The House on Tuesday night passed legislation that temporarily averted the fiscal cliff disaster. The vote was 257-167, as 172 Democrats joined with 85 Republicans to enact the legislation, which Obama is expected to sign.
Individuals earning $400,000 and households earning $450,000 will pay a top income tax rate of 39.6%, up from 35%, the rate that existed during the Clinton administration. It will raise $600 billion over 10 years, a mere pittance compared to the amount of spending and the corresponding amount debt the country will take on over the same period. Estimates are that the national debt will be somewhere between $20-$30 trillion in 10 years. Congress did not address any spending cuts in this legislation.
This bill affects the 0.6% richest people in the country; Obama promised to raise rates on the top 2%, who earn $250,000 or more. The new law effectively ascribes a new definition to what it means to be wealthy in America raising it from $250,000 to $400,000. On a side note, Grover Norquist, the king of no new taxes in the country, indicated that the House action did not violate the promises made by Republicans to vote against tax increases, since the body was effectively reducing taxes that automatically increased on December 31.
Other changes in the legislation include: capped itemized deductions on those earning over $250,000 individually and $300,000 for households, a higher estate tax rate of 40% from 35%, extended unemployment insurance for 2 million people, renewed child care, tuition, and research and development credits, and continued reimbursement for doctors who accept Medicare patients.
Not address was the increasing payroll tax rate that increased from 4.2% to 6.2%. It will increase withholding taxes by $50 per month for those earning $30,000, and $189.50 per month for those earning $113,700.
Monumental issues that still remain to be settled are:
- The debt ceiling. The country is at the current limit established by Congress of $16.394 trillion. The treasury will be taking “extraordinary measures” that will generate about $200 billion of cash flow. This will enable the government to pay its bills until late February or early March. Congress must increase the ceiling before that time or the federal government will not be able to meet its obligations. The quid pro quo for Republican approval of a higher debt ceiling will likely be spending cuts relating to entitlements.
- The sequester was deferred for two months. If a new deal is not made before then, certain agencies and the Department of Defense will incur spending cuts of 8%-10%.
-The federal government is operating with continuing budget resolutions, as it has not passed a new budget in a few years during Obama’s administration. Republicans can use this situation as a means to extract future spending cuts.
As much as Democrats want to boast of a victory relating to the fiscal cliff, it was not. Rather, it is a loss for all Americans. Clearly, the drama associated with the cliff and the future of American financial strategy makes it clear that our leaders and legislators are incompetent in these matters. The debt is still growing at an unsustainable rate that totals trillions of dollars each year. Yet, Congress was only able to deal with only a small part of the problem.