Bull Vs. Bear - A Deal For The Fiscal Cliff Can Happen

By Will Ashworth | December 13, 2012 AAA

Question: Is a deal for the fiscal cliff going to happen?

Bull's Response
Gallup recently surveyed 1,069 adults about the "fiscal cliff." The pollster found that 70% of the respondents believe Congress should come to some sort of compromise before the end of the year, avoiding going over the proverbial mountain's edge. Many Washington pundits don't see a solution by the end of the year. I do. Republicans and Democrats alike know the country won't get ahead if they continue their partisan ways. A deal gets done, if only a temporary fix, so a more permanent solution can be found in 2013.

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What's at Stake?
Most people realize that if the Bush-era tax cuts expire in 2012, everyone will be paying more taxes in 2013; nobody wants that to happen. The Congressional Budget Office estimates unemployment would rise to 9% from the current 7.7% if a deal isn't cobbled together within the first few months of the New Year. That too would be unpalatable for most Americans. Of the changes that kick in on January 1, the one that hurts the largest number of people would be the withholding rate for the payroll tax, which reverts to 6.2% of income on your first $110,110 of salary from the current 4.2%. The two-year tax holiday saved someone earning the median income of $50,054 approximately $1,000 per year. For most people that's an entire holiday shopping list. But of course there are many others that will be affected like income tax, estate tax, long-term unemployment, dividend tax, etc. Yes, there's a lot at stake.

SEE: Help Your Clients Prepare For The Fiscal Cliff

What Happens If No Deal?
Warren Buffett appeared on CNBC November 28. He basically stated that going over the fiscal cliff won't be the end of the world and it won't affect his long-term investment decisions one iota. He believes that the payroll tax, which generates one-third of the federal government's annual revenue, is the "most regressive" tax in America and extraordinarily burdensome on the middle class. Without getting too numbers oriented, he feels that the federal government's revenues and expenditures should equal 18.5 and 21% of GDP, respectively. To get there, Congress will have to increase revenues and cut spending at the same time. To do that, both parties will have to make some concessions. It's for this reason he's not confident a deal can be reached by the end of the year. I suppose you could call him a bull dressed in a bear's clothing. The CEO of Berkshire Hathaway (NYSE:BRK.A, BRK.B) has always been a big proponent of the American economy; a tiny disagreement between 535 people in Washington isn't going to change that opinion. He's right. Whatever happens by the end of the year - we'll carry on.

Why It Gets Done?
Former Clinton White House Chief of Staff Erskine Bowles believes there's a 40% chance that the government will get a deal done before the end of the year. While Warren Buffett sees the Republicans as the stumbling block, I see the Democrats as the real fly in the ointment. It's going to be awfully hard for senators and representatives to give up all, or a portion, of some of their cherished entitlement programs such as welfare and subsidized housing. Whereas the Republicans should have a much easier time throwing the top 2% of income earners under the bus. You know why? Because those aren't the people that get you elected. Sure, they'll finance your campaign, but they don't get you to Washington as the recent election demonstrates. Even if you are some sort of anti-tax ideologue, is it really worth putting the entire nation, including your own family and friends, in financial hardship just to keep a few wealthy people happy. I don't think so. When push comes to shove, the Democrats will have to bend as much or more than the Republicans because the second term is supposed to be about getting things done and providing a legacy for the President. If that's what it takes, so be it.

SEE: Parties For Taxes: Republicans Vs. Democrats

The Bottom Line
CEOs like Jim McInerney of Boeing (NYSE:BA) and Andrew Liveris of Dow Chemical (NYSE:DOW) have banded together under an umbrella group called the Business Roundtable. They believe that going over the fiscal cliff will do significant harm to the American economy. They might be right. However, fear is an incredible adrenaline rush. Once it subsides we often realize the fear wasn't nearly as great as we imagined. Nonetheless, for the sake of the American people, I believe the only sensible solution is to agree to something that lets all parties come back in the New Year feeling confident about the future. The bull in me says a deal gets done before December 31.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Don't forget to read the Bear side and weigh in with your opinion below.

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