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Archive for August 4th, 2011

I’m like Randall from Clerks, only the exact opposite: I like people, but I hate gatherings. Particularly dinner parties. Oh, how I hate dinner parties.

This is largely due to the fact that I’m awful at small talk, which in turn is largely due to the fact that I’m only well-versed on two things in life: sports and The Simpsons. And while this may make me a hit with the 14-21 year old demographic, most adults seem largely unimpressed with my ability to list 20 people who’ve worked alongside Homer at the Springfield Nuclear Power Plant.

No, the majority of my contemporaries prefer to talk about grown-up topics like mortgage rates and lawn care and the various pros and cons of the local school systems. Now, call me immature, but when I get stuck talking about any of this stuff, it makes my brain want to flee my body, sort of like this:

As my wife constantly reminds me, however, I am now a husband and a father, and by extension, a grown-up. I can no longer avoid uncomfortable conversations by stuffing my pockets with cocktail shrimp and waiting out a party in an upstairs guest bathroom. I’ve got to grin and bear it, which means I’ve got to be prepared.

And you should be too. Whether you’re socially challenged like me or not, as CPAs, new acquaintances expect us to be experts on all things finance. It matters little if you’ve spent your entire career preparing consolidated corporate tax returns, your neighbor Bill will inevitably look to you for advice on funding little William’s 529 plan.

That’s why I’ve put together the following FAQ. As you may have heard, our nation has been dealing with a bit of a debt problem. On Tuesday, legislation was passed as part of a “deficit reduction deal,” allowing the U.S. to narrowly avoid defaulting on its obligations and preventing us from becoming the largest province in the Chinese empire.

It’s only a matter of time before someone asks you what the deal is about the deal. So read on, and you can thank me after your next dinner party.

Wait…what happened?

The U.S. almost defaulted on its outstanding debt. The U.S. Treasury is no different then MC Hammer or Mike Tyson; it can’t cover its expenses strictly from the revenue it earns. As a result,  it looks to borrow.  However, the Treasury can only borrow money as long as the total debt doesn’t exceed a ceiling stated by law.  As of July 2011, the U.S. had maxed out its $14.3 trillion borrowing limit, meaning unless the President found some serious loose change under his couch cushions, we would have to either increase the debt limit or risk becoming unable to service our obligations, potentially leading to default.

So how did we avoid default?  

To change the debt ceiling, new legistlation must be passed. This was accomplished mere hours before default was likely, when lawmakers agreed to increase the amount the U.S. could borrow from its lenders, while simultaneously requiring the government to cut its spending in an effort to reduct the deficit. This may seem counterintuitive — akin, if you will,  to trying to curb your wife’s shopping habit by handing her a shiny new VISA but advising her to take it easy at Ann Taylor Loft —  but it accomplished the task of keeping us out of default.

How much additional cash can we borrow?

The legislation will raise the debt ceiling by $400 billion today, then another $500 billion in September. It will then be increased by another $1.2 trillion to $1.5 trillion. That’s a total debt ceiling increase of $2.4 trillion, or just enough to cover Albert Pujols next contract.

What kind of budget cuts are we facing? 

Much of the first $900 billion of spending cuts will likely come from our defense budget. So while we may become a more fiscally responsible nation,  in ten years there will be nothing to prevent the King of England from marching right through your front door and pushing you around. So there’s that to consider.

Where are the tax increases?

Despite an abundance of rhetoric over the past few months, the current proposal doesn’t account for any additional revenue raisers — tax or otherwise. Only reduced spending.

Can you really reduce a deficit by merely cutting spending and not raising additional revenue?

Sure you can, but as Chris Rock once said, you can also drive a car with your feet, but that don’t make it a good idea. It’s extremely likely that when the bipartisan committee assigned to reducing the deficit puts their heads together later this year, tax reform will be on the menu.

What kind of tax reform might we see?

In light of these recent developments, I would wager a guess that any reform may well be sweeping, the likes of which we haven’t seen since 1986. I just wouldn’t expect to see any major changes in 2011, since the bipartisan committee has a tight window to work with in meeting its November 2011 deadline for recommending additional deficit reduction strategies.

From a long-term standpoint, however, several proposals are currently on the table, including the following:

Obama’s Plan:

  • Includes an extension of the Bush tax cuts after 2012 for only those earning less than $200,000 ($250,000 for MFJ).
  • Eliminating tax breaks for big oil and corporate jets.
  • A permanent extension of the R&D credit.
  • Keeping the 3.8% Medicare contribution tax on certain unearned income after 2012.

These proposals keep with Obama’s theme of targeting the wealthy and demanding that they pay their “fair share.”

The Gang of Six Plan

White House Deficit Commission

  • Reducing tax rates, but eliminating or reducing many current tax incentives, including the deduction for home mortgage interest, accelerated depreciation, lower rates on capital gains and the earned income credit.
  • Individual rates would drop to a range from 8-23%, though dividends and capital gains would be taxed as ordinary income.
  • Eliminating the AMT.
  • Repealing the state and local tax itemized deduction and reducing the charitable contribution deduction.
  • A single corporate rate of 26% and elimination of the Section 199 deduction.

That should give you everything you need to handle any unsolicited questions with aplomb. You’ll notice I’ve only provided facts; no opinion. It’s been my experience that in a social setting, one should never offer their views on politics, religion, or just how overrated Lady Gaga is. It can never end well.

Instead, just drop some deficit reduction deal knowledge. You’ll be a bigger hit at parties than this dude. 

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