Saturday, January 5, 2013

The Fiscal Cliff Deal

With the new year, the much anticipated fiscal cliff was partially averted, partially delayed as U.S. leaders reach some sort of compromise.  It makes permanent the Bush administration's tax rates for those earning less than $400k per year ($450k for couples) but raises rates on those earning more than those thresholds.  Above that, the income tax rate increases from 35% to 39.6%, bringing back the top bracket from the Clinton era.  Dividends and capital gains will also be taxed for people in that bracket at a new 20% level instead of the normal 15%.  Obama is now able to say that he succeeded in raising income rates on the wealthiest of Americans but not his initial target of those earning more than $200k annually.  Also, the temporary lower payroll tax rate implemented in 2011 (lowered to 4.2% from 6.2%) has also expired which will cost $50 a month for those making $30k a year and about $190 a month for those making around $114k.  Itemized deductions will also be capped for those making more than $250k ($300k for couples).  Taxes on inherited estates over $5 million will also increase to 40% from 35%.

There was also some amusing news the last few months about the consequences of going over the fiscal cliff. A small part of the bill would have ended U.S. farm support programs and many articles warned about milk prices doubling as a result.  This new "dairy cliff" was another concern brought up by the media.  The new compromise only postpones the issue for a year.  The most recent farm law expired in September and the failure to pass another five year proposal resulted in the law reverting back to the rules enacted back in 1949 where the government would buy milk until prices reached "parity" with its cost immediately before WWI.  After adjusting for inflation, the milk-support price would be roughly double what it costs today to $7 per gallon.

Aside from the looming dairy cliff, the threat of $110 billion in automatic spending cuts was only postponed for two months, not directly addressed this time.  There is a very large issue at hand with increasing the debt ceiling limit as the government deficit pushes up to $16.4 trillion.  Even though the markets rallied year-end as the government reached a compromise on the fiscal cliff, there are still plenty of big decisions to be made in 2013.

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