The Government Swerves to Avoid the Fiscal Cliff
Like viewers of an action movie, some Americans have been at the edge of their seat, anxiously wondering if the nation’s economy would plunge over the metaphorical “fiscal cliff.” After many weeks of intense negotiation in Washington, D.C., an agreement was finally reached in the final hours of the deadline. On January 2nd, President Obama signed into law H.R. 8, the American Taxpayer Relief Act of 2012 (ATRA). The final vote in Congress was 89-8 in the Senate and 257-167 in the House of Representatives.
The “fiscal cliff” was on the government’s mind at the turn of the year.
The law sets new rules regarding taxes and government spending. The two major issues causing the potential fiscal cliff–the expiration of the Bush-era tax cuts and “sequestration” (the automatic spending cuts created by the Budget Control Act of 2011)–were addressed. Economists had feared that no action would drive the economy back into a recession. Overall, the new law will allow for $600 billion in new tax revenue over ten years.
Highlights of the American Taxpayer Relief Act of 2012:
Taxes
- Income taxes on persons in the highest income bracket (those earning $400,000 a year as individuals or $450,000 as a married couple filing jointly) will go up from 35% to 39.6%. This increase matches the rate created during the Clinton administration and which had been reduced during the George W. Bush administration.
- Income taxes on those earning less than $400,000 a year will stay the same. This rate was originally scheduled to increase when the Bush tax cuts expired.
- Tax credits for low-income families were extended. The Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit were extended for five more years. The Child Dependent Tax Credit was made permanent.
- Payroll taxes will go up 2%. This is a Social Security payroll tax deduction put in place in 2010 that will be allowed to expire.
- Several corporate tax breaks were extended, including a rum tax, benefits for NASCAR racetrack owners, employers who hire members of Native American tribes, and those who drive 2-or-3-wheeled electric cars.
Spending
- “Sequestration” cuts (the automatic cuts in defense and domestic spending caused by the Budget Control Act of 2011) were delayed by two months to allow for further negotiations.
- Unemployment benefits were extended for one year.
- A pay freeze for members of Congress was extended.
- A measure in Medicare known as the “doc fix” was included. This insuring that payments to physicians keep pace with medical inflation. Without it, doctor’s payments would have seen a cut of 26.5%.
- Parts of the Farm Bill that were supposed to expire in September were extended for nine months. These include subsidies for grain, cotton and soybeans.
Response
The biggest opposition to ATRA came from House Republicans. They felt the bill was unbalanced, with more focus more on raising taxes and not enough on cutting spending. On the other side, some Democrats believe that taxes on the wealthy were not raised enough. Shortly after the bill was signed into law, there was a boost in world markets, which was good news for investors who have been waiting for markets to recover. With economists still calling the recovery slow and uncertain, only time will tell the full impact of ATRA 2012.