An Analysis of the ‘Fiscal Cliff’ Deal


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Taxes have steadily trended downward since the end of World War II. Credit: By Thomas L. Hungerford, U.S. Congressional Research Service

Taxes have steadily trended downward since the end of World War II. Credit: By Thomas L. Hungerford, U.S. Congressional Research Service

I do not believe in a fate that falls on men however they act; but I do believe in a fate that falls on them unless they act — Buddha

Were he still with us today, Buddha may have noted how the Republicans and Democrats acted during the oft-cited ‘fiscal cliff’ negotiations, shook his head in disbelief and rethought his 2,500 year-old words of wisdom. Although an 11th hour deal was eventually cut, passed by both houses of Congress, and signed into law via autopen by the president (the American Taxpayer Relief Act), more questions than answers remain to be dealt with in the undoubtedly rocky months to come.

The ‘Fiscal Cliff’ – a Quick Primer

The fight over the ‘fiscal cliff’ was borne of largely philosophical differences between factions within both the Republican and Democrat parties, with the following issues at stake:

  • Expiration of the 2001 and 2003 Bush tax cuts
  • $1.2 trillion in automatic spending cuts over ten years
  • Recasting of the Alternative Minimum Tax to 2000 levels
  • Certain key Medicare changes
  • Sunset of the 2% payroll tax cut
  • Estate and capital gains taxes
  • Expiration of unemployment benefits extensions
  • Elimination of various tax credits

Had the Congress and President Obama failed to come to an agreement, legislated austerity would have been imposed upon the United States, much as it has been throughout Europe. As has happened in Europe, this action would have drained sufficient discretionary spending out of the economy to tilt it back into another recession.

The American Taxpayer Relief Act

The agreement capped a nearly two-month period of intense negotiations between the White House and Republicans within the House of Representatives, which led to a bill entitled The American Taxpayer Relief Act. Key features to the bill, which passed 89-8 in the Senate and 257-167 in the House, are as follows:

  • It makes permanent the current marginal tax rates up to $400,000 in adjusted gross income for individuals, $450,000 for married couples.
  • The new bill increases the top income tax rate to 39.6%.
  • There are limitations on itemized deductions for individuals with over $250,000 in adjusted gross income, $275,000 for head of household and $300,000 for married couples.
  • It makes permanent the current capital gains/dividend tax rates of 15% up to the same thresholds, increasing to 20% above those levels (not including the Affordable Care surcharge).
  • The bill provides a permanent patch for the Alternative Minimum Tax (AMT).
  • The bill extends the Research and Experimentation credit until December 31, 2013
  • Extends the Earned Income Tax Credit for five years.
  • It makes permanent certain personal tax credits, including the child care and college tuition credit.
  • It extends long-term unemployment insurance for one additional year.
  • The new bill allows the 2% payroll tax holiday to expire.
  • It defers the automatic spending sequester for two months.
  • It adds tweaks to Roth conversions for retirement accounts.
  • The bill makes permanent some tax-free employee benefits, such as employer-provided educational assistance.
  • Current estate, gift, and generation-skipping transfer taxes are made permanent, as are exemption levels, with the maximum tax rate increased from 35% to 40%.
  • The bill extends existing Medicare payment rates and a floor index (GPCI) through December 31, 2013.
  • The new law provides 50% bonus depreciation for qualified property placed in service
  • Imposes a 3.8% Medicare tax on investment income and .9% on earned income for individuals making over $200,000 and married couples over $250,000.
  • There are 12 additional health care tweaks.
  • The bill extends or makes permanent 13 additional tax credits.
  • The new tax law extends 40 business tax credits.

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