Stock Market - What's behind Fiscal Cliff
All maintream media are focusing of fiscal cliff as soon as President Obama got reelected Nov 6, 2012 presidential election. Before stepping onto Fiscal Cliff, we need to understand about Bush Era of Tax Cuts.
Bush Era Tax Cuts:
Unites States has a progressive income tax system in which people making lower income pay lower percentage of taxes. The tax rate can go upto 35% for people making more than 250,000 per year. Bush Administration approved the 15% tax rate for the long term capital gains through stock market. Also death tax went down to zero from 55%. Republican want to maintain the current rate but Democrats want to increase the tax rate especially targeting the people who are rich.
If no action taken by the congress, then it would increase tax for everyone and spending cut by the government. But it can reduce the $700 billion deficit for the government every year moving forward.
For instance, individual earning around $ 50,000 will see an increase of $2500 in taxes, which is not good for the economy. By protecting the lower-income people as per democrats, the burden will move onto the rich.
The current long term capital gain and dividends gain tax percent is at 15%. If we reset this rate, then tax payers have to pay anywhere from 25% - 35% depends on their income bracket. It strongly discourages the long term investors since there is no advantage for them to hold stocks at long time.
The other option is keep the highest rate at 35% but decrease the window of paying 15% and move them to 25%. There are couple of options being discussed by mainstream medias, analyst and congress. Currently we have to wait and watch what congress coming up by end of Dec 2012.