Fiscal Cliff: Congress approved permanent extension of middle-class tax cuts, tax rates for top 2% to go up
Staving off part of the “fiscal cliff,” Congress voted yesterday to permanently extend the Bush-era tax cuts for the middle class but allow the tax rates for the top 2% of income earners to revert back to the Clinton-era level.
The House voted 257 to 167to pass H.R. 8 “American Taxpayer Relief Act of 2012″.The Senate approved the billby a vote of 89 to 8.
“Thanks to the votes of Democrats and Republicans in Congress, I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America,” said President Barack Obama. “[The] agreement enshrines, I think, a principle into law that will remain in place as long as I am President: The deficit needs to be reduced in a way that’s balanced. Everyone pays their fair share. Everyone does their part. That’s how our economy works best. That’s how we grow.”
The bipartisan agreement was reached following a round of intense 11th hour negotiations between Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-Ky.).
The tax deal would keep the current tax rates for individuals earning less than $400,000 a year and couples earning less than $450,000 per year. Doing so will save an average middle-class family about $2,000 a year.
Tax rates for incomes exceeding the $400,000threshold will return to 39.6%. Allowing the Bush tax cuts to expire for the top 2% income bracket, along with reverting the top capital gains tax rate to 20% and capping itemized tax deductions for high-income earners, would generate an additional $625 billion in revenues over the next decade.
Given that the White House initially sought to grow revenues by $1.6 trillion by letting the Bush tax cuts expire for income exceeding $250,000 a year, the terms of the tax deal represented a significant compromise on the part of the Obama administration.
Still, McConnell lamented that the tax agreement was an “imperfect solution”.
“We don’t think taxes should be going up on anyone, but we all knew that if we did nothing they’d be going up on everyone today. We weren’t going to let that happen,” said McConnell. “Thanks to this imperfect agreement, 99% of my constituents won’t be hit by those hikes.”
Extending tax cuts will add $3.6 trillion to deficit
But the President’s compromise on taxes also added significantly to the $16 trillion deficit. In fact, the non-partisan Congressional Budget Office projected that fiscal cliff tax compromise would grow the deficit by $3.6 trillion over the next 10 years.
To put the numbers in perspective, consider this: The deficit resulting from extending the tax cuts is 6 times more than the amount of tax revenue raised (slightly over half a trillion dollars).
The bill also included provisions to extend the current Medicare reimbursement rate (known as “Doc Fix”) and unemployment insurance. It would also extend business tax credits to encourage hiring, research and development, college tuition tax credits, and renewable energy incentives.
Read more: 5 key facts about sequestration
However, the agreement only addressed half of the fiscal cliff problem. The other half is the $1 trillion in automatic, across-the-board cuts to the discretionary budget known as “sequestration.” The sequester cuts mandated by the Budget Control Act of 2011 will impact both defense and non-defense programs equally.
Congress and the President have agreed to delay the sequester cuts, which were scheduled to take effect on Jan. 1, 2013, by two months to give lawmakers time to work out a more “balanced” plan.
Although House Republicans voted overwhelmingly in favor of sequestration as part of the debt ceiling compromise in 2011, they have tried to replace the defense sequester cuts with even deeper cuts to non-defense programs, which would mean considerably less federal fundings for public safety, law enforcement, schools, health and science research, and social safety nets for low-income families.
“We can’t simply cut our way to prosperity. Cutting spending has to go hand-in-hand with further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans,” said Obama. “And we can’t keep cutting things like basic research and new technology and still expect to succeed in a 21st century economy. So we’re going to have to continue to move forward in deficit reduction, but we have to do it in a balanced way, making sure that we are growing even as we get a handle on our spending.”
Another unresolved item related to the fiscal cliff is the pending increase of the debt ceiling.
Read more: U.S. debt ceiling timeline 2011
By law, Congressional approval is needed to raise the debt limit to enable the federal government to borrow money to pay for the spendings that Congress authorized.
Raising the debt ceiling traditionally has been a non-controversial issue. However, as the debt limit crisis of 2011 illustrated, Republican have not shied from using the threat of U.S. default to exact political concessions.
GOP House Speaker John Boehner said in late November that there is a “price tag” associated with increasing the debt limit.
“I continue to believe that any increase in the debt limit has to be accompanied by spending reductions that meet or exceed it,” Boehner insisted.
Clearly, Boehner’s position on the debt limit has not changed since the 2011 debacle. It’s important to remember that Boehner’s insistence on dollar-for-dollar cuts to offset the debt limit increase was what brought forth sequestration, which Congress has to fix in two months to avert the second half of the fiscal cliff.
McConnell’s statement on Tuesday all but confirmed the GOP’s plans to exploit the debt ceiling vote for steep spending cuts to balanced the deficit that has grown by another $4 trillion, largely due to tax cuts.
“In the upcoming months, we will have the opportunity to put our country back on sound financial footing—and there’s no excuse not to seize it,” said McConnell. “We have an immediate opportunity to act: the debt ceiling. Washington’s credit card has reached its limit again, and the Senate majority must act on legislation early in February—rather than waiting until the last minute, abdicating responsibility and hoping someone else will step in once again to craft a last-minute solution for them.”
Obama warned that if the Republicans allow the U.S. to default on its bills, the damage to the economy will be far worse than going over the fiscal cliff.
“While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed. Let me repeat: We can’t not pay bills that we’ve already incurred,” said Obama. “If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff.”
- Congressional Budget Office: Cost estimate for H.R. 8, American Taxpayer Relief Act of 2012
- Joint Committee on Taxation: JCX-1-13 Estimated Revenue Effects Of The Revenue Provisions Contained In An Amendment In The Nature Of A Substitute To H.R. 8, The “American Taxpayer Relief Act Of 2012,” As Passed By The Senate On January 1, 2013
- Thomas.LOC.gov: H.R. 8 “American Taxpayer Relief Act of 2012″
- Senate.gov: Vote #251 H.R. 8 (Job Protection and Recession Prevention Act of 2012 ) – An act entitled the “American Taxpayer Relief Act of 2012″
- WhatTheFolly.com: Transcript: President Barack Obama’s remarks on the “fiscal cliff” tax deal on Jan. 1, 2013
- WhatTheFolly.com: Transcript: President Barack Obama’s remarks on the “fiscal cliff” negotiations on Dec. 31, 2012
- WhatTheFolly.com: Transcript: Boehner: “I’m disappointed in where we are” on fiscal cliff talks
- McConnell.Senate.gov: ‘An imperfect solution’ to prevent very real financial pain
- McConnell.Senate.gov: Debt Ceiling an Opportunity to Curb Out-of-Control Washington Spending
- WhiteHouse.gov: Fact Sheet: The Tax Agreement: A Victory for Middle-Class Families and the Economy
- WhatTheFolly.com: Overview of the White House’s initial proposal to avert the fiscal cliff
- WhatTheFolly.com: CBO analysis shows ‘fiscal cliff’ will sharply reduce long-term deficits but lead to a recession in 2013
- WhatTheFolly.com: 5 key facts about sequestration
- WhatTheFolly.com: Analysis: Impact of sequestration on non-defense discretionary spending
- WhatTheFolly.com: U.S. debt ceiling timeline 2011