Fiscal Cliff Averted: Deficit Projected However to Rise by Another $4 Trillion Over 10 Years - Part Two

For people living and working abroad, the foreign earned income exclusion (FEIE) is also maintained and increases with inflation to over $97,600. The tax brackets however do not take into account the FEIE, so for folks earning more than the exemption amount, they will see a significant incremental increase in their overall tax bill as they go from no tax into a tax bracket of someone earning over $97,600. Nevertheless, the continued existence of the FEIC may encourage more and more self employed folks, who through the use of technology to live and work outside the US.

International Reaction

International reaction to the new bill averting what many had referred to as the "fiscal cliff" was mixed. The Asian markets reacted favorably rallying two percent for the day to their highest levels in 5 months. The European indices and FTSE followed suit reaching 17 month highs. The BBC reported that while there remained unresolved issues, "for now investors have the concrete news they were looking for".

Al Jazeera reported that "while the deal has helped to alleviate concerns of an immediate economic nose dive in the US, it by no means solves the greater terms of actually putting a dent in the deficit, the deal did practically nothing, and in fact, tax payers or wage earners will be seeing an increase in their taxes from the beginning."

China's state news agency, Xinhua took an even more dim view warning that "the United States must get to grips with a budget deficit that threatened not a fiscal cliff but a fiscal abyss". China holds the majority of its $3.3 trillion in foreign exchange reserves in US dollars.

The Tax Bill is Only the Beginning

Whether a step towards fiscal responsibility or a further step into the abyss, it’s clear that the new tax bill is the opening act in what will become a major war between the White House and the Republican House. The House had very little leverage in this opening scrimmage since the alternative was higher taxes on everyone.

But without a "Grand Bargain" including any real spending cuts or entitlement reforms (which both the House and the White House said were on the table), the House can take the position that it has given all it is going to give and put ALL of the new focus on future spending cuts. The issue will come to a rapid head within two months as the Government reaches its borrowing limit of 16 trillion dollars. The tables may be turned as the White House will need the Republican House to go along with legislation to increase the debt ceiling further.

Whatever happens, it is clear that money printing (called "quantitative easing") and deficit spending will continue in 2013 without any real political will to do otherwise. Investors will be forced to turn to gold and other precious metals, industrial metals, commodities, foreign real estate (especially income producing) and other alternative investment "assets" that are not correlated to the US dollar to protect themselves against imminent inflation and dollar devaluation. Global diversification, together with greater use of IRAs, 401Ks, insurance products and other products designed to achieve legal tax deferral should take on new importance for every taxpayer.

Joel M. Nagel is an international lawyer and entrepreneur focusing his practice in the area of asset protection, cross-border transactions, and global investment. He speaks all over the world on the topics of asset protection, global banking and investment, and international legal compliance.

Joel has written articles and has been quoted by Forbes, Fortune, Live and Invest Overseas, Hemispheres Publishing, Sovereign Society, Sovereign Man, Stansberry Research, Oxford Club, Pirate Investor, True Wealth, Islands magazine, Business Times, Physician’s Money Digest, and the Simon Letter. He also hosts a weekly radio program called the “Global Legal Advisor” broadcast over the Web on the Overseas Radio Network. Joel can be reached through his website or by telephone at +412-749-0500.