The United States averted economic calamity recently when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the world’s largest economy off a “fiscal cliff” and into recession.The agreement hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only now beginning to pick up steam after the deepest recession in 80 years, reports Reuters.
Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.
Asian stocks hit a five-month high and the dollar fell as markets welcomed the news.
While the vote averted immediate pain like tax hikes for almost all U.S. households, it did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion (66.7 billion pounds) in military and domestic programs were only delayed for two months.
Obama urged “a little less drama” when the Congress and White House next address thorny fiscal issues like the government’s rapidly mounting $16 trillion debt load.
There was plenty of drama on the first day of 2013 as lawmakers scrambled to avert the “fiscal cliff” of across-the-board tax hikes and spending cuts that would have punched a $600 billion hole in the economy this year.
As the rest of the country celebrated New Year’s Day with parties and college football games, the Senate stayed up past 2 a.m. and passed the bill by an overwhelming margin of 89 to 8.
When they arrived at the Capitol, House Republicans were forced to decide whether to accept a $620 billion tax hike over 10 years on the wealthiest or shoulder the blame for letting the country slip into budget chaos.
The Republicans mounted an effort to add hundreds of billions of dollars in spending cuts to the package and spark a confrontation with the Senate.
For a few hours, it looked like Washington would send the country over the fiscal cliff after all, until Republican leaders determined that they did not have the votes for spending cuts.
In the end, they reluctantly approved the Senate bill by a bipartisan vote of 257 to 167 and sent it on to Obama to sign into law.
“We are ensuring that taxes aren’t increased on 99 percent of our fellow Americans,” said Republican Representative David Dreier of California.
The vote underlined the precarious position of House Speaker John Boehner, who will ask his Republicans to re-elect him speaker when a new Congress is sworn in.
Boehner backed the bill but most House Republicans, including his top lieutenants, voted against it.
The speaker had sought to negotiate a “grand bargain” with Obama to overhaul the U.S. tax code and rein in health and retirement programs that are due to balloon in coming decades as the population ages.
But Boehner could not unite his members behind an alternative to Obama’s tax measures.
Income tax rates will now rise on families earning more than $450,000 per year and the amount of deductions they can take to lower their tax bill will be limited.
Low temporary rates that have been in place for the past decade will be made permanent for less-affluent taxpayers, along with a range of targeted tax breaks put in place to fight the 2009 economic downturn.
However, workers will see up to $2,000 more taken out of their pay checks annually with the expiration of a temporary payroll tax cut.
The non-partisan Congressional Budget Office said the bill will increase budget deficits by nearly $4 trillion over the coming 10 years, compared to the budget savings that would occur if the extreme measures of the cliff were to kick in.
But the measure will actually save $650 billion during that time period when measured against the tax and spending policies that were in effect on Monday, according to the Committee for a Responsible Federal Budget, an independent group that has pushed for more aggressive deficit savings
USA deal looks so-so for businesses
– The “fiscal cliff” deal that slowly, painfully took shape in the U.S. Congress in recent days fulfills some of corporate America’s tax policy goals, but leaves others unmet, including a big one – meaningful deficit and debt reduction.
The bill will provide businesses with greater tax certainty in the short term. About $46 billion in business tax breaks were included in the compromise, forged by Democratic Vice President Joe Biden and Senate Republican leader Mitch McConnell and approved early on Tuesday by the U.S. Senate.
The legislation contains a long list of tax “extenders,” or temporary tax provisions that will be perpetuated for a year.
Some big-ticket items were part of that, including an extension through 2013 of the widely claimed research and development tax credit. Also included was a provision allowing businesses to write off immediately half the value of new investments, known as 50 percent bonus depreciation.
The legislation also includes a wide range of other favors for select industries, including tax breaks for railroad track maintenance, restaurant and retail store improvements, auto racetracks, film and television production, and rum production in Puerto Rico and the U.S. Virgin Islands.
Wind Power Backed
Numerous tax breaks for wind power production and other alternative energy technologies were also included.
“This agreement might not be seen as perfect by everyone, but it gives American consumers and businesses the certainty they need to put worries over this issue behind them,” said Matthew Shay, head of the National Retail Federation.
Washington’s army of business tax lobbyists need not fear that the bill will leave them with nothing left to do. Just as notable as what is in the deal is what is not, especially when it comes to reducing the federal deficit.
The legislation postpones for two months the deep federal spending cuts, known as the “sequester,” that were a central worry of the “fiscal cliff.” That delay could set up another fiscal cliff in late February, analysts said.
Corporate America has dedicated millions of dollars in recent months to lobbying lawmakers for deficit and debt reduction, seen as crucial to preserving the nation’s credit standing and financial power. The legislation would do little on that.
No ‘Territorial’ System
The compromise also makes no mention of setting up a new method of taxing profits made offshore and brought into the country by U.S. multinational corporations. Many such businesses have been pushing for a “territorial system” that would let them bring foreign-earned profits home with little or no taxation.
The White House did note in its summary of the legislation that it left “substantial scope’ for “reforming corporate taxes” and cutting the corporate tax rate to make it more competitive with the rate in other industrialized countries.
That had been a key goal of lobbyists.
Guggenheim Partners policy analyst Chris Krueger said the deal was “far above what was expected” for business.
He said, “On the deficit reduction side of things, it was clearly a miss, but I suspect they will take the short-term certainty with extenders over entitlement reform any day.”
On the other side of the business tax fence, advocates of closing special loopholes that help certain industries had reason to be disappointed. The legislation contains no mention of ending key tax breaks for the oil and gas business, or for senior managers of private equity firms and hedge funds.
Also left out was a proposal once trumpeted by Obama, in a piece of political symbolism, to end accelerated depreciation of corporate jets. An Obama proposal to end last-in-first-out accounting, a cost-saving business accounting method, also was nowhere in sight.
Those omissions from the compromise plan mean much work remains for those wishing to overhaul the U.S. tax code. That is a project that may or may not materialize in 2013. -Reuters
Stocks Leap on U.S. “fiscal cliff” Deal
Britain’s top share index jumped higher on the first trading session of 2013 after U.S. lawmakers approved a deal preventing massive tax hikes and spending cuts, boosting the outlook for the new year.
The FTSE 100 index was up 86.52 points, or 1.5 percent, at 5,984.50, having ended a thinly traded half-day session on Monday, New Year’s Eve down 0.5 percent as traders awaited news on the U.S. fiscal cliff negotiations, reports Reuters.
Asia stocks rose strongly, copper prices hit a two-week high, and Brent crude reached a one-month peak on Wednesday after U.S. lawmakers struck the last-minute budget deal, with upbeat manufacturing data from top commodities consumer China also helping.
China’s official manufacturing purchasing managers’ index held steady in December at 50.6, matching November’s seven-month high, adding to evidence that the world’s second-largest economy was headed towards steady growth revival.
Miners led the blue-chip gainers, contributing almost 20 points of the FTSE 100’s advance, boosted by the jump in commodity prices.
Banks were also in demand, with Barclays the top blue-chip gainer, up 4.8 percent, with traders saying the stock was helped by a price target hike from Investec Securities.