As we have heard repeatedly over the last several months, Congress faces an urgent challenge during its current “lame duck” session: unless lawmakers take action before the end of this year, a series of automatic tax increases and across-the-board spending cuts—dubbed the “fiscal cliff”—will go into effect, with potentially crippling implications for our economy. The lead up to and uncertainty about the cliff is already hurting the economy, in fact.
For a nation still struggling with high unemployment and a recovery that feels uncomfortably close to recession for many households, the numbers are stark: $393 billion in tax increases; $110 billion more in automatic spending cuts; and, according to Federal Reserve Chairman Ben Bernanke, the possibility of 1.25 million fewer jobs created in 2013 if the fiscal cliff is not averted.
As lawmakers in both parties finally turn their attention to this looming catastrophe, my team and I at the Financial Services Institute (FSI) have some common-sense requests for Congress on behalf of independent financial services firms and independent financial advisors across the country:
- Extend all of the 2001 and 2003 tax rates: The economic recovery is best served by maintaining current marginal tax rates, as well as current dividend and capital gains rates. Congress should also extend estate tax relief for all taxpayers. If nothing is done, tax benefits for education, retirement savings, and low-income individuals will disappear, while marriage penalties – among others – will increase.
- Extend vital expired and expiring business tax provisions: Various tax incentives that are crucial to American businesses, including credits for research and development and the active financing exception, expired at the end of 2011. These provisions, as well as the payroll tax rate, should be extended to avoid severe economic consequences.
- Provide Alternative Minimum Tax (AMT) relief: The AMT, which was never meant to impact middle-class Americans, threatens to ensnare approximately 30 million additional taxpayers with increased taxes unless a patch is implemented.
- Avoid activation of the “sequester”: Without Congressional action by the end of the year, draconian across-the-board discretionary spending cuts known as “sequestration” will go into effect, including painful reductions to Medicare provider payments and in defense spending.
While media coverage of the fiscal cliff implies that the impact of these changes will only be felt if they take effect as scheduled on January 2, the reality is that the economy is already being held back. As we and our members see every day, the mere anticipation of the fiscal cliff has spooked markets and caused businesses to put off investment and hiring decisions. The sooner Congress acts to resolve these issues, the better off the economy will be.
Further, Congress should not stop at merely fixing the problem in the short term; rather, it should act to put our country on stronger fiscal footing for the long term, in order to avoid similar crises in the future. Congress must commit to comprehensive tax reform, in order to implement a fairer and saner tax code that will help to improve and stabilize the country’s fiscal health in the years ahead.
Our nation’s leaders must also develop a plan that addresses America’s excessive spending— particularly entitlement spending—in order to restore the nation’s long-term fiscal health. The issue is a daunting one, but that factor cannot serve as an excuse for inaction. A comprehensive deficit reduction plan will give the economy space to recover in the short term while long-term spending reforms work to promote lasting growth for the future.
We recognize that time is short, and that lawmakers are often hesitant to enact significant legislation in the few weeks between the November elections and the end of the year. The fiscal cliff, however, is a crisis that has been years in the making and cannot be kicked down the road any longer.
Our nation’s future, both in 2013 and beyond, depends on lawmakers’ ability to implement real and lasting solutions to these problems. We and our members call on our leaders in Congress to rise to the challenge.