Pioneer Investments:


Home Insights From Our Blog Printable Version


About This Content - The views expressed here regarding market and economic trends are those of Investment Professionals, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of Pioneer. There is no guarantee that these trends will continue.

This material is not intended to replace the advice of a qualified attorney, tax advisor, investment professional or insurance agent. Before making any financial commitment regarding any issue discussed here, consult with the appropriate professional advisor.
Back To List
The Fiscal Cliff Doesn’t Arrive on December 31

Sam Wardwell
calender-icon Posted on December 11, 2012


The news media is breathlessly counting down the days until the arrival of the fiscal cliff on December 31. It may make for good television (tune in tomorrow) but it’s not good economics…or good political analysis. Here’s why:

•  As we all know, “fiscal cliff” is shorthand for a broad array of tax increases and spending cuts scheduled to take effect December 31. It’s a catchy phrase but a misleading metaphor. It’s really more accurate to visualize the so-called fiscal cliff as a hill which the economy must climb if it is to continue moving forward.

•  The steepness of that hill is variable: W2 withholding and Social Security taxes start taking a larger bite out of paychecks on January 1, but the higher taxes on 2013 capital gain and dividend income won’t be due until 16 months from now in April 2014. Likewise, the spending cuts, if they happen, will impact the economy at varying times.

•  Another reason December 31 isn’t a drop-dead date is because Congress has the power to change tax rates retroactively. If we hit the cliff, the new tax rates would take effect, but they wouldn’t be carved in stone…they could be changed.

The bottom line is, there’s no real need to strike a deal by December 31 …or even during the lame duck session before the new Congress is seated in mid-January.

The Deadline is Actually Sooner than December 31.

Unless Congress delays its holiday recess, any 2012 deal would have to be proposed as legislation by December 18. So we’ll find out by December 18 whether a deal has been struck in 2012.

The AMT is the most “Cliff-Like” Element

As I noted above, the fiscal cliff doesn’t hit all at once. The so-called “AMT patch” (an annual shell game Congress has played for decades to make future deficits look smaller) expired at the end of 2011. If no 2012 patch is passed, April 2013 tax bills will be roughly $90 billion higher than otherwise. That’s likely to put a dent in the consumer.

Time is an issue here as well. In theory, Congress can address the AMT patch after year-end, but what’s the deadline for the IRS to start printing forms? How about the programmers at the tax preparation software companies? When are their deadlines?

The Fiscal Cliff Deadline Isn’t Even the Most Important Deadline…or the Biggest Cliff

The debt ceiling, in contrast, is a very real fiscal cliff…and it does arrive around year-end…The debt ceiling is a critical deadline. It’s the least flexible, and it would require the largest “fiscal adjustment” if not extended.

Unless Congress raises the debt ceiling, the U.S. government will be forced to stop borrowing and limit its spending to what it collects in tax revenue. In effect, the debt ceiling would force the government to eliminate its fiscal budget immediately. This would be a fiscal tightening roughly twice as large as the so-called fiscal cliff. It would also happen much more abruptly, since the government would effectively have to go hand to mouth almost immediately.

Current projections are that the government reaches the debt ceiling around year-end and that it has enough cash on hand to continue operating for another three months or so. The prevailing assumption seems to be that Congress will vote to raise the debt ceiling without much of a fight. If that assumption is wrong, the ride could get very bumpy.

And don’t forget the rating agencies, which have threatened to downgrade the U.S. if we don’t bring our budget deficits under control. The deadline for a grand bargain which prevents those downgrades is probably late 2013.

In summation: there really are three different deadlines out there: the fiscal cliff, the debt ceiling, and the downgrade. The fiscal cliff comes first, but is the least scary of the three.

 

Before investing, consider the product's investment objectives, risks, charges and expenses. Contact your advisor or Pioneer Investments for a prospectus or summary prospectus containing this information. Read it carefully. To obtain a free prospectus or summary prospectus and for information on any Pioneer fund, please download it here.

U.S. Home | Global Home | Site Map | Careers | Privacy and Security | Legal | Business Continuity
Securities offered through Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA. 02109. Underwriter of Pioneer mutual funds, Member SIPC © 2014 Pioneer Investments.