An Entrepreneur's Guide to the Fiscal Cliff
There’s this thing we’re calling the fiscal cliff -- a combination of $500 billion in tax hikes and $200 billion in spending cuts that are set to automatically take place on December 31. Essentially, it’s an accumulation of every budget decision that Congress has been putting off since 2011, plus provisions that were set to expire at the end of this year anyway.
If we were to “go over the cliff,” and allow these tax hikes and spending cuts to take place, what would happen? The positive side is that we’d start to make progress on the national debt, which is currently at a staggering $16 trillion. Unfortunately, it’s widely believed that this would be devastating to our economy and push us into another recession.
The irony is that, once you take away the specter of the fiscal cliff, our underlying economy continues to grow slowly and steadily. Most consumers and businesspeople are cautiously optimistic. It is the dilly-dallying of Congress, all in the name of helping the economy, which is itself creating uncertainty and holding our economy back.
If uncertainty is your problem, I have a remedy. Here’s what to expect, and how it will affect the decisions you need to make about your company.
A deal will get done . . . Congress simply cannot afford to do nothing. All sides agree that allowing middle class tax cuts to expire would be a terrible idea. The White House has calculated that doing so would cost the average middle-class family an extra $2,200 in 2013. The Republicans have made a valiant effort to hold middle class taxes hostage so they don’t have to agree to higher taxes on the wealthy, but public sentiment is against them and individual Republicans are starting to say they’d be open to negotiations about letting tax cuts expire for wealthier Americans.
. . . But not until the last minute. Negotiations in Washington never end early. If the Republicans are going to give a little on the idea of raising taxes on wealthier Americans - and it looks like they will - then they also have to drag this debacle out until the last possible moment to show that they fought as hard as they could. This is unfortunate, as it’s the lack of clarity that’s holding business owners back from making any growth choices. It might even be that Congress goes past December 31st, but this won’t cause any immediate catastrophe. They’d have weeks to come to a deal before the average American feels any consequence from it.
It will look more Democratic than Republican . . . President Obama campaigned unambiguously on the platform of raising taxes on wealthier Americans. He won a strong victory and therefore has legitimate grounds for framing his proposal as a mandate from the people. Further, the White House feels that Republicans acted in bad faith during the 2011 debt ceiling negotiations, so they have every incentive to stick to their demands and little reason to give a lot of concessions.
. . . but that’s not as bad for business as you might think. The Democrats propose allowing the top marginal tax rate to revert from 35% to 39.6%, as it was during the Clinton administration. This is the provision that most concerns small and mid-size business owners. But it’s an oversimplification: The effective corporate tax rate is actually 20%. Although business owners are likely to pay more taxes, it probably won’t be 3.6% more taxes. Look at this as another wrinkle in your corporate tax planning.
What does this mean to you? Let me offer an anecdote. A friend of mine has a company that makes organic skin care products. It’s a great product and she’s had success selling to wholesalers. Since the end of 2011, she’s been saying that the next step in the company’s growth is to double the size of her sales team. I agree. But she hasn’t yet made a hire because of the continual uncertainty about which regulations are going to be coming out of Washington. First she delayed because the Supreme Court hadn’t ruled on the Affordable Care Act. Then she decided to wait until after the election. Now she’s holding back because of uncertainty about the fiscal cliff and the debt ceiling.
I’m not bashing her: Entrepreneurs have to walk a fine line between conservatism and risk-taking, and she is legitimately concerned that hiring new people could cause her to overextend herself and not be able to respond to higher taxes or healthcare requirements. My point is simply that uncertainty in the business world is a constant, whether it comes from Washington, national disasters, sweeping technological innovations, or something else.
Bottom line: Things are not as uncertain for business owners as they seem. With a budget deficit of over $1 trillion, it’s pretty safe to assume that taxes are going to go up and government spending is going to be cut. (Certainly, taxes are not going to go down over the next four years!) The only question is when and how much.
No matter the environment, good business decisions are good business decisions. You provide a product or service, and you will be profitable so long as customers are willing to pay more for it than it costs you to provide. Yes, you need to make educated and rational decisions. But if you need to sell your business or expand it or hire more people or invest in R&D or start a new product line - sure, you can wait to see what Congress does over the next month. After that, 2013 should be a good year to take action.