The United States has averted upcoming and expected economic calamity on Tuesday when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the US to the world’s largest economy off a “fiscal cliff” and into recession.
Unfortunately, since the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring, most of the Americans will still end up paying more federal taxes this 2013. In 2012, the 2-percentage-point cut in the payroll tax was worth about $1,000 to a single worker earning $50,000 a year.
It is estimated that 77% of American households will face higher federal taxes in 2013 under the agreement negotiated between President Barack Obama and Senate Republicans. Though high income families will get the biggest tax increases, many middle and low income families will pay higher taxes too.
Despite the “disadvantage”, the deal agreement hands a clear victory to President Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans.
For now, the deal resolves the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only beginning to stand up again after the deepest recession in 80 years.
The Asian stocks hit a five-month high as the dollar fell. China’s state news agency Xinhua took a more severe view, warning the United States must get to grips with a budget deficit that threatened not a “fiscal cliff” but a “fiscal abyss”. Most of China’s $3.3 trillion foreign exchange reserves are held in dollars.
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. on Tuesday and passed the bill by an overwhelming margin of 89 to 8.
When they arrived at the Capitol at noon, 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. (Reuters)