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Winners and Losers From The Fiscal Cliff Deal

Ian Wyatt

I'm glad that there aren't many in the financial media showering credit on Washington for reaching a fiscal cliff deal one day after the actual deadline passed.

Most of us recognize that folks who, through their own stupid actions (or inactions as the case may be), plot their own course toward disaster don't deserve credit when they alter said course.

They just avoid looking as stupid as they could have.

Yesterday at the 13th hour, the House passed the compromise bill that appears to have helped the U.S. avoid imminent economic disaster … from the House's own inability to reach a compromise before the January 1st deadline.

For now, the markets appear to be cheering the reduction of some uncertainty. But it's not the all-inclusive deal that many had hoped for.

Here are some of the apparent winners and losers included in the deal:

Loser: Employees - The temporary payroll tax cut first enacted as part of the 2010 stimulus is gone. Employees will now pay 2% more toward social security (6.2% total) just like they did prior to 2010. For those making $40,000 to $75,000, this will increase their taxes by $800 to $1,500 annually, all else being equal. On the flip side, these same employees should be happy that their payments help improve Social Security's solvency projections (see below).

Winner: Social Security -Actually, it's the social security trust fund that wins. The temporary 2% reduction mentioned above didn't help projections for the program's solvency. It should be on better footing with these payments coming back, assuming that unemployment doesn't go up as a result of the broader deal.

 

Loser: The Wealthy - This assumes you believe those earning above $450,000 (married) are “wealthy,” which President Obama clearly does. This group will see their income tax rate rise by 4.6% to 39.6%. It also increases their dividend tax rate by 5% to 20%. This said, we have a marginal tax rate system, so income below the $450,000 threshold enjoys the lower tax rate.

Winner: Dividend Stocks - The increase in the dividend tax rate is much smaller than that which could have been, and applies only to the “wealthy,” as mentioned above. This should silence all those who suggested that investors sell dividend-paying stocks ahead of a looming big increase in the dividend tax rate (we were definitely not in that bunch).

Loser: U.S. Debt-to-GDP Ratio - Congress started 2011 needing to trim around $4 trillion in spending to keep the U.S. debt-to-GDP ratio, which currently stands at around 79% (according to The Committee for a Responsible Federal Budget [CRFB]) from rising. This deal slows the projected growth rate, but doesn't bring it anywhere closer to the 40% level we enjoyed at the beginning of the century.

Winner: The Deficit … Sort of - The CRFB projects that this deal will reduce the deficit by $650 billion over 10 years, better than the estimated $4.6 trillion increase associated with extending the entire package. The projected reduction is a start, but nowhere close to what's needed to get the country on a path to sustainable debt-to-GDP levels. To view the CRFB's breakdown of the fiscal cliff deal, click here.

 

Loser: The Debt Ceiling - The deal postpones dealing with the $110 billion in scheduled defense and domestic program spending cuts and the need to increase the country's borrowing limit. Get ready for a new catch phrase, maybe fiscal cliff 2.0?

Winner: President Obama - With this deal Obama was able to avoid raising taxes on the middle class, and get Republicans to raise taxes on the “wealthy.”

Loser: Image of U.S. Politicians - As I stated earlier, Washington leaders hammered out a deal after the deadline to avoid a potential tragedy of their own creation. Rather than focus on what is best for the country, they appear to be more focused on preserving their jobs. This deal guarantees only that the political posturing will continue in the first half of 2013, and increases the policy uncertainty that is so exhausting to investors and business managers alike.

Winner: The Market … for now - The market enjoyed two days of triple-digit gains as this deal took shape. The good news is that tragedy has been averted, for now. The bad news is that the debate over our nation’s borrowing limit and spending cuts still looms. And that means there is still a lot of uncertainty for investors.

In other words, expect more of the same in the first half of 2013.

Good Investing,

Tyler Laundon, MBA

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