(Updated 7.00am ET, Jan. 2)
Despite waves of last-minute drama and discord, the fiscal cliff bill has now been approved by both the US Senate and the House of Representatives, and awaits the president’s signature to be signed into law.
The final agreement on the deal should minimize any impact of the fiscal cliff—the drastic package of austerity measures and tax hikes triggered as of Jan. 1. Measures that kicked in immediately—such as the suspension of extended unemployment benefits—can be retroactively revoked.
And investors showed appreciation for the deal, with markets across Europe rallying early on the news with big gains across major indexes. Notable equity advances included the mining industry led by Rio Tinto Group, automotive stocks including Porsche, Volkwagen, BMW and Daimler, and banks such as Commerzbank and Deutsche Bank.
In any case, the deal is by no means a solution to the longer-term goal (paywall) of reducing the deficit by $3-$4 trillion over 10 years. It’s not even really a solution to the fiscal cliff itself. It merely puts off some decisions.
Virtually nobody likes the current deal, which comes after the US technically went over the fiscal cliff. 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 on New Year’s Eve, are angry at having to allow any tax hikes at all. (The House vote was 257-167, with Democrats overwhelmingly backing the bill but only one-third of Republicans in favor. Politico has a detailed reconstruction of the legislative sausage-making.) It’s in the context of this broad discontent that things got messy over the past two days.
Now that it’s speeding its way into law, what does it mean?
What has been agreed
The main outlines of the bill (see also a summary at our sister publication National Journal):
- Income tax rates will rise on couples filing jointly with taxable household income over $450,000 (the Democrats had earlier 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 on Dec. 31. “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. As part of the last-minute deal, there’s an agreement to suspend those cuts for another two months while broader deficit reduction talks take place. Next deadline: in two months.
- The “doctor cliff”. That 27% 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 has grown 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.