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Fiscal Cliff Battle - Obama Won Big; Next Step - Abolish the Debt Ceiling?

Gary D. Halbert’s
January 3, 2013

First, let me wish everyone a Happy New Year! I hope your holidays were joyous for you and yours. 2013 will no doubt be another challenging year, both for the economy and the financial markets.

Second, many of you receiving today’s blog posting are not subscribers to my blog… at least not yet. Since I did not send my regular Tuesday E-Letter out the last two weeks due to the holidays, I decided to send everyone my weekly blog that goes out on Thursdays (and sometimes more often if there is late-breaking news).

My blog is FREE and covers a free-wheeling menu of topics week in and week out. So I hope that today’s content will convince you to subscribe. Remember, we never sell, rent or otherwise share your e-mail address with anyone – never have, never will.

As for the fiscal cliff battle, virtually everyone believes it was a big win for President Obama. He succeeded in getting almost everything he wanted, and did so without any spending cuts. Most conservatives believe the bill that just passed in Congress is a disaster and are angry that more Republicans didn’t vote against it. Count me as one of them!

Let’s take a look at the highlights (or lowlights) of the bill that passed in both houses of Congress on Tuesday.

Income Tax Rates: Permanently extends the Bush tax cuts on incomes up to $400,000 for individuals and $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6%, up from the current 35%. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.

Estate Tax: Estates will be taxed at a top rate of 40%, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35%.

Capital Gains & Dividends: Taxes on capital gains and dividend income will increase from 15% to 20% for those with income exceeding $400,000 for individuals and $450,000 for families. For everyone else, the rate will remain at 15%.

Alternative Minimum Tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.

Other Tax Changes: Extends for five years the expansion of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year the accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.

Unemployment Benefits: Extends jobless benefits for the long-term unemployed for one more year.

Cuts in Medicare Reimbursements to Doctors: The so-called “Doc Fix” blocks a 27% cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula that has never been reformed.

Social Security Payroll Tax Cut: Allows a 2-percentage-point cut in the payroll tax first enacted two years ago to lapse, which restores the employee’s part of the payroll tax to 6.2%.

Across-the-Board Spending Cuts (Sequester): Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. This will be yet another political battle in late February.

What you may not have heard is that the Senate snuck in tens of billions in new pork barrel spending in what was intended to be a bill that only dealt with the tax code. An estimated $75 billion in “earmarks” were deceptively hidden in the 157-page bill. The House approved it, too.

So, President Obama came out the big winner on this one. Round Two will unfold in late February most likely and will include battles over the Sequester noted just above and the next debt ceiling battle. Only this time, the Debt Ceiling battle will be very different.

Obama Wants the Debt Ceiling Eliminated

Several weeks ago, Treasury Secretary Geithner announced that the US would officially reach the statutory debt limit of $16.4 trillion on December 31, but added that the government could employ “extraordinary measures” to keep paying its bills for a couple more months.

At the same time, President Obama let it be known that he will push for the abolishment of the debt ceiling altogether. He no longer wants any congressional limit on how much the government can spend. He wanted it eliminated in the fiscal cliff bill, but due to strong opposition, he had to back off. He will go for it again in the debt ceiling battle in February.

If you watched the movie 2016: Obama’s America (as I repeatedly urged my readers to do), you know exactly why Obama wants the debt ceiling abolished. If you didn’t watch 2016, I again urge you to rent it – especially if you are an Obama supporter. Trust me, watch it.

Another gut-wrenching political battle is sure to ensue, much as we saw in 2011 when we last hit the debt ceiling. That battle pushed the US dangerously close to defaulting on its debt and, as you will recall, resulted in the first credit rating downgrade in the history of our nation.

This time, the battle will be even more intense, especially if Obama pushes for the elimination of the debt ceiling altogether. And I think he will. I hope I am wrong.

The argument will once again boil down to the Republicans fighting hard for spending cuts in exchange for raising the debt ceiling. President Obama will fight the spending cuts tooth-and-nail. We could once again see the US on the verge of default. Moody’s warns that our credit rating could fall yet again. Stocks will plunge… again, only to rebound if an 11th-hour deal is finally struck.

That assumes, of course, that Obama is not successful in eliminating the debt ceiling. If somehow he gets his wish that the debt ceiling is abolished, all hell could break loose in the financial markets. Foreign buyers of our Treasury securities could revolt! Watch the movie.

I will keep you “posted” on these and other developments in this blog in the weeks and months ahead. That’s why I encourage those of you who read my weekly E-Letters to subscribe to my blog. Again it’s FREE and we never sell, rent or share your e-mail address with anyone.

Basically, I try to blog about whatever I think is the most interesting topic I see each week. Regardless of your political persuasion, I think you’ll like what you read. And I invite you to join the conversation with your own thoughts – pro or con.

Have a great weekend everyone!

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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