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Fiscal cliff: what happens next?

2 January 2013

Last night Congress agreed on a deal to avert the fiscal cliff. If you’re a little hazy on the detail of what that cliff actually was, it’s well worth reading Jonathan’s excellent briefing, while below are the details of last night’s drama, and what we can expect in the weeks and months ahead:

What happened last night?

Congress agreed on legislation which will avert the ‘fiscal cliff’, with a 257-167 vote just after 11pm in the House of Representatives. Out of 236 Republicans, 151, including Majority leader Eric Cantor, voted against the Bill. The Senate had approved the measure the night before by 89 votes to 8.

The US Treasury has also confirmed that the government had hit its $16.4 trillion debt ceiling. Using ‘extraordinary measures’, the Treasury can keep the government running for the next two months.

What does the deal include?

The deal will raise taxes by $41 for every $1 cut from the Budget, according to the Congressional Budget Office.

It extends Bush-era tax cuts on incomes up to $400,000 for individuals and $450,000 for couples. Earnings over those thresholds will be taxed at 39.6 per cent, up from 35 per cent. Similarly, taxes on capital gains and dividend income will increase from 15 per cent to 20 per cent on income exceeding $400,000 for individuals and $450,000 for families.

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The top rate of tax on estates will be 40 per cent – up from 35 per cent – with a $5 million exemption for individual estates and $10 million for family estates.

The legislation also indexes the alternative minimum tax for inflation, preventing 30 million families from falling into the tax and facing higher bills of an average of $3,000.

It extends for five years expansions initiated by Obama of the child tax credit, the earned income tax credit an a $2,500 tax credit for college tuition fees. Long-term unemployment benefits get a one year extension, and there will be an end to a 2 percentage point cut in the social security payroll tax, restoring it to 6.2 per cent: this will shrink pay packets for workers immediately.

What it doesn’t include, though is a decision on $109 billion of automatic spending cuts, which has been delayed for another two months.

Who does it hit?

The Tax Policy Center says those earning more than $2.7 million will pay 26 per cent of the additional burden in this legislation, or an average of $443,910 more than in 2012. Those earning between $500,000 and $1 million will pay $14,812 more.

What’s next?

Obama says he will sign the bill into law. But this isn’t the last time you’ll hear of the fiscal cliff. Democratic congressman Jim Moran has already warned that yesterday’s deal will in fact ‘set up three more fiscal cliffs’.

The need to raise the debt ceiling will be the next bargaining chip for the Republicans, who will use it to force Obama to accept cuts to programmes such as Medicare. The crunch point on this will come in February if the government is to avoid a default. Obama has already made positive noises about being ‘very open to compromise’ on issues such as Medicare spending.

But the President also hinted last night that he wanted this sort of brinkmanship to end, saying:

‘The one thing that I think, hopefully, the new year will focus on, is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.’

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Show comments
  • Roy

    Such is the rumpus resulting from an election with more promises from the sitting leader mollifying the underprivileged. Such is the incredible power force to be top dog, the numbskull leadership can mortgage off the country without as much as a budget to show for its plans. Once more we are able to see the beguiling gimmickry of the left to assign themselves a leadership role at the utmost pinnacle. Risking all (like Europe itself); in its blind re-installation of an extreme left wing progressive of Marxist proportions to lead the free world out of its slippery sloping depths.

  • ToryOAP

    The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome become bankrupt. People must again learn to work instead of living on public assistance.”

    – Cicero , 55 BC

    So evidently we’ve learned nothing.

  • Curnonsky

    This “solution” has the same air of ramshackle impermanence as the monthly Eurozone fixes we hear so much about. Meanwhile the whole top-heavy edifice of the American welfare state continues to be propped up by the Federal Reserve’s printing presses and the gullibility of the Chinese government.


    There is no fiscal cliff. It is all PR politics. The real issues will always be disguised and ignored. Those who live only for their own increasing wealth and power are not bothered in the least about what may happen after they have left office and moved on to even greater things.

  • Jules

    So Obama is extending unemployment benefits, raising taxes on the wealthy but introducing minimal spending cuts. Meanwhile Cameron is cutting benefit, cutting taxes for the wealthy and introducing massive spending cuts. And we call Americans right wing nutjobs? The only right wing nutjobs are in Downing St, numbers ten and eleven.

    • HooksLaw

      The spending cuts have not been decided yet. Thats the next fight. So to say there will be none is just stupid on your part. The fact that America may not succeed in its cuts or make silly wrong headed cuts is another matter and is entirely down to the numpty way the US is governed.
      The US is of course a vast continental sized agglomeration of separate states – a bit like the EU. I would have expected the usual suspects to have made more of that.

      But then the UK will be well out of the next federalising EU Eurozone treaty and the UK will have negotiated an arms length relationship with that group – hopefully by a tory PM rather than a socialist one. This is a sane reality the usual suspects cannot bring themselves tom face.

  • Augustus

    ‘Well sir, if I were you, I wouldn’t start from here’. It certainly is baffling that the same people who have brought America to a ‘fiscal cliff’ are those who were returned to power in the Senate and the White House. When Republicans gained control of the House in
    2010 they began by resisting Obamacare and a whole range of presidential initiatives, but could not even bring the President to the table for a balanced budget or cuts in spending. The fiscal Cliff was, and is, Obama’s fiscal cliff. He no longer has George W. Bush as a convenient whipping boy and excuse. It may be a familiar tune to say the problem is government spending, but the problem is government spending.


    Of course politicians need to be blind to their own failings but a Guardian columnist has said today that Obama should stop ‘campaigning’ ie get real about the problems.

  • Naomi Muse

    Putting off the day of reckoning. Ah well. We’ve all done that. However, the American form of democracy is hidebound because of the short term appointments in the houses, which encourages procrastination. I think it’s the underlying system that needs to change to make democracy possible, and brinkmanship less normal. Likewise the polarisation of politics on party political lines seems to have lost the objective of being for the good of the country or the common good.

  • HooksLaw

    Like I said a couple of days ago the automatic spending cuts have been put off. No doubt it will be fudged again.

    There is no incentive amongst federal politicians to cut spending – they all want to cut someone else’s spending not their own areas. The fudge between the white House and congress is crippling the US’s ability to govern.
    The trouble with the issue of medicare is that there seems no control over how the money is spent, no ability to make efficiencies within the budget as is happening in the UK.

    And it should be pointed out that neither side contested the 2% increase in payroll taxes which will have a significant effect on US consumer spending and jobs.
    The taxes were lowered previously as ‘stimulus’. As it stands this stimulus clearly did not help the deficit. is Ed Balls listening. We have seen 4 years of stimulus under Obama and the US deficit is bigger than ever. Now from this even deeper hole they are talking about tax rises and (maybe) spending cuts.

    The US defence cuts are what is important to us. Will the F35 survive? It begins to look as though it might.

  • William Blakes Ghost

    Well if Obama wants to ends the brinkmanship he and his democrat pals need to stop acting like prize arses and start governing properly.

  • Right On

    This whole episode is a perfect summary of the Obama presidency. Lots of attempts to win political advantage, lots of campaigning, lots of shallow, partisan attacks. No attempts to compromise (on anything notable) and absolutely no moves to actually tackle the underlying problem. Oh….and lots of fawning, one sided coverage of the whole thing by the media. Unfortunately this is now the new normal!

  • TomTom

    $5 million tax exemption on estates compared to $527,000 in UK is a stark contrast. The simple fact is it changes NOTHING. The USA is paying so much Interest to China that it will soon cover the Chinese Defence Budget. Japan holds $1 Trillion in US Government Debt. There is no way the USA can ever reduce its deb t burden and it thinks it can use Depreciaton of US Dollar through QE to INFLATE away the Debt……and it won’t work. National Debt was $9.6 Trillion when Obama took office and is now $16.4 Trillion and at the end-2013 it is forecast at $20 Trillion (Fed, State, Local) in a world where Global GDP = $70 Trillion

    Congress cannot control Spending and dare not tax to cover Spending. The US has deficit-financed the global-economy and since Vietnam War has funded the rise of every Asian economy whether Korea, Taiwan, Thailand, China just as the Korean War boosted Japan. The US deficits are the motor of the globalised system and will lead to Currency Collapse

  • commentator

    The whole thing is a total and cynical farce. Barry O wanted to engage in a bit of class warfare so he jacked up taxes on the evil “rich” but hasn’t even begun to tackle the never-ending multi-trillion deficits which are staring him in the face…..because that would involve levelling with the unfunded entitlement junkies who make up the Democrats’ heartlands. So the whole mad circus rolls forward with America’s young and lower middle classes being put to the fiscal sword while the Fed prints gazillions of dollars to fill the yawning chasm.

    • AnotherDaveB

      The man just won an election with that platform.

    • Lonestar

      You really don’t know jack shit about the situation in the USA do you, you halfwitted fool!

  • Old Blue Eyes

    One thing to ascertain from the figures quoted in the article is that in comparison to the people of the USA web are vastly overtaxed in the UK.

    • Old Blue Eyes

      “we are” (finger trouble)

    • HooksLaw

      The US are simply ignoring the level of tax it needs to support its spending. Its congressmen and senators vote for spending programmes to aggrandise themselves to their constituents but will not countenance the necessary taxes. That way is ruin and America needs to wake up or it will be ruined.

      That is not the same as saying we are overtaxed.

      And of course if the US economy does pick up and does generate income – will that be used to pay down debt? What do you think?

  • DaveT

    If you are earning 400k a year the tax rises are just headline grabbers, there are still 1000s of loopholes and exemptions for your accountant to exploit.

    • TomTom

      Not if they impose AMT

  • alexsandr

    they still havent sorted the underlying problem. That they are spending more than they get in tax. Nice bequest for their grand kids and great grandkids eh?

    Still the US are not alone are they????

  • In2minds

    What happens next? Clegg tells us what he thinks!

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