In our last piece, we talked about the quickly approaching economic catastrophe known as the fiscal cliff. Today, we'll look at the potential outcomes that may result from the political horse-trading that will most likely take place between the Republican and Democratic parties following the November 6 election and what it will mean for the average individual investor.
If you remember from the most recent article, the combined spending cuts and tax increases amount to a $600 billion to $700 billion hit to the economy. Many in the financial and political realms predict this will have between 3 percent and 5 percent off of annual GDP, though the final number is hard to predict at this point. This represents the worst-case scenario, and thus the most unlikely.
Assuming that national politicians can cut some sort of deal, it's safe to assume that some of the economic "sweeteners" deployed during the depths of the financial crisis will be eased or axed. Many economists agree that the 2 percent payroll tax cut enacted in 2010 will be on the chopping block. This could hit the consumer economy in a big way and may cause unforeseen turmoil in retail stock markets. Similarly, unemployment benefits that were extended as part of the Budget Control Act of 2011 – which mandated the sequestration cuts – may be rolled back as well.
For higher-income investors, the Obama administration's efforts to raise taxes will likely make the situation worse. There could be higher tax rates for those who make more than $250,000 per year, most likely a jump from 35 percent to 39.5 percent annually. Additionally, capital gains taxes, which range from 15 to 20 percent currently and depend on the person's income bracket, could be raised to as much as 30 percent.
What will the result of these actions be? Economic growth will certainly take a hit. According to a recent report from Credit Suisse, an international bank based out of France, the best-case scenario involves a transitory 1 percent detraction from GDP, though it is likely to be higher. Regardless, investors need to take charge and protect their money. They can do this by contacting Great Wealth Strategies and asking about our tried-and-true wealth preservation methods.