If Taxmageddon Strikes, Will We Fall Off the Fiscal Cliff?

There's been much discussion lately of America's impending "fiscal cliff." And some have recently bandied about the term "taxmageddon" to describe the likely scenario if politicians don't take certain actions by the year's end.

The fiscal cliff is a reference to several temporary tax breaks set to expire in 2012, including the so-called Bush tax cuts and the payroll tax holiday. Extended unemployment benefits are also set to expire at year end. Then, too, some mandatory spending cuts kick in as a result of politicians' failure to reach a deal amid 2011's debt ceiling debate. All told, some estimates put the size of the so-called cliff at just under $500 million-a hefty-sounding sum, to be sure. Combine that with the likelihood we again hit the debt ceiling late 2012 or early 2013.

But is the kerfuffle warranted? Consider the debt ceiling-yes, the very one Congress has increased over 90 times since 1940. Some of the ceiling hike debates have been quite heated-including in 2002, 2003 and 2004. And yet each time, politicians found a way to ultimately pass an increase, averting "disaster."

Let's say this time's different, though, and for any of myriad possible reasons, Congress doesn't manage to pass a debt ceiling increase in time. (Ignoring the fact debt ceiling deadlines are typically fairly arbitrary and can be moved with little ill impact.) What would happen? We'd probably not have sufficient funds to make some discretionary payments-meaning sites like the Smithsonian might close for a couple days. Picnics at your local national park would be out. But otherwise, currently, tax receipts are sufficient to cover our debt interest payments-which is what's most critical on a monthly basis.

Over and above that, it's also extremely likely we'd have enough to make Social Security, Medicare and Medicaid payments. Amid last summer's debt ceiling drama, that was indeed the case, according to CBO estimates. So it seems likely we'd overall survive another round of debt ceiling debate, unsavory as that may be for our eardrums and political sanity.

What about the tax issues? As my colleagues and I have discussed before here and elsewhere, we're overall fans of flatter and lower tax rates across the board, preferring generally the private sector decide how to spend dollars instead of the government. But the reality is such incremental changes to tax rates are unlikely to make or break the US economy-it's far more resilient than that, as demonstrated by the fact we've had top marginal federal income tax rates ranging from 7% to 94% since the income tax's official inception in 1913, yet the economy is still standing. More than that, actually-since 1913, it's grown (in fits and starts) enormously to roughly $15 trillion.

Furthermore, from a market perspective, by the time this all comes to a head, we'll have had over a year to digest the fact the tax cuts just may expire come 2013-and markets are extremely efficient discounters of widely known information. Then too, US tax policy is a US-only issue-but markets are fully global. In the scheme of things, relatively little changes in our tax code just don't have a huge global impact on markets.

So while I'd prefer rates stayed the same (or even went down, were flattened, simplified, etc.), and while the political rancor surrounding taxes and the debt ceiling may temporarily rattle nerves (and possibly markets some), overall, both the economy and the market aren't tremendously impacted long term by yet another tax-rate jigger-whether politicians address the fiscal cliff and/or fiddle while a debt ceiling deadline comes and goes or not. And thank goodness for that-after all, how often do politicians do what you'd want them to? (I won't answer that....)

Amanda Williams is a member of Fisher Investments MarketMinder's editorial staff. She has been with Fisher Investments since 2006.

This article constitutes the views, opinions, analyses and commentary of the author as of April 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.