As of this writing, encouraging but still tentative signals are emerging from Washington about a deal on taxes and spending that would put off the drastic package of austerity measures that kicks in at midnight known as the “fiscal cliff”.
Let’s be very clear: this deal, if it happens, is by no means a solution to the longer-term goal (paywall) of reducing the deficit by $3-$4 trillion over ten years. It’s not even a solution to the fiscal cliff itself. It merely puts off some decisions.
Also, technically, it’s too late. The US is going over the cliff. Even if Congress agrees to the deal that Vice President Joe Biden, for the Democrats, and Senate Minority Leader Mitch McConnell, for the Republicans, have reportedly hashed out, it won’t be until tomorrow. But measures that kick in immediately, such as the suspension of extended unemployment benefits, can be retroactively revoked.
Nobody likes the deal. Liberals think it grants too many concessions to the wealthy (paywall) and leaves the government still hostage to talks over the debt ceiling in the coming weeks. Conservatives, still bristling at an aggressive speech from President Barack Obama earlier in the day, are angry at having to allow any tax hikes at all. But if the Democrat-dominated Senate votes on it later tonight, and the Republican-dominated House of Representatives gives it the nod tomorrow (it has agreed to convene at noon on Jan. 1), the agreement could go through.
So, if the package is accepted, what will it mean?
What has (probably) been agreed
- Income tax rates will rise on households earning over $450,000 (the Democrats had wanted a $250,000 threshold), or approximately the top 1%.
- Capital gains and dividend taxes rise somewhat, estate taxes increase slightly (Republicans had wanted no change), and various tax credits are extended
- The payroll tax cut expires
- Unemployment benefits for the long-term jobless last another year
- All but the highest earners are exempted from the alternative minimum tax
- A 27% cut in Medicare payments to doctors is waived
What’s been kicked down the road (and how far)
- The debt ceiling. The United States officially exceeded its $16.4 trillion borrowing limit today. “Extraordinary measures” by the Treasury will hold it off for another couple of months, give or take. But then lawmakers will have to indulge in another round of haggling similar to what spawned the fiscal cliff in the first place. Next deadline: late February/early March.
- Sequestration. This is the fancy name for the fiscal cliff’s spending cuts, worth a little over $100 billion and affecting a wide swath of government spending. There’s been no progress on what to cut instead, but there may be an agreement to suspend them for a little longer. Next deadline: probably in three months.
- The “doctor cliff”. That cut in payments to doctors is supposed to take place as part of a program for keeping the cost of Medicare (healthcare for the elderly) under control. The cut is so big because Congress votes every year not to implement it, and boots it to the following year. And guess what: looks like they’ve done it again. Which means they now have to argue over what else to cut instead. Next deadline: one year from now.
- Unemployment benefits. Unless the economy suddenly bounces upwards, against all sensible expectations, America will still have a large cohort of long-term unemployed when the current extension expires. Next deadline: one year from now.
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