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Saturday, 19 September 11:09 (GMT -05:00)



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Tax Hikes – Good or Evil For USA?


Tax hikes and social benefit cuts have always been unpopular measures. They hint that there are crisis phenomena in a country’s economy. If the authorities have to go down to such steps in their fiscal policies, that means that it becomes harder for them to conceal and reject the difficult economic and financial situation in the country.

 

 
In order to gild the pill of austerity, governments usually to take populist steps like introducing taxes for the rich. Shortly after the French authorities decided to increase the max tax rate, the USA decided to do the same.
 
 

 

 

 

Fiscal Cliff
 
As we all know, in late 2012, the world’s biggest economy found itself on the verge of falling off the so-called “fiscal cliff”. In mid 2012, US politicians started discussing the ways and means of avoiding a new recession and the “fiscal cliff” (which could have manifested itself on January 1st 2013). The situation looked dangerous. Some experts expected another crisis like the one we could see in summer 2011when S&P downgraded the USA’s rating as the result of the continued disputes over the debt ceiling issue. This provoked panic in financial markets as investors started fleeing those markets, initiating a sellout.
 
On January 1st, most measures introduced by George W. Bush’s administration lost their effect.  This means automatic tax hikes and some benefit cuts.  This also includes budget spending cuts, including defense (-$50bn), education and other sectors. The total amount of spending cuts is estimated at $600bn. The US authorities are planning to save $1200bn in 10 years.
 
 
Taking into account the current weakness of the US economy, most experts are concerned about whether the economy will be able to withstand the new shocks without falling into recession. If this is the case, the consequences may be devastating, including another rating cut and market collapse, which may grow into another global crisis.
 
 
How Did US Politicians Try To Avoid Fiscal Cliff?
As usual, everything was resolved “at the 11th hour”. Before that, the US politicians had to spend days trying to find a compromise.
 
Barack Obama wanted to defend the poor at the expense of the rich. In July 2012, he urged the Congress to extend the duration of tax rebates. This was quite an expected move if to take into account the fact that it was made by a Democrat president amid the run-up to the 2012 presidential election. He was planning to help those whose annual income was below $250 000.
 
However, the President’s ambitions faced tough criticism from everywhere. While the Republicans urged him to not discriminate the rich, the Democrats blamed him for not raising the border up to $1 000 000 per year.
 
The opponents gave a range of arguments:
 
·         Tax hikes for the rich only will bring no more than $85bn per year, which is equal to 8.5 days of public spending.
·         Those tax hikes will mainly concern small- and mid-scale businesses, which create most jobs in the country.
·         A 1-year delay in tax hikes for “the poor” won’t allow US employers to make long-term planning, which will definitely have a negative impact on the rate of employment.
·         The military warned the US Congress that spending cuts may in the defense sector may result in massive job cuts (800 000 jobs).
 
Tense talks. In November 2012, right after President Obama was reelected, he was continuously inviting the Republicans to participate in the development of a new budgetary agreement and promised to consider all the suggestions.
 
In December, during tense talks, Obama agreed to raise the bar up to $400 000. In response, John Boehner, Speaker of the United States House of Representatives (a Republican), offered to raise the bare up to $1 000 000. However, other Republican congressmen declined the offer, saying that they promised their electorate to prevent tax hikes. The Democrats warned that in this case the Democrats would be responsible for a financial collapse if it happened.
 
 
On December 27th, Obama decided to break off his vacation in order to have final talks with the Congress…
 No Fiscal Cliff
 
On December 31st, Joseph Biden, Vice President of the United States, and Mitch McConnell, the senior United States Senator from Kentucky, a member of the Republican Party and the Minority Leader of the Senate, finally concluded an agreement.
 
The next step was made by the Senate on January 1st, 2013. It implied amendments, which helped the USA to avoid the “fiscal cliff”. The Senate approved tax hikes for people with annual income over $400 000.
 
Later on that day, the House of Representatives approved a bill, which canceled tax hikes for the rich. The bill took affect after it was signed by President Obama.
 
 
Details
 
In particular, the new legislation will imply:
 
1.       Tax rebates for those who earn under $400K per year will be reserved.
2.       Taxes for those households that earn over $450K per year will be increased from 15% up to 20%.
3.       US citizens with annual income over $400 000 will be forced to pay 39.6% as taxes.
4.       Dividend and income taxes will be raised from 15% up to 23.8%.
5.       The tax on any residential property that costs over $5 000 000 will be raised from 35% up to 40%.
6.       The payroll tax will be increased from 4,2% up to 6,4%.
7.       The pension tax will be raised as well.
8.       In January, the US authorities will also introduce a healthcare tax, which will be equal to 3,8%.
9.       The new law provides a 2-month delay in spending cuts.
10.   It also implies unemployment benefit hikes for those who stay unemployed under 12 months.
11.   Consequently, it implies benefit cunts for those who stay unemployed over 12 months.
 
According to the Tax Policy Center, 77% of US citizens feel the consequences of the new legislation. Altogether, they are expected to lose $115bn.
 
It means that the reforms will be painful to most Americans. Still, Barack Obama can be considered the winner as managed to fulfill one of his election pledges.  
 
US Dollar: Outlook 2013
 
The US public debt has already exceeded $16 000bn and keeps growing. This may result in the weakening of the UD Dollar against other major currencies.
 
Masterforex-V Academy experts say that EURUSD increased from 1.23 to 1.29 in late 2012. This is the first wake-up call, which may signify a long-term decline of the US currency.
 
One of the key bearish factors is the Fed’s decision to start another round of quantitative easing (QE3) in order to stimulate economic growth in the USA.
 

 

 

 

 

 

 

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