SimplePolitiks

The Fiscal Cliff Deal Explained

• By Simple Politiks
• 2 January, 2013
• 10 Comments

NEWS + OPINION

Late Tuesday during the final hours of the 112th Congress the House passed the Senate’s bill to avert the fiscal cliff, officially ending the nation’s economic trepidation. This was the first clash and regrettably it will not be the last. There are many other contested issues for the new year where the 113th Congress will undoubtedly meet with comparable gridlock and obstructionism; the reason being that the so-called “Grand Bargain” could not be reached with this agreement.

However, before delving too deep into the long term issues I want to explain what did in fact get through Congress and what it means for the American people. Below is an explanation provided by a Yahoo News article:

The House and Senate passed the bill on Tuesday and sent it to President Barack Obama for his signature. Highlights include:

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—Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.

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—Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.

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—Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.

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—Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.

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—Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.

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—Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.

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—Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.

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—Social Security payroll tax cut: Allows a 2-percentage-point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2 percent.

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—Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.

This bill passed the Senate with remarkable bipartisan support of 89-8. The House reached an agreement and managed to pass the bill too, but with a much weaker approval of  257-167. Their biggest complaint? The lack of weighty spending cuts. When you look at the delayed $109 billion in cuts predetermined to begin this week, you begin to see why they were so upset.

I believe this bill is a rather diluted compromise which was only a byproduct of the dysfunction in Washington. Given months to arrange a concrete plan for the future, this bill was the best Congress could muster before their session concluded. I frequently say that something is better than nothing, so in that respect I’m happy the politicians did compromise on some issues. However, I must express my disappointment because this only kicks the can further down the road; there are three smaller-scaled fiscal cliffs coming up (some are thanks to the 112th Congress’ inability to compromise). Below are the big upcoming conflicts:

• Delayed Sequester (series of automatic cuts in federal spending). The Senate plan also calls for $12 billion in new revenue and another $12 billion in spending cuts. These will be split between defense spending and nondefense spending.
• New Debt Ceiling
• Continuing Budget Resolution

We can only hope the 113th Congress is an improvement over the 112th. Not only do we need greater efficiency, but they also need to see the bigger picture. Ideally the politicians will be capable of coming to grips with the fact that our entitlements need serious restructuring. Social Security and Medicare are set for bankruptcy if they remain unscathed by significant reformation. Yet despite the urgency for a rational budget, neither side is willing to budge (Democrats more than Republicans in this case). Why? The issue remains political suicide for those in Washington because no matter how you look at it, things are going to get tougher for everyone (especially the elderly and the poor). Nobody has the stomach to face the kind of uproar of unpopularity that would follow that type of discussion. So everybody sits back and pushes the impending crisis off to the side, only to wonder why our deficits are growing at a rate we haven’t seen in decades. As I’ve already pointed out in an earlier post, we are spending the entirety of our budget on mandatory spending (entitlements) and the debt interest. We cannot keep this up! There is over $1 trillion of discretionary spending that immediately goes into our deficit! If our politicians were rational and put party before politics then both sides would come together and explain the situation to the American people. Everybody needs to know that our current spending levels are unsustainable. However, until the American people understand this fact and the politicians refrain from accepting it, we’ll be forced to endure the debased form of lawmaking that party politics openly invites.

Entitlements shouldn’t bear the only significant budget cuts; the military spending is out of control too. We spend more than most of our allies combined… Yet even the smallest of cuts are considered abhorrent by the Republicans. Each party has their own “sacred cow” and it’s about time for everybody in Washington to face the facts. If they continue to put forth legislation like this fiscal cliff “aversion” then in the next decade or two the typical Americans are going to pay for their mistakes.

The longer they wait, the harsher our payments will be.