Americans can breathe a sigh of relief with some sense of what to expect in federal taxes this year as a result of the cliffhanger deal finally reached by the White House and Congress Tuesday. After a months-long standoff, the country avoided going off the so-called fiscal cliff when the House approved a Senate-passed bill to extend middle-class income tax cuts first enacted under President George W. Bush. However, the deal leaves unresolved spending issues that still threaten the economy in 2013.
The final agreement came only after the shameful lack of leadership by President Obama, House Speaker John Boehner and Senate Majority Leader Harry Reid, who gave up and turned negotiations to Vice President Joe Biden and Senate Minority Leader Mitch McConnell to work out the details.
But no one deserves accolades for this disgraceful performance. All of Congress shares the blame for the dysfunction fueled by the bitter partisanship that has poisoned national politics and made it almost impossible to achieve reasonable compromises on spending and taxes. In the end, a tired Congress realized that it was past time to do something.
Rather than a deal with across-the-board tax changes that calls on everyone to share in the fiscal solution, the agreement leaves in place middle-class tax breaks. Individuals earning more than $400,000 and couples earning more than $450,000 will pay higher taxes with their rate rising from 35 percent to 39.6 percent. Their investment taxes will also go up.
Tax credits for children and college tuition remain in place for five years with one-year extension of some business tax credits. About 2 million Americans will continue to receive extended unemployment benefits for another year. The pact puts off for one year a 27 percent reduction in payments to Medicare providers.
The agreement finally resolves the recurring issue of the alternative minimum tax, which requires taxpayers above certain income levels to calculate their taxes two ways and pay the higher tax. It will be permanently indexed to inflation so about 30 million households will no longer have to wait on Congress for its annual fix to calculate their taxes.
Whatever tax savings middle-class Americans see, though, will be partially offset by a return to the 6.2 percent Social Security payroll tax reduction, which had been at 4.2 percent for the past two years. It will mean a loss of $1,000 a year for someone earning $50,000 annually, which will cut into consumer spending.
But the deal is only a partial solution. While addressing the taxing side of the fiscal cliff, the bill puts off for two months how to handle $109 billion in across-the-board, deficit-reduction spending cuts that were due to take effect Tuesday.
In February, Congress will also renew the battle over lifting the $16.4 trillion debt ceiling, which the country reached Monday, setting up the possibility of more gridlock and brinkmanship that sadly has come to characterize our national leadership.