after story about how the world will end and the Hobbesian nightmare will descend if our dear leaders do not solve this horrible crisis.

    It conditions news-watchers (that sheep-like being that depends on others to provide insight) to believe that only through the violent actions of the Nation-State can our economy stay upright and our lives be saved.

    The truth is we would all be better off without any of these discussions and without the Nation-State trying to control our lives. The only thing they can do is what the State does, extract as much revenue as possible from the people in order to maintain control, but not so much that we have nothing to give.

    Footnote: You've heard of the "Right to Life"? I'm sure. Well, there's no such thing. The right to life comes from the early robbers who became Kings who became Presidents. The early robbers realized that by putting the subject under his control, rather than just killing him and taking his stuff, he could reap a more secure and profitable bounty. Over time, this "right to life" was seen as a good thing, from the State's perspective.

    David in Liberty

  • Report this Comment On January 02, 2013, at 5:12 PM, SPARTANBURG wrote:

    America is kicking the can down the road. Europe is definitely kicking the can down the road. Japan has kicked the can down the road for so long, it was actually saved by its demographics. China is always a question mark but I'm pretty sure they will sign up for a "kicking the can down the road" or are doing so already. The smaller countries are either "kicking" or being kicked down the road. This democratic system is really a perpetual mess. Thank goodness there are no aliens to kick our planet "down the road".

  • Report this Comment On January 02, 2013, at 5:55 PM, xetn wrote:

    "In aggregate, the tax changes raise tax revenue by $600 billion over the next decade. The economy should produce something close to $220 trillion in GDP during that time, so the tax hikes total less than a third of a percent of GDP."

    Morgan: The GDP is around 16 trillion. How do you arrive at $220 Trillion over 10 years? That seems absurd. Do you thing GDP will average $22 trillion per year?

  • Report this Comment On January 02, 2013, at 6:01 PM, TMFMorgan wrote:

    <<Do you thing GDP will average $22 trillion per year?>>

    Yes. That's using $16 trillion today and assuming 4.5% nominal annual growth (real growth of 2-2.5%).

  • Report this Comment On January 02, 2013, at 6:02 PM, 4167chariot wrote:

    Term limits are key to a more functioning US government. Let's assume that the majority of our elected officials are intelligent enough to know that you can't kick the can down the road forever. But the last thing any of these "lifer" politicians want to do is jeopardize their next election. So, if there was no option for reelection, I hope many of these people would see the light and make the tough decisions that American families and businesses have to make every day (live within their means).

  • Report this Comment On January 02, 2013, at 6:04 PM, KBOKSOFT wrote:

    Is the tax rate on qualified dividends still as LT cap gains? or did that expire?

  • Report this Comment On January 02, 2013, at 6:58 PM, TheRealRacc wrote:

    David in Liberty, you make a great assessment of the human condition applied to the development of society:

    "The right to life comes from the early robbers who became Kings who became Presidents. The early robbers realized that by putting the subject under his control, rather than just killing him and taking his stuff, he could reap a more secure and profitable bounty."

    You speak truth. The question is, how do you define "early"?

    Do we know the true history of civilized beings? It is quite possible that before what we call the human race was able to verbally communicate, there were "robbers" and "kings" who ruled small groups of people for their own stream of benefits. This would mean that the human condition you've chosen to target, has indeed been around for millions of years.

    Today, this human condition is seen everywhere, but specifically to the point (and quite obscenely, I agree with you) in capitalism.

    I read your opinions from time to time and I usually agree with some things you have to say. But when you come down on modern-day society referencing a million-year-old truism, it's falls short of being meaningful.

    My question to you is (and maybe I just don't read enough of your comments), how do you propose to manage 7 billion humans?

    It is out personal responsibility to tune out the news and not let it affect our judgements. You cannot help the helpless. You can't convince a dog that he's a cat. But, we can worry about ourselves, and hope our leaders do what is best for us. And in the mean time, I'll enjoy a nice steak dinner and a ball game.

  • Report this Comment On January 02, 2013, at 6:58 PM, TheRealRacc wrote:

    I wonder if that worked.

  • Report this Comment On January 02, 2013, at 7:06 PM, HeyPacketMan wrote:

    Once again, we've been served a plateful of s*** by the Stupid Party and the Tax-and-Spend Party.

    All the while the major networks pine for more deficit spending and won't hold anyone accountable.

    I have a Swedish friend who moved here in the early 90's to escape socialism. He's considering moving back. That's how bad it's become.

  • Report this Comment On January 02, 2013, at 7:43 PM, WhidbeyIsland wrote:

    I am old enough to remember movie serials where the main plot line was Pauline tied to the railroad tracks while a train sped around the bend approaching her. The main adjustment for modern times is that Pauline and the train hurl insults at each other. As to whom plays the train and whom plays Pauline, I leave to you to decide.

  • Report this Comment On January 02, 2013, at 7:58 PM, royhobbsxx wrote:

    all we are doing is setting up our children and grandchildren for failure. imagine what this country could do we had no debt and a balanced budget...I am embarassed of my generation...shame on us all

  • Report this Comment On January 02, 2013, at 8:04 PM, RouteReflector wrote:

    Does anyone have more info on the specifics of the itemization phaseout? I read through the first few pages of the bill but had trouble finding the motivation to strike line 2 (B) (7) and replace X with 2012 and then multiplythe remainder by the square root of 1/3 pi substituting integer 6 for 3.

    The Democrats clearly won this round, which was predictable. It'll be interesting in a self-hating way to see how the spending cuts round plays out in 2 months.

  • Report this Comment On January 02, 2013, at 8:09 PM, RouteReflector wrote:


    The country is never going to have no debt. Everyone needs to get used to that. Having debt is not a bad thing for a country, as long as it is maintained in moderation. It's intellectual dishonest to view national debt and household debt through the same lens. When a country maintains debt in moderation the country grows out of it. We've seen an explosion of debt over the past decade not entirely due to spending, but primarily due to the economic downturn. As the economy recovers the deficits grow effectively smaller, and the % debt-to-GDP shrinks. 16 trillion is a big number in raw terms right now - in the grand scheme of things it's really not a huge number, though.

  • Report this Comment On January 02, 2013, at 8:22 PM, Morgana wrote:

    New Frame: We have a "progressive tax structure." That concept of a progressive tax structure should apply to those making more than $388,000 (single federal tax) as it does for those under that amount. Why should the structure of increasing the rate STOP suddenly at $388,000 or $250,000 or $450,000? Translation: the concept of people's tax rates increasing as they make more money should apply NOT ONLY to the middle class BUT ALSO to the wealthier Americans. We are asking that "the rich" accept the same principles of taxation that they impose on "the poor and the middle class." That is what is behind "paying one's fair share."

  • Report this Comment On January 02, 2013, at 8:27 PM, tednerry wrote:

    I'm tired of hearing folks blame both parties equally. The fact is that the neanderthal Tea Party dominated Republicans ignore reality and happily destroy our national credit while preventing us from restoring an infrastructure disgracefull by first world standards. It is the same GOP that started two wars and funded them on credit while instituting an unfunded new prescription drug benefit. Let's face it - we have a bunch of ignorant, bigoted, intellectual rednecks keeping us from doing our very best in a complicated, ever more competitive world. A pox upon them!

  • Report this Comment On January 02, 2013, at 8:54 PM, TMFDarwood11 wrote:

    I love the fact that the plan includes $74 Billion in tax breaks for the special interests.

    As for the expiration of the payroll tax "This will raise taxes by about $1,000 for a typical middle-class family." Yes, it will. What does that mean? The "typical" middle class family has annual earning between $37,675 to $75,350, and the high end is about $95,000.

    So if we make a leap and assume the "typical" middle class family has income of about $56,000 per year, then that family will see a taxes take an additional 1.77% of their income next year.

    Of course, someone has to pay for those special tax breaks.

    Isn't it wonderful how the Congress takes care of the Middle Class?

  • Report this Comment On January 02, 2013, at 9:00 PM, whereaminow wrote:


    Thanks for the thoughtful reply

    --->My question to you is (and maybe I just don't read enough of your comments), how do you propose to manage 7 billion humans?<---

    Therein lies your problem. It's the word "manage".

    One of things I've come to accept as absolute truth is that only a certain kind of person truly believes he can manage so many others without destroying many lives in the process. That person would have to be incredibly egotistical, fantastically naive, superficial to a fault, and a compulsive liar and risk taker.

    I think we have found the formula for the standard politician, no?

    So maybe the answer isn't in trying to manage each other, but learning to cooperate peacefully. I realize that most people do not want to hear that message. But it's true.

    As for the origins of the Nation-State, it's modern form that dominates the globe only came about with the growth of large navies and the invention of the train, after. Before that, most of the world lived in freedom from States. So this is very much a new thing for most of the world, as States were relegated to isolated areas that had a geographic advantage either in trade or military position. If you'd like, check out James Scott's "The Art of Not Being Governed" for a quick overview and Oppenheimer's "The State" for a more detailed analysis of the evolution of the Nation-State.

    Robbers are robbers, whether they are the brutal raiders of the medieval cossacks or slick, well dressed Washington insiders. Methods change, but the nature of the thing is still the same.

    It may not be my lifetime, but this ugly and brief historical experiment called the State will be gone one day. Either through the destruction it causes or the people's eventual rejection. (on that, la boitie's "discourse on voluntary servitude" is a must read)

    David in Liberty

  • Report this Comment On January 02, 2013, at 9:07 PM, RouteReflector wrote:


    I enjoy your posts; I like the perspective you offer, even though I generally disagree with your stance on most everything. :). Keep it up.

    That said, those titles you provided reek of confirmation bias.

  • Report this Comment On January 02, 2013, at 9:38 PM, DrKin wrote:

    Let's see.... we are just coming out of TWO unfunded WARS which ran concurrently with the BIGGEST TAX CUTS for the wealthy since WWII, followed by the WORST crash since 1929! Guess WHAT

  • Report this Comment On January 02, 2013, at 9:40 PM, DrKin wrote:

    Taxes are going UP! Whoddathunkit!!

  • Report this Comment On January 02, 2013, at 9:47 PM, whereaminow wrote:



    --->That said, those titles you provided reek of confirmation bias.<----

    Perhaps. That said, I wasn't always an anarchist. in fact it took my mind changing several times to get there, and it still gets changed quite a bit (although more subtly now). So at some point I must have read something that confirmed nothing and unwound everything :)

    David in Liberty

  • Report this Comment On January 02, 2013, at 9:55 PM, DrKin wrote:

    I want to throw in one more thing. How is it that those who have the most and who are most likely to wave the flag like mad, grow teary eyed when the national anthem is played, believe in US "manifest destiny", rave about us being the "GREATEST COUNTRY IN THE WORLD", carry on and on about our "heroes" in the US military and consider themselves the greatest of "patriots" are also those who scream the loudest, bitch the most and refuse to compromise on a modest tax hike to ACTUALLY SAVE THIS COUNTRY from bankruptcy and falling into third world decay?!!

  • Report this Comment On January 02, 2013, at 10:49 PM, NOTvuffett wrote:

    Morgan posed the question "Who else is ready to stop hearing about the fiscal cliff?"

    Unfortunately, this kabuki dance is only half over. In another month or two, there will be a big fight over increasing the debt limit. Some on the right will want to tie this to reductions in spending, but the only real question is how big it will be.

  • Report this Comment On January 02, 2013, at 11:15 PM, wjcoffman wrote:

    Tax the middle class so they'll realize the cost of their benefits. You got to be kidding. I'm really enjoying the extension in umemployment 'insurance'. What a crock! Oh, wait it's the people still working that are providing the premiums.

    And as a reward for participating in this American dream my homeowners insurance is being dropped to "reduce hurricane exposure". But wait, to keep my mortgage I have to have homeowner's insurance. I'm so glad for the benevolent insurers and mortgage companies that make my lifestyle possible.

    Yep, the middle class needs to be taught a lesson!

  • Report this Comment On January 02, 2013, at 11:26 PM, BillFromNY wrote:

    Can't believe all the slightly dim folks who are making a big fuss over this "Fiscal Cliff" deadline. This is all for the benefit of the legislators and the press. Give it a catchy title and declare 31 December as a "deadline" and they are all happy with a big story to report.

    No matter that Congress before the deadline could, as it did in part, postpone the implementation of the legislation or, after the "deadline," could amend or repail any of "Fiscal Cliff" before it took effect.

    And no one, not even those Nobel winning economists, can do anything but guess at the impact that the legislation will have on the economy.

  • Report this Comment On January 02, 2013, at 11:31 PM, SUPERMANSTOCKS wrote:

    The entire deal sucks..... not worth a crap

  • Report this Comment On January 02, 2013, at 11:40 PM, Rudyescher wrote:

    Overall a good deal for what it's worth. What we need is a wealth tax on billionaires who hoard their wealth and don't invest in the economy. Billionaires like Warren Buffet don't take a high income and don't pay their fair share of taxes. Corporate taxes are only a fraction of payroll taxes (about 20%). If corporations paid the same as individuals we would have a budget surplus today. Just like SS taxes should be shared equally between corporations and individuals.

  • Report this Comment On January 03, 2013, at 12:00 AM, worthaminute wrote:, brilliantly worded.

    The Tea Party corrupted the traditional sensibilities of the GOP; loyalty, community, "values ", twisting a understandable economic perspective into one that is just based on stubborn pride, and certainly not logic.

    And most certainly not mercy! I know many people, of various education levels who have searched for work with no luck for 2 years. People with no imagination frown on "welfare" - until one day they have to use unemployment benefits. Some people have to feel the pain to get it.

    On my part, I'll pay the higher taxes to provide this buffer for others. Who knows when we'll need the same grace?

  • Report this Comment On January 03, 2013, at 12:24 AM, NickD wrote:

    ok poor man.

  • Report this Comment On January 03, 2013, at 1:09 AM, whereaminow wrote:

    There are a few people here that are apparently under the impression that this Fiscal Cliff deal is a "tax on the rich". Morgan, you didn't do them any favors by not properly reporting on the tax breaks in it for the cronies.

    These people cannot have their ignorance washed away if you don't give them the proper information (although if people still think that a tax bill written by politicians backed by corporate money - including dear leader - would ever hit them worse than us, perhaps they are beyond help).

    David in Liberty

  • Report this Comment On January 03, 2013, at 2:21 AM, depsee wrote:

    While I agree with astuber9 in principle, I will have to take offense. I am a single man struggling to maintain what might be considered a middle class standing. I don't ask for gov. handouts. I don't have a house full of children I am being given money for. I just turned 51 and have never been on unemployment. I served 6 years in the military. I take offense to you thinking I need my taxes raised to the level to make people who want all these government services squeal, when in fact most of those people don't pay any taxes and could care less. You need to steep back and re-think what the real issue is here.

  • Report this Comment On January 03, 2013, at 5:10 AM, KeitaiOtaku wrote:

    Yes, I was offended enough with astuber9 to just have to respond as well. The fact is, most of our predicament can be nicely blamed on Republicans for cutting taxes while dramatically increasing spending on foreign wars. Why is the American public conned into thinking, in any way, that the Grand Oldies are fiscally conservative, and that the majority of the population just wants a free hand-out? I would absolutely vote for a party platform that was fiscally conservative, but any sense of financially responsibility is tossed out the window in the name of righteousness.

    On the other hand... I have to wonder. Is the GOP position REALLY to make the country into a debtor nation, while proclaiming that spending is bad? Let's see... go to war, spend trillions, and buy off the public with lower taxes, rack up 10 Trillion, and sit back and laugh while all the ants scurry around trying to deal with the results. And what really happens...?

    The rest of the world is very interested in seeing the US succeed, because they're invested in us. Imagine the savings we would have if China attacked one of our ships, for example. Wouldn't we just write off all that debt? Or at least use it as a bargaining tool? The political implications of being in serious debt to China and other countries is perhaps a net positive?

  • Report this Comment On January 03, 2013, at 6:50 AM, carjjc wrote:

    I really apperciate the Fools reporting. They reported months ago that tax cuts do not result in good economies.

    I also think the GOP is causing a lot of problems in this country by their bad tax policy. They give too much away.

    It is also funny to me that the GOP wants cuts in social programs but these programs have not caused the problem.

    Can the Fools do some research on who uses more of the government? I think you will find that the wealthy and companies use more of the government and do not pay for their share. For instance the court system is used mostly by companies. Roads, Bridges, and Airports are built for companies. Roads and bridges are built for trucks not cars. It seems to me that the tax rate should be higher for the high earners and corporations because they use more of the government.

    Also without pensions the workers are at huge risk of not ever being able to retire. Why are companies let off the hook to pay for there employees through government social safety nets.

    In addition with the laws passed by the GOP reducing the regulations on companies, it is a greater risk to invest. This has made the 401k system a huge failure. And if we would have allowed social security to go into the market under Bush, we would not have any social security system today.

    We need higher taxes to provide good government and a better social saftey net.

    Lastly the GOP does not want to cut government or they would have proposed spending cuts. No GOP individual ever talks specifics about cuts. If they cut programs for the middle class we will have a depression. It costs a lot of jobs when the middle class has their take home pay reduced.

  • Report this Comment On January 03, 2013, at 7:49 AM, gkirkmf wrote:

    The real issues are decaying infrastructure and declining natural resources (oil and water for 2). We have foolishly spent our money on bankrolling several million bad mortgages, a couple of car companies, 30 banks, and 2 unnecessary wars. Now it is time to pay the piper... we can do it with spending cuts... just cut the defense budget by 2/3, or if we want to continue our national preoccupation with stealth fighters we can just raise everone's taxes. How about a transaction tax to slow down high speed trading? How about a VAT tax... it attacks the underground economy by making sure that the guys running meth labs pay taxes when they buy their BMW's.

  • Report this Comment On January 03, 2013, at 8:54 AM, Emphasis123 wrote:

    There are a lot of objections to the changes but one that as always baffles me is the disparity between the tax break for married couples and the one for individuals, "•Marginal tax rates on those earning $400,000 and up, or $450,000 between married couples, will revert to the Clinton-era rates of 39.6%” The government seems to want to incentivize shacking up as opposed to getting married. Is this a healthy goal for a society?

    Term limits is a long overdue partial solution to our problem, however I have been in favor of that for decades and do not see any movement in that direction.

    One other partial solution that we should advocate is to force the Senate and the House to approve by vote any federal regulation conceived as a result of legislation passed by those bodies that authorize the “Secretary” of whatever enforcing agency to draft one. I want them to read and vote on what they have allowed to be created by their attitude towards legislation.

  • Report this Comment On January 03, 2013, at 9:17 AM, Emphasis123 wrote:

    Incidentally, anyone that sees this estimated 60 billion dollars a year as the answer to our problem is living in a dream world. 18% of GDP has been the average take by the federal government over decades regardless of the tax rate. If you think that the "rich" won't change their economic behavior to avoid the new taxes you don't know human nature or believe they got rich by being stupid.

  • Report this Comment On January 03, 2013, at 9:55 AM, CJ71965 wrote:

    All this talk about the fiscal clilff is just that, TALK.

    Anyone who believes that our currency isn't already devalued isn't paying attention. I heard an interesting comparison awhile back. In the beginning of the 20th century a haircut cost twenty cents, 100 years later that same haircut, using the same technology is twenty dollars meaning that a 2012 dollar is worth 1 1912 penny, that is currency devaluation.

    There are multiple ways to fix the fiscally challenged government. The two fastest fixes are either, as Morgan says borrowing needs to become more expensive (rates higher than inflation) or we need to push term limits, either by legislation (not likely as our legislators regularly vote themselves huge raises while most working folks income growth barely keeps up with the cost of living) or simply by NOT VOTING FOR THE SAME PEOPLE EVERY ELECTION (as Albert Einstein said, "doing the same thing over and over but expecting a different result each time is one definition of insanity."

    As an electorate we are obviously insane, we do the same thing over and over again expecting a different result.

  • Report this Comment On January 03, 2013, at 12:52 PM, Swampy86 wrote:

    We are turning into a mirror image of many European countries. I read a story in the Wall Street Journal about France's new socialist leader levying a tax of 75% on all people that make $1million dollars or more per year. I think the article stated this would only affect 80 people, most of which will probably move to Belgium to avoid this penalty. The French courts said it was unconstitutional because it only applied to individuals, so they are going to re-write it to include couples that make more than the $1milion dollar mark are taxed at the same rate, then it will be enforceable.

    I read a story a while back that stated in France that only 1 person in 4 actually has a job and pays taxes, as with the United States, this is unsustainable. It amazes me that all we have to do is look across the "pond" at Greece, Italy, Spain, Portugal, and soon France to see our destination given our current trajectory.

    To start the ball rolling in the right direction, it will take both more revenue(taxes) and less spending(entitlement/defense cuts). I agree with some of the earlier posts, our "leaders" are not doing what is best for the country, they are doing what will get them re-elected. It used to be an honor to be asked by your neighbors to serve them in Congress, now it is life long employment with many perks, lifetime Blue Cross/ Blue Shield Insurance, so the fate of Medicare is of no worry to them. Annual raises seem to come most years as most people do without. If you happen to not get re-elected during you political career then you can find lucritive employment in some capacity with either a government contractor, or within one of our vast and multiple government agencies.

    I fear for the country my children and hopefully their chidren will live in.

  • Report this Comment On January 03, 2013, at 3:31 PM, WobblyWorldFool wrote:

    gkirkmf wrote:How about a VAT tax... it attacks the underground economy by making sure that the guys running meth labs pay taxes when they buy their BMW's.

    This Fool thinks a VAT a good idea if applied to only non-essential goods but we can do more than tax the guys running meth labs.

    We can End The War on Drugs!! It could save the LEMMINGS (Politicians) from having to jump off the cliff...DhOoooooo!! It could even help to fix this fiscally challenged government.

    Though a highly contentious issue since its inception. A poll on October 2, 2008, found that three in four Americans believed that the War On Drugs was failing.

    I would propose a discussion on alternatives, including decriminalization.

    We could even get the CIA involved, they have loads of experience after all...!!??

    A 2008 study by Harvard economist Jeffrey A. Miron has estimated that legalizing drugs would save taxpayers $76.8 billion a year in the United States — $44.1 billion from law enforcement savings, and at least $32.7 billion in tax revenue ($6.7 billion from marijuana, $22.5 billion from cocaine and heroin, remainder from other drugs)

    40 Years, $1 Trillion, 45 Million Arrests: This is the War on Drugs.

    Forty years ago, President Nixon called a press conference to tell the American people that their “public enemy #1” was drug abuse. He then proceeded to declare an all-out war on drug users and sellers, with resounding repercussions on criminal justice policy and on vast numbers of Americans.

    Subsequent presidents, drug czars, and local politicians have followed Nixon’s lead, fueling an unprecedented boom in the country’s prison population and waging an ever-escalating campaign against what many consider to be nothing more than a public health problem.

    Drug War Statistics

    • Over the past 40 years, the War on Drugs has cost more than $1 trillion and accounted for more than 45 million arrests.

    • In 2009 nearly 1.7 million people were arrested in the U.S. for nonviolent drug charges – more than half of those arrests were for marijuana possession alone. Less than 20% was for the sale or manufacture of a drug.

    • Even though White and Black people use drugs at approximately equal rates, Black people are 10.1 times more likely to be sent to prison for drug offenses. Today, Black Americans represent 56% of those incarcerated for drug crimes, even though they comprise only 13% of the U.S. population.

    • In a 2010 survey, 8.9% of Americans over the age of 12 had used illicit drugs in the past month.

    • Today, there are more people behind bars for nonviolent drug offenses than were incarcerated for all crimes, violent or otherwise, in 1970. To return to the nation’s incarceration rates of 1970, America would have to release 4 out of every 5 currently held prisoners.

    • Between 1973 and 2009, the nation’s prison population grew by 705 percent, resulting in more than 1 in 100 adults behind bars today. In 1980, the total U.S. prison and jail population was about 500,000 – today, it is more than 2.3 million.

    • The U.S. incarcerates more people than any country in the world – both per capita and in terms of total people behind bars. The U.S. has less than 5 percent of the world’s population, yet it has almost 25 percent of the world’s incarcerated population.

    • 1 in every 8 state employees works for a corrections agency.

    • It costs an average of $78.95 per day to keep an inmate locked up, more than 20 times the cost of a day on probation.

    The war on drugs has been a failure practically, morally, and economically. The results of this law enforcement approach are stark: today, there are more than 500,000 people incarcerated for drug offenses; billions of dollars are spent annually on narcotics enforcement; treatment is still out of reach for millions of people; and drugs are more available and cheaper than ever before.

    But there is also a growing recognition that the course of the past 40 years must change, and there is increasing momentum for drug policy reform from all levels of government and civil society.


    Filmed in more than twenty states, captures heart-wrenching stories from individuals at all levels of America’s War on Drugs.

    Please visit the Community Action tab to find organizations in your state and community that are working to end the war on drugs.

    Find out what you can do in your

    community to help end the war on drugs !!!

  • Report this Comment On January 03, 2013, at 3:48 PM, Jamesband wrote:

    The United States government plutocracy has created a bureaucracy beyond anything imaginable just a few years ago. Make no mistake, the new government for the people, by the people is now a corrupted, inept criminal organization whose primary function is to usurp the earned income from the citizens of this once great nation. This lawless organization, who we call government, is the worst of the worst, more ruthless than any known mafia or terrorist organization, more corrupt than any Ponzi schemer could have ever devise, and the largest extortionist organization ever to exist or be imagined. This is the state we now live in, this from a country that had no equal just a few short years ago, whose liberties and freedoms where the envy of all the world. And now, we rank 17th in the world’s freest nations. In summary, we have 16.5 Trillion dollars in US debt, which has run out, the government, in the first of the fiscal year is operating on pure credit i.e. stolen from worker pensions to pay for the socialist bureaucracy created by themselves, for which no one benefits. We are no longer the land of opportunity, the land of the free, we have allowed that title to be expunged from our history and we will suffer dearly for that grave misstep in our travels. God help us, for it will take a divine intervention to stop the tyranny that has bestowed itself upon us.

  • Report this Comment On January 03, 2013, at 10:48 PM, TMFDarwood11 wrote:

    My comment about taxes. Our tax code is a joke.

    If we want to level the playing field, simply treat all sources of income as identical and tax them uniformly. For example add the various incomes for determining tax. Add all sources of income including capital gains income, wages, interest and so on. The sum is "income" and is then taxed progressivey from a single tax table. No special breaks for capital gains, no special write-offs.

    A couple of weeks ago I had an over dinner conversation with an attorney whose firm makes a lot of money helping people shelter their income from the IRS. We discussed such a plan and her comment was "It wouldn't work because this would drive money overseas." Yes, and it would eliminate a lot of that legal firms business. My retort was "Most of the high rollers, including Soros and companies such as GE, Microsoft and Apple are already doing this and have anticipated such maneuvers."

    The politicans are usually way behind the curve and too interested in protecting or promoting special interests. For example here in Illinois, the state government is currently working on legalizing gay marriage. That's more popular and much easier than dealing with the $96 billion in unfunded pension liabilities and current income shortfalls.

    Of course, an obtuse and convoluted tax code does make it necessary for a lot of accountants to assist the proletariat (middle class) in preparing their income taxes, etc. That's good for the service economy, I guess.

  • Report this Comment On January 04, 2013, at 3:50 PM, TheRealRacc wrote:

    David in Liberty,

    Thank you for replying and suggesting the reading material.

    I too whole-hardheartedly agree that the Nation-State will fail. And as an optimist, I prefer to think that it will be through rejection. A willing rejection. And one that realistically have to take place over hundreds of years.

    Where my optimism falls short is the era in which we live - we are clearly eons away from realizing that our rejection of the state is actually coming to fruition. It will be a natural progression of life on Earth. And it is happening, as proven by people like you.

    So while I lay in bed and see the future in my mind's eye, I rest easy knowing that (most of) my money is invested in blue chip stocks that will pave my way to death.

    Speaking concretely, my current confusion rests in this statement/question: The human race is far away from realizing what you already know. The policies of our current administration would fit had we been living (arbitrary) 500 years in the future. But today, it appears that our administration is making decisions to destroy the State at such a rapid rate, that the human condition will not be able to catch up and realize where we should be headed, before it is all destroyed.

    Shouldn't we at least prolong the existence of the State, for as long as possible, so humanity does not turn the guns on themselves?

  • Report this Comment On January 06, 2013, at 2:09 PM, Peak2Trough wrote:

    TMFMorgan: "Yes. That's using $16 trillion today and assuming 4.5% nominal annual growth (real growth of 2-2.5%)."


    I really enjoy your articles and analysis... I make a point to read your articles over those of other Fool writers.

    But I will take a bet against the above outcome for virtually any amount you want to wager, even odds. Not even Fool-idol Buffet believes our nominal GDP will approach anything resembling 2.5% real going forward.

    He and Munger both agreed we would be lucky to achieve 1% real GDP growth at the 2012 Berkshire shareholder meeting, and the chorus of noted economists that agree with them is very loud indeed.

  • Report this Comment On January 06, 2013, at 2:31 PM, TMFMorgan wrote:

    ^ I believe Buffett/Munger were citing real GDP *per capita* when making those calls:

    "On the other hand, he [Buffett] believes that a 2.2% GDP print is not as abysmal is is being made currently. 'If you have a 2.2% growth in annual GDP and have a 1% growth in population, that would be 1.2% increase in real per-capita growth.'

    Real GDP has increased 2.3% over the last three years, and I don't think anyone would argue we're experiencing runaway growth.

  • Report this Comment On January 06, 2013, at 2:33 PM, TMFMorgan wrote:

    ^2.3% per year, that is.

  • Report this Comment On January 06, 2013, at 2:35 PM, TMFMorgan wrote:

    ^ Another way to think about this is forecasts of GDP potential:

  • Report this Comment On January 06, 2013, at 5:37 PM, Peak2Trough wrote:

    Interesting link, thanks. Although, it appears even compared with the Fed forecasts your projection is optimistic (4.5% vs 4.16% nominal) over 10 years. And if anyone has reason for optimistic projections, it's the Fed :)

    And am I reading it wrong or does nominal GDP never decrease in the projection? Are recessions simply embedded within the projections with lower positive numbers on average?

    As for Buffett, I obviously can't speak for him, but if he meant per capita, I don't recall him saying it. The discussion was towards the end of the Q&A when an attendee asked when we could expect a return to 3.5-4% GDP growth. He and Charlie hemmed, hawed, chortled and grunted and finally ended up with a two-man consensus of 1% real GDP growth. Maybe someone has a recording out there somewhere...

    At any rate, I must agree with them, and others, in that I am very skeptical that an economy as developed as ours, with a government so mired in debt can achieve much higher than 1% real GDP growth. That said, I hope you're right and I'm wrong... depending, of course, on the size of our wager.



  • Report this Comment On January 09, 2013, at 9:08 PM, thidmark wrote:

    The partisan stupidity on display in these comments guarantees this problem is not going to be fixed soon.

    We have exactly the government we deserve. Immoral fools placed in office by an increasingly dumber electorate.

    The Greatest Generation has been replaced by the worst.

  • Report this Comment On January 10, 2013, at 3:35 PM, DJDynamicNC wrote:

    "I read a story in the Wall Street Journal about France's new socialist leader levying a tax of 75% on all people that make $1million dollars or more per year"

    Goodness, that's only 20% lower than the top marginal tax rates found in the hardened socialist regime that history knows only as "The United States of America" circa 1950.

    You live in a socialist country. We all do. The very notion of socialism is the backbone of civilization. We are social animals and we depend on one another for our success. The only disagreement is over how socialist we are, not whether or not we're socialist at all.

    You may not enjoy that, but it remains a fact for anybody who has ever strung two US dollars together and purchased something.

  • Report this Comment On January 10, 2013, at 3:39 PM, DJDynamicNC wrote:

    And for the pessimists - please note that by every quantifiable measure, the quality of life we now enjoy is better and improving.

    Long term trends for literacy, poverty, health outcomes, violent crime, and every other indicator are moving, in fits and starts, in the right direction.

    While the United States tends to lag behind other developed countries as per the article below - and I'll leave my very partisan opinions for the cause of that off the table for now - the world as a whole continues to drastically improve in just about every way. We have problems ahead of us, but the vast majority of them are self-imposed - and eminently solvable.

  • Report this Comment On January 10, 2013, at 3:42 PM, DJDynamicNC wrote:

    Back on topic: Congress is facing a serious problem meeting a deadline imposed by Congress that requires Congress to address a pre-existing issue created by Congress.

    Until Congress stops obstructing everything and playing hostage with the economy then the fiscal cliff situation is going to keep arising, because it's a convenient choke point over which to force battles. But make no mistake when you place your blame, because this is just legislative masturbation - Obama can make whatever proposals he wants, but at the end of the day, Congress is playing with itself.

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