As anticipated, US lawmakers reached an 11th hour agreement last night, which prevents tax rises of $600 billion and across-the-board spending cuts; the deal removes immediate pressure to prevent the fall back into a recession. While it deals with some issues of concern, it by no means addressed the largest issues facing the economy, and so is seen as a sort of ‘bridge’ deal to allow some time and room for maneuvering until a comprehensive deal can be reached in two months time.
- tax cuts for individuals earning less than $400,000 have been made permanent.
- $65bn of automatic spending cuts for have been postponed for two months
- benefits, worth $26 billion, for the long-term unemployed will be maintained for another year
- an $11bn cut in Medicare payments has been postponed for another year.
- The Bush-era income tax cuts for individuals earning over $400,000 is expired, with the top rate increasing from 35% to 40%
- Certain income tax deductions for individuals earning more than $200,000 are phased out.
- higher taxes on dividend income, capital gains and inheritance for these same top earners
- The expiration of the payroll tax break, raising payroll taxes from 4.2% to 6.2%. The expectation is that $95 billion in additional revenue will be raised from the tax increase.
In many ways, as we’ve expected, the deal is a kick-the-can-down-the-road approach to solving overspending by the government. While economists seem to feel that the expiration of the payroll tax breaks will be the biggest single influence on US consumer spending, the reality is that the much larger issues, the ones that will influence long-term economic growth the most, have not yet been dealt with. The real work will come over the next two months, while lawmakers attempt to reconcile their positions on spending cuts and entitlement programs.
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