Fiscal Cliff Avoided, but Debates Rage On 02 Jan 13

Politicians had 507 days to steer the U.S. economy away from the fiscal cliff, but chose to come to a solution during the wee hours on the day of the deadline — technically falling over the cliff; although, the changes will be backdated to January 1st.

The fiscal cliff became the term used to describe the end of 2012 when the conditions of the Budget Control Act of 2011 were scheduled to go into effect. Among other things, the act included the elimination of a decade’s worth of tax cuts as well as $109 billion in defense and domestic spending cuts. Economists warned that the combined impact of the changes could send the country spiraling back into a recession.

The “solution” to the problem was hard fought, excruciating, and apparently left both parties largely unsatisfied. Overall, the plan is set to raise around $600 billion in taxes over the next 10 years, which is significantly less than the $2 trillion initially discussed by President Obama and House Speaker John Boehner.

What does the new bill mean for taxpayers?

While the changes will protect 99% of Americans from an income tax increase, lawmakers did allow a tax break, which reduced most American’s social security payments by 2%, to expire. This means most middle class Americans will still end up paying more in overall federal taxes (around $1000 for households earning $50,000).

Most of the Bush-era tax cuts are extended for individuals making less than $400,000 and for married couples making less than $450,000. These tax cuts, first passed by President George W. Bush, include lower taxes for all families, reduced investment and estate taxes, and increased numbers of tax credits.

However, wealthy earners (individuals who earn more than $400,000 and couples who earn more than $450,000) will see their tax rates rise from 35% to 39.6%. Capital gains will rise 5% and, as part of the health care reform act, an additional 3.8% capital gains surtax will be levied on individuals making over $200,000 and couples earning more than $250,000. These changes equate to an average tax increase of $14,812 for those making $500,000 to $1 million and a tax increase around $170,341 for those making over $1 million.

According to the Business Roundtable, a group of top corporate chief executives, President Obama and Congress have only begun to pull away from the fiscal cliff.

“When pressed to the limit, political leaders averted some of the most immediate negative consequences of the short-term fiscal cliff, but left unaddressed the most serious and fundamental reforms required for the country’s long-term economic health,” the group said. “We hope political leaders will now work continuously to agree on market-credible structural fiscal and spending reforms needed for America to compete in a modern global economy.”*

A similar group of chief executives, Campaign to Fix the Debt, said the New Year’s Day changes were a “small step forward,” but were also a “missed opportunity to do something big to reduce our long-term fiscal problems.”**

Meanwhile, the country just hit its legal borrowing limit (i.e. the “debt ceiling”) of $16.9 trillion. Thus, although the official deadline of the “fiscal cliff” has passed, the debate among politicians and economists regarding deficit reduction is far from over.