US Congress avoids fiscal cliff tax hikes

2013-01-02 08:36

Washington — A weary Congress sent President Barack Obama legislation to avoid the economy-threatening "fiscal cliff" of middle-class tax increases and across-the-board spending cuts late on Tuesday night hours before financial markets reopen after the New Year's holiday.

The bill's passage on a 257-167 vote in the House of Representatives sealed a hard-won political triumph for the president less than two months after he secured re-election while calling for higher taxes on the wealthy.

Moments later, Obama strode into the White House briefing room and declared, "Thanks to the votes of Republicans and Democrats in Congress I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing tax hikes that could have sent the economy back into recession."

He spoke with Vice President Joe Biden at his side, a recognition of the former senator's role as the lead Democratic negotiator in final compromise talks with Senate Republican Leader Mitch McConnell of Kentucky.

The economic as well as political stakes were considerable. Economists have warned that without action by Congress, the tax increases and spending cuts that technically took effect with the turn of the new year at midnight could cause unemployment to spike and send the economy into recession.

The extraordinary late-night House vote took place less than 24 hours after the Senate passed the measure in the pre-dawn hours on New Year's Day. The legislation cleared the Senate hours after Biden and McConnell, veteran negotiators, sealed a deal.

Upper ranks split

In addition to neutralising middle class tax increases and spending cuts that technically took effect on Monday at midnight, the legislation raises tax rates on incomes over $400 000 for individuals and $450 000 for couples.

Remarkably, in a party that swore off tax increases two decades ago, dozens of Republicans supported the bill in both houses of Congress.

The Senate approved the measure on a vote of 89-8 less than 24 hours earlier, and in the interim, rebellious House conservatives demanded a vote to add significant spending cuts to the measure. But in the end they retreated.

The measure split the upper ranks of the Republican leadership in the House.

Speaker John Boehner of Ohio voted in favour, while Majority Leader Eric Cantor of Virginia and California Representative Kevin McCarthy, the party's whip, opposed the bill.

Supporters of the bill in both parties expressed regret that the bill was narrowly drawn, and fell far short of a sweeping plan that combined tax changes and spending cuts to reduce federal deficits.

Permanent relief for middle class

That proved to be a step too far in the two months since Obama called congressional leaders to the White House for a post-election stab at compromise.

Majority Republicans did their best to minimise the bill's tax increases, just as they abandoned their demand from earlier in the day to add spending cuts to the package.

"By making Republican tax cuts permanent, we are one step closer to comprehensive tax reform that will help strengthen our economy and create more and higher paychecks for American workers," said Representative Dave Camp of Michigan, chairperson of the tax-writing House Ways and Means Committee.

He urged a vote for passage to "get us one step closer to tax reform in 2013" as well as attempts to control spending.

House Democratic Leader Nancy Pelosi also said the legislation included "permanent tax relief for the middle class", and she summoned lawmakers to provide bipartisan support as the Senate did.

The bill would prevent an expiration of extended unemployment benefits for an estimated two million jobless, renew tax breaks for businesses and renewable energy purposes, block a 27% cut in fees for doctors who treat elderly Medicare patients, stop a $900 pay increase for lawmakers from taking effect in March and head off a threatened spike in milk prices.

Taxes still on the rise

The bill would also raise the top tax rate on large estates to 40%, from 35%, and taxes on capital gains and dividends over $400 000 for individuals and $450 000 for couples would be taxed at 20%, up from 15%.

It would stop $24bn in spending cuts set to take effect over the next two months, although only about half of that total would be offset with spending reductions elsewhere in the budget.

Even with enactment of the legislation, taxes are on the rise for millions.

A 2 percentage point temporary cut in the Social Security payroll tax, originally enacted two years ago to stimulate the economy, expired with the end of 2012. Neither Obama nor Republicans made a significant effort to extend it.

The fiscal cliff measure had cleared the Senate on a lopsided pre-dawn New Year's vote of 89-8, and House Republicans spent much of the day struggling to escape a political corner they found themselves in.

"I personally hate it," Representative John Campbell of California, said of the measure, giving voice to the concern of many Republicans that it did little or nothing to cut spending.

May have to start all over

Cantor, the No 2 House Republican, told reporters at one point, "I do not support the bill. We are looking, though, for the best path forward."

Within hours, Republicans abandoned demands to add spending cuts to the bill and agreed to a simple yes-or-no vote on the Senate-passed bill.

They feared that otherwise the Senate would refuse to consider any alterations, sending the bill into limbo and saddling Republicans with the blame for a whopping middle class tax increase.

One Senate Democratic leadership aide said Majority Leader Harry Reid would "absolutely not take up the bill" if the House changed it. The aide spoke on condition of anonymity, citing a requirement to keep internal deliberations private.

If the House failed to pass the Senate bill it would mean that any fiscal deal would have to start all over when a new Congress, with dozens of new members, is seated on Thursday. And any change in the legislation would require the Senate to re-pass the measure before it could go to Obama for his signature.

Despite Cantor's remarks, Boehner took no public position on the bill as he sought to negotiate a conclusion to the final crisis of a two-year term full of them.

Sticking point

House Democrats met privately with Biden for their review of the measure, and the party's leader, Pelosi, said afterward that Boehner should permit a vote.

The non-partisan Congressional Budget Office said the measure would add nearly $4 trillion over a decade to federal deficits, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels.

There was little or no evident concern among Republicans on that point, presumably because of their belief that tax cuts pay for themselves by expanding economic growth and do not cause deficits to rise.

The relative paucity of spending cuts was a sticking point with many House Republicans. Among other items, the extension of unemployment benefits costs $30bn, and is not offset by savings elsewhere.

For all the struggle involved in the legislation, even its passage would merely clear the way for another round of controversy almost as soon as the new Congress convenes.

With the Treasury expected to need an expansion in borrowing authority by early spring, and funding authority for most government programs set to expire in late March, Republicans have made it clear they intend to use those events as leverage with the administration to win savings from the Medicare health care program for the elderly and other government benefit programmes.

Saved by Obama, Congress

McConnell said as much moments before the 02:00. Tuesday vote in the Senate — two hours after the advertised "cliff" deadline.

"We've taken care of the revenue side of this debate. Now it's time to get serious about reducing Washington's out-of-control spending," he said. "That's a debate the American people want. It's the debate we'll have next. And it's a debate Republicans are ready for."

The "fiscal cliff" came about because tax rate cuts enacted in 2001 and 2003 during President George W Bush's administration were set to expire at the end of the year.

The threatened across-the-board reductions in government spending, which would slice money out of everything from social programmes to the military, were put in place last year as an incentive to both parties to find ways to cut spending.

That solution grew out of the two parties' inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit which has averaged about $1 trillion a year.

If Obama and Congress failed to act, about $536bn in tax increases, touching nearly all American workers, and about $110bn in spending cuts, about 8% of the annual budgets for most federal departments, were scheduled to start going into effect beginning in January.

  • Sibusiso - 2013-01-02 09:05

    Debt-ridden US ,pls go to hell.

      rob.bayliss.94 - 2013-01-02 09:20

      get real...if they go to hell they will take a lot of countries with them. You know, I think the biggest problems in the world today are caused by peoples wanting to take away stuff from others instead of growing/building their own!

      ryan.a.smith.3958 - 2013-01-02 10:00

      you hate Japan too ? you should probably hate them twice as much since Japan has twice as much debt to GDP as the USA

      Sibusiso - 2013-01-02 10:12

      Japan is doesn't have troops all over the world trying to tell people how to live their lives.So, I don't hate Japan.Imagine how much the Americans would save if they were to bring all their troops home!

      rob.bayliss.94 - 2013-01-02 10:20

      America is not telling anyone how to live their lives it is telling them how not to. Judging from the mess obvious throughout much of the Middle East and Africa (and a few other places) any sort of regulation of negative behavious is better than the free-for-all destructive mess we have today! Or are you proposing Sharia, or Ubuntu Marikana style as an alternative?

      ryan.a.smith.3958 - 2013-01-02 10:32

      ahhh Sibusiso, there you get to your point. well you are right about one thing, they would save a lot of money (and help fix the deficit) by cutting military spending. but that's nothing new, and this has been discussed in the House and Senate recently. south africa also spends too much on its useless military, money that could be spent on something better

      Sibusiso - 2013-01-02 11:23

      Ryan,don't even mention SA.Our govt is even more clueless.At least Mbeki understood economics hence he managed to reign in the deficit.

  • frans.vanderpoll - 2013-01-02 09:12

    I thought this Fiscal Cliff was related to the reggae musician Jimmy Cliff. If this Fiscal Cliff guy is really such a problem for America, why don't they just get the army to force him out of the country. Hahaha!

      Sibusiso - 2013-01-02 10:13


  • Getrude - 2013-01-02 09:18

    Happy New year dear bloggers. Your engagements are highly appreciated. We get informed a lot.

      Mark - 2013-01-02 10:57

      Gertrude you sound like a blog comment spammer.

  • greypatriot - 2013-01-02 09:21

    It is time for our government to make the right cuts in expenditures.

      Eterni80 - 2013-01-02 10:03

      yeh right, like that's gonna happen..

  • leonard.w.gray - 2013-01-02 09:34

    awesome that they reached an agreement, I hope this will help bring about recovery in the US and for the rest of the world. The democrats must now try and promote business growth and domestic manufacturing rather than exporting it China in order for America to get back to the pinnacle of financial success.

      Raymon - 2013-01-02 11:04

      Not going to happen. China owns 1/4 of the 16 trillion U.S. debt. China is busy buying up companies and land in the U.S. lt is like when a business goes bankrupt. At some point, it is ripe for the picking... A 'corporate takeover' is on the cards.

  • Eterni80 - 2013-01-02 10:02

    it's time the world weaned itself off its addiction to all things American...before they bankrupt the planet.

  • Ntutu Dlova - 2013-01-02 10:08

    Been following this on twitter, glad its done. The guy gets people involved,unlike the ANC ,the only time u hear anything from them is when they want votes. Zuma can learn a thing or two from Obama, but then he is not educated

  • bbooyse - 2013-01-02 10:47

    It's too little, too late I'm afraid... They are still spending way more than they've ever and will ever get in..this is just delaying the inevitable..

  • Raymon - 2013-01-02 11:01

    Its all a pipe dream. They have already gone over the fiscal cliff. Obama and his administration ruined the country. He spent more money in 4 years than Bush did in 8. In fact, he spent more money than any previous President. The U.S. is in the same boat as Greece. The only difference is that they can print their own money... This will just prolong the inevitable. Even with the so-called fiscal cliff being averted, they will have national debt close to 17 trillion at the end of 2013. The clock is ticking......

      bbooyse - 2013-01-02 11:06

      The scary thing is that figure excludes their social security debt (which dwarfs the $17tril figure)

  • sean.bagley.50 - 2013-01-02 11:58

    The GOP didn't care about deficit or spending cuts when they were in charge.All they cared about was their own taxes and increased spending and sending the bill to the next Party in the Oval Office. Obama said he would make spending cuts in addition to $1 trillion he's already made into account as to the $4 trillion he'd proposed to the GOP House-led and they'd subsequently rejected. Wall street bankers have created a negative equity market economy by draining all the value out of the taxpayers labor and feeding 2% off in taxbreaks themselves. The GOP didn't want to raise taxes on the rich.They wanted to tie spending cuts into any deal possible.The GOP also didn't want extensions in key Democratic favored programs. Wage earners will now see 6.2% increase in payroll tax on earnings up to $113,700 a yr to fund SSI & MediCare.Individuals on $400,000 & $450,000 a yr will see their taxes rise from 36% to 39%. Capital gains & Dividends will rise to 20% up from 15%.Health Care reforms will levy a new surge tax of 3.8% on capital gains for rich Americans.pushing top capital gains to 23.8% rate.Extended unemployment benefits extended to 2 years.

      sean.bagley.50 - 2013-01-02 11:58

      continue... Estate owners tax rate to rise from 35% to 40% for estates valued at $5million or more.Alternative Minimum Tax to guarantee the wealthy pays a minimum Federal income tax regardless of deductions,credits or exemptions is created by the permanent inflation patch. In other words a flat tax rate of between 26% & 28%.Child tax credit,earned income tax and opportunity tax credits extended for 5 years.DocFix Medicare reimbursement rates shielding doctors from the potential 27% cut in their reinbursement. Last but not least,the Sequester delay,i.e. billions of dollars in across-the-board spending cuts when the Debt Ceiling debates gets fully understood. As Michael Hudson used to say:"It's Casino Capitalism at it's best".The $800 billion TARP & the $2trillion "cash for trash" swaps to enable banks to continue their remuneration of the executives and bondholders was hardly a hiccup right.

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