For a nation obsessed with assigning nick-names for everything from Special Purpose Vehicles to hurricanes, it is surprising that the recent presidential election did not have a brand-name.

However, months after winning over the youth and women at the polls, President Obama is facing a crisis that has already been given a name -- fiscal cliff.

The fiscal cliff is a set of laws which could result in tax increases and spending cuts, which could have a mitigating impact on the budget deficit. Two critical laws in this have been the Bush tax cuts and spending cuts under the Budget Control Act, 2011.

The Bush-era taxes

EGTRRA and JGTRRA — which expand as Economic Growth and Tax Relief Reconciliation Act (2001) and Jobs and Growth Tax Relief Reconciliation Act (2003) — formed the core of the Bush Tax cuts.

In a nation where your marital status could well decide your tax slab and the number of children you have could decide your tax credit, the all-round reduction in tax rates introduced by EGTRRA were widely welcomed.

JTRRA accelerated the gradual rate reduction and increase in credits passed in EGTRRA.

The maximum tax rate decreases originally scheduled to be phased into effect in 2006 under EGTRRA were retroactively enacted to apply to the 2003 tax year.

Also, the child tax credit was increased to what would have been the 2010 level, and marriage penalty relief was accelerated to 2009 levels. In addition, the threshold at which the Alternate Minimum Tax (AMT) applies was also increased.

JGTRRA increased both the percentage rate at which items can be depreciated and the amount a taxpayer may choose to expense, allowing them to deduct the full cost of the item from their income without having to depreciate the amount. In addition, capital gains was decreased from rates of 8 per cent, 10 per cent, and 20 per cent to 5 per cent and 15 per cent.

Obama’s intent

Opinion is divided on the impact that the Bush tax cuts had on both economic growth and job creation. Statistics attempted to solve this division of opinion.

The growth in jobs following the Bush tax cuts remains surprisingly small in comparison to the job growth achieved by two-term presidents without the benefit of the mega-tax cuts for the wealthiest.

These numbers have ridiculed the theory that tax cuts mean more jobs and the other radical one that tax increases on the job creators create less work for the jobless.

However, it should be stated that the recession did not help matters at all and would have contributed to the unemployment rate.

President Obama is proposing – and the entire US seems to be agreeing --that tax increases for deficit reduction should fall on the top 2-3 per cent of taxpayers, who have enjoyed the largest gains in income and wealth over the last 30 years.

That is why he is proposing that the Bush tax cuts be allowed to expire at the end of the year for those in this bracket, while the rate cuts for other taxpayers are extended.

Unfortunately, it will take time to negotiate tax reforms -- more time than remains until the end of the year, when the 2001 and 2003 tax cuts are scheduled to expire for all taxpayers.

But there is still time to negotiate an agreement that extends these cuts for the bottom 98 per cent, and that contains temporary measures to cap deductions and credits for high-income taxpayers in 2013.

Such an agreement could help to break the political impasse over whether and how much these taxpayers’ rates should rise next year, thereby preventing the US from falling over the fiscal cliff and back into recession.

There are no two schools of thought on the fact that the United States has for long survived on credit in some form or other, and some stringent measures need to be implemented to boost income generation and unemployment.

However, while the top 3 per cent of tax-payers would not mind the increase in their tax-outgo, others could feel the pinch if they are loaded with the additional burden.

Tax laws in the US contain numerous provisions which could be tweaked to generate additional revenue without affecting the average citizen — who is no better off today than he was in 2001 when the tax-cuts were introduced.

(The author is a Bangalore-based chartered accountant.)

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