Super committee fails, now what?

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As everyone should remember, this bipartisan super committee was formed by President Obama as part of a deal that prevented a total default in early August. This committee had the task of developing a budget, and now they have failed to reach a budget deal, leaving America’s future unclear.

Actually, according to Forbes.com, there are four scenarios which are possible. The first involves a continued gridlock. What will happen then is “first, $1.2 trillion of automatic across-the-board spending cuts will kick-in on October 1, 2012. Second, the Bush tax cuts will expire for everyone at the end of that year. In addition, the temporary cuts in the payroll tax and the extension of unemployment benefits may not be continued.” So, what’s the recommended response?

An author on Forbes.com says Americans should be designing their own budgets as if the payroll tax cut was already gone (for example using the extra income to pay off high- interest debt), the tax hike will likely be what affects Americans the most.

Forbes.com also recommends bracing yourself for higher income and capital gains taxes. One way they recommend doing this is by selling any shares of stock you have, and “converting as much of your pre-tax retirement money to Roth accounts as you can (paying less now not more later).”

The second scenario applies if the Democrats are victorious. If that happens by some of their own rhetoric, they will repeal the Bush tax cuts for “individuals making over $200 thousand a year, as well as, couples earning $250 thousand a year.” According to Forbes.com, “there has also been talk of a new, higher rate on incomes over $1 million a year.” If any of this applies to you, it is again recommended that you convert pre-tax income into Roth accounts.

In the third scenario, the outcome of a Republican victory, tax increases are off the table. According to Forbes.com, “many of them (Republican Presidential candidates) would even eliminate taxes on capital gains and dividends altogether. On the other hand, there could be a reduction in exemptions, deductions, and credits to simplify the tax code and help pay for lower rates.” These would make saving easier but the Republican plan for Social Security and Medicare (raise retirement age and reduce spending) may make it all the more necessary.

According to Forbes.com, “the Ryan plan would transform Medicare into a defined contribution premium support plan to help retirees purchase private health insurance. If the health insurance premium is more than what the government is willing to pay, guess where that money is coming from?”

Finally the fourth scenario has an element of compromise in it between the Democrats’ refusal to make cuts in entitlement programs and the Republicans’ refusal to raise taxes. As Forbes.com states, “Politicians in both parties have been kicking the can down the road and now we’ll have to pay the price in higher taxes and/or lower benefits if we don’t want to turn into Greece.” The future is uncertain but there is a lesson: “We need to sit down around our kitchen tables and set priorities,” according to Forbes.com.

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