Adios 2012

Julia Gillard ‏@JuliaGillard

It’s in the world’s interest that the US Congress joins President Obama to address the fiscal cliff comprehensively. JG

U.S. Budget Compromise Deal Reached
Dec 31 2012-5Mins Ago
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President Barack Obama and congressional Republicans sealed a budget deal late on the final day of the year to avert the fiscal cliff that would raise income-tax rates for the first time in nearly 20 years, maintain unemployment benefits to millions of people and extend a number of tax breaks for families of modest means.

The deal also delays for two months part of the $110 billion in spending cuts that otherwise would have taken place in early January.

Top Democratic lawmakers said the Senate would vote on the deal Monday night. The House could reconvene, or wait until Tuesday to vote. Passage in the House isn’t assured and could depend in part on the result in the Senate as well as the reaction to conservatives of the delay in spending cuts.

Any delay would mean the U.S. technically would go over the cliff when midnight strikes. With U.S. markets closed Tuesday, the impact of waiting one day could be minimal. What damage the wrangling has caused—to the 2013 tax-filing season and consumer confidence—is already assured.

According to officials on both sides, the key elements of the deal, developed during all-night negotiations between Senate Republican Leader Mitch McConnell (R., Ky.) and Vice President Joe Biden, include:

Permanently raising tax rates on income over $400,000 for individuals and $450,000 for couples filing jointly.

Raising taxes on capital gains and dividends for those households, from the current 15% to Clinton-era levels of roughly 20%.

Limiting the value of personal exemptions as well as the value of itemized deductions, two restrictions that would kick in at $250,000 for individuals and $300,000 for couples. Those limits disappeared in 2010.

Setting the estate tax rate at 40% on estates over $5 million, up from the 35% that applies now to those over $5.12 million. That isn’t as high as the 45% rate Mr. Obama sought with a $3.5 million exemption.

The deal doesn’t do much to control the U.S.’s long-term budget woes, which are driven largely by entitlement spending, especially on health care, which were left untouched in this agreement. And depending on the budget math and the ultimate fate of the spending cute, it may not do much for the short-run deficit either.

By waiting until the last minute, and by cutting a deal on a much smaller scale than either side once envisioned, Washington also deferred many of its thorniest questions for perhaps as little as a few weeks. In late February of early March, the Treasury Department will run out of extraordinary measures to deal with the government’s borrowing limit—which it reached on Monday—and Congress would need to approve an increase, setting up a new and potentially more dangerous deadline.

The changes in tax rates that were agreed to between Messrs. Biden and McConnell would raise roughly $600 billion in new revenue over 10 years. While that would represent the largest tax increase in decades, it would be less than 20% of the revenue that would have come in if policy makers allowed all the current tax breaks to expire on New Year’s Eve.

The Biden-McConnell deal is a classic compromise that included something for everyone to love—and hate. The key question is whether the positive components and the pressure of the Jan. 1 deadline are enough to neutralize the parts that raise objections. If not, attacks from the left and right could combine to topple the deal.

For Republicans, the bill includes the bitter medicine of the first income-tax rate increase since 1993, a violation of the anti-tax orthodoxy that has defined their party. On the other hand, it would codify the Bush-era lower income-tax rates for most Americans as permanent law, ending the recurring battles over how long they will endure.

For Democrats, the bill’s tax increase makes good on their party’s marquee promise in the 2012 election to raise taxes on upper-income Americans and not the middle class. But many Democrats, especially liberals, were infuriated that the bill set the income threshold as high as $450,000.

Heading into a meeting with Mr. Biden, Senate Democrats mostly declined to comment. Said Sen. Clare McCaskill, (D., Mo.): “Nobody’s happy—that means its probably a compromise.” Sen. Tom Harkin of Iowa gave a thumbs down. Sen. Barbara Boxer of California said she expects to support it.

“I’m believing we’ll get a big vote, which will help us in the House,” she said.

One sticking point in the talks has been automatic spending cuts, known as the sequester, which are set to take effect in coming days.

Republicans had insisted the cuts of $24 billion be offset with savings in other areas. The White House wants some of the offset to be in the form of tax increases, not just other spending cuts.

The deal pays for delaying the sequester with a mix of new taxes and spending cuts, according to a person familiar with the matter.

Other elements of the deal could be costly. It calls for a permanent fix to the alternative minimum tax, a one-year extension of unemployment insurance benefits, and a five-year extension of other tax breaks. Among them are tax credits for families of modest means, including one for college tuition, and an expanded earned income tax credit, which provides cash to working poor families who don’t earn enough to pay income taxes. It also would block a scheduled cut in Medicare payments to doctors for one year.

The deal taking shape also would include tax breaks adopted by the Senate Finance Committee earlier this year, aides with knowledge of the talks said. Among them was a one-year extension of the tax credit, with slight modifications that would allow wind-farm developers to claim the credit for projects that begin construction by Jan. 1, 2014.

Some Democrats and liberal activists said they believe the White House gave up too much, weakening Democrats’ position heading into next round of budget talks with Republicans. “It’s not a good deal if it gives more tax cuts to 2 percent and sets the stage for more hostage taking,” Richard Trumka, president of the AFL-CIO, said in a twitter message.

–Corey Boles, Patrick O’Connor and Siobhan Hughes contributed to this article.
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