Short Term Trading forex trading links forex trading books market statistics trader values euro and us dollar Shocks Crashing What could be the consequences for the US, if the fiscal cliff is not resolved?

Tuesday, 27 November 2012

What could be the consequences for the US, if the fiscal cliff is not resolved?




(Image by Tax Credits via Flickr)
Guest post by Emma Davis
 
With a view to lend support to the sagging U.S. economy, lawmakers had announced a tax reduction in the U.S. workers’ payroll as a result of which the last two years have seen them relatively happy with an increase of two-percent point in their salary after deductions.

This cut is set to expire with the end of this year; meaning that the average U.S. household may have to forego the extra boost of about $1,000 that it was getting annually in these years and pay more by way of tax hikes.

Many hope that these Bush tax cuts for the middle class can be extended, although the government has hinted that when these payroll tax cuts were created, they were clearly meant to be for a temporary period. But as is very obvious, the state of the U.S. economy is still in doldrums and earnings of most of the people have suffered greatly in recent times; therefore extension of the payroll tax cut needs to be given prime consideration.
 
Some have expressed the opinion that the above extension could be at the expense of Social Security as the above could divert the tax money from Social Security and hence affect about forty million senior citizens. So, if the Bush tax cuts are allowed to expire, individuals will have to suffer substantial hike in their taxes.
 
In the year 2011, when issues pertaining to the debt ceiling were discussed, the Congress and the Super-Committee could not finalize on a compromised budget deal and hence this resulted in the announcement of forced budget cuts. As of now, the budget commences with $120 billion in the year 2013 and over a span of the next ten years, it will be reduced by an amount of $1.2 trillion. Let us suppose that the growth of the economy will be at the rate of two percent from the starting of next year. Taking the increase in tax into consideration as well as the cuts in the budget, 2013 will have to bear an amount of about $700 billion; affecting the GDP by 3.6% as per Moody’s Analytics. This implies that there will be a 1.6% loss in GDP and America will go into recession.
 
Many think that if President Obama could manage to convince a handful of chief executives that those citizens holding incomes over $250,000 need to pay higher taxes, it would put him in an influential light. Politically, the fiscal cliff looks like a solution to the congress members to gain time to fix the increase in taxes and spending for the long term. By this, small businesses will be able to plan for expansion and creation of jobs.
 
If there is no compromise reached on the Fiscal Cliff, the year could end on a dismal note; with the U.S. economy struggling at a lethargically slow pace. There could be an increase in taxes. Naturally, consumers will tend to spend less and this will hit the government spending to a large extent. With the euro zone crisis still in a debacle and the Chinese economy still not well enough on the path to recovery, the global economy paints a sorry picture. With another recession looming around the corner, there will be increase in the number of unemployed people and the stock market too does not look very hopeful. By way of tax increases, the average household could have to shell out $3,500 per year. This will be about $600 billion in tax increases totally.
 
It will also come as no surprise if austerity measures similar to the ones in the euro zone will need to be implemented. What will be the U.S. take on them then?
 
Only time will tell.
 
Bio: Emma Davis is staff editor & writer at www.investmentcontrarians.com which is based in New York. Emma just published a new site about US Economic Outlook 2013
 

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