Wednesday, January 2, 2013

The Fiscal Cliff Bill: Now What?

Congress finally pulled through and the fiscal cliff was averted somewhat during the final hours last night. The senate passed a bill on Tuesday morning, 2 am to be precise, which extended tax cuts for individuals earning less than $400,000 and couples earning less than $450,000.  Anyone earning over those thresholds will pay a 39.6% tax rate. Yesterday, during a 15-minute voting session, House members passed that same bill, which has been sent over to the president for his signature.

About a week ago, President Obama did announce that if there was anything our elected leaders agreed on it was that the middle class should not be burdened with additional taxes. This has materialized and they were relieved as promised. Only difference is they bumped up the income level from $200,000 for individuals, as the president had been advocating for quite sometime, to $400,000. And this extension is now permanent.

I am impressed to read that the House, as a conservative majority, had agreed to tax high earners at the higher rate. But keep in mind that this bill, dubbed the 'Fiscal Cliff' bill or officially HR8, also granted Congress the right to extend budget spending talks until February. Which just shows that those awfully nice conservatives are expecting a quid pro quo in two months. We shall see how this event unfolds.

While President Obama has called on Congress to deliberate the budget talks with less friction, expect more bickering in February. Democrats had hoped to raise $1.6 trillion in tax revenues by extending the tax cuts to the $200,000 income level. This new bill will only raise $620 billion. Add to that the expiration of the 2 percent payroll tax, which generated additional income for Americans the past two years. Both parties will definitely feel as if they had over-compromised, and will expect to be over-compensated.

And where precisely will the reward be expected? In entitlement programs such as Medicare and Social Security benefits, which has been a point of contention for both parties. Democrats have been giving their Republican counterparts a big fight to avoid making any cuts to those programs. Come February, we will see if they are spared.

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