- The temporary Bush tax cuts of 2001 and 2003 are now officially the permanent Obama tax cuts for all individuals earning less than $400k and married couples earning less than $450k.
- For individuals/couples with income above $400k/$450k, the marginal tax rate will revert to 39.6%.
- The capital gains and dividend tax rates will remain at 15% for all individuals below the above limits and rise to 20% for those above.
- The temporary Obama tax cuts of 2009 will be extended for 5 years, including the earned income tax credit and child tax credit.
- Permanent alternative minimum tax (AMT) relief.
- Phaseout of personal exemptions and itemized deductions for high-income earners.
- Extension of emergency unemployment compensation program and extended benefit provision.
- No extension of 2% FICA reduction.
- Delay of sequestration until March 1, 2013.
In the end it appears that both sides of the political spectrum are left frustrated. For the Democrats this bill effectively expands the middle class upwards to include all but the top 1-2%. Keeping with recent trends, the majority of tax benefits will accrue to the upper-middle class, making this deal far more regressive than many on the left had hoped. On the other side, the Republicans will watch tax rates for the top 1-2% go up a fair amount (~8-9%) once the 3.8% Medicare surcharge and phasing out of exemptions/deductions are added. By permitting talk of any spending cuts to be postponed another two months, the Republicans also forfeited a significant portion of their bargaining capital for that debate.
Looking at events of the past couple months, maybe years, it’s natural to feel disappointed by the dysfunctional dynamic of Congress. While I can certainly appreciate that pessimistic view, let me try and briefly argue an opposing perspective put forth first by Joe Weisenthal.
Throughout the entire debate about the fiscal cliff, both sides have made clear their shared preference for deficit reduction (though each side prefers a different method). Earlier this year, the CBO’s baseline projection was that:
The deficit will shrink to an estimated $641 billion in fiscal year 2013 (or 4.0 percent of GDP), almost $500 billion less than the shortfall in 2012.Following passage of the recent deal, Cullen Roche notes that:
Using the CBO’s “Alternative Fiscal Scenario” we’re still looking at big budget deficits in 2013. I’ll let the CBO run the final numbers here, but my back of the napkin math points to something in the $950B-$1T range.Despite agreement on the “harmful” future consequences of trillion dollar deficits, Congress is simply unable to reach any agreement that meaningfully lowers current deficits.
This consistent failure by Congress to achieve a mutual goal has, in some senses, actually been an enormous blessing in disguise. With household demand still constrained by previously acquired debt, the government’s big budget deficits have been supporting employment, corporate profits and private sector debt deleveraging. Had Congress been more effective in meeting its goals, smaller budget deficits might well have placed the US on a path of declining growth and rising unemployment similar to Europe.
So rather than complaining about Congressional gridlock, we should be thankful for a Congress dysfunctional enough to ensure the recovery continues.