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Fiscal Cliff

Congress avoided the dreaded “fiscal cliff” by passing the American Taxpayer Relief Act of 2012 (ATRA). The bill avoided scheduled income tax rate increases and the automatic spending reductions required by the sequestration process that was part of the Budget Control Act of 2011. Undoubtedly, Senators gave the 154-page bill and the associated CBO score (luckily, only three pages) close scrutiny during the three minutes between receiving the bill and voting 89-8 in favor of it. The House passed the bill by a vote of 257-167. The White House said that bipartisan bill protected “98 percent of Americans and 97% of small business owners from a middle class tax hike.” The agreement will raise $620 billion in new revenue, by imposing the “first income tax in two decades” on households earning $450,000 or more per year (and individuals earning $400,000 or more per year), based on income tax rate increasing from 35% to 39.6%. Paul Krugman notes that the total new revenue would have been about $800 billion, if President Obama’s original goal of raising taxes on household making $250,000 or more per year had succeeded. Taxes on capital gains and dividends will increase from 15% to 20%.

Congress agreed not to make the Social Security tax cut that expired on Jan. 1, 2013 part of the fiscal cliff negotiations, effectively increasing nearly all workers’ social security taxes by 2% for 2013. Congress did add a “permanent” Alternative Minimum Tax (AMT) fix to the ATRA, which is especially beneficial to households making between $45,000 and $105,000 per year. Congress also included its annual (since 2003) “doc fix,” averting a 26.5% pay cut to doctors treating Medicare patients. Not surprisingly, medical groups (and analysts) would like a more permanent “doc fix.” Unemployment insurance is extended for another year for two milion people. Other “winners” include working families, clean energy producers, and businesses that make capital investments. Somewhat surprisingly, Hurricane Sandy relief was not included, to the great (and bipartisan) annoyance of legislators such as New York’s Peter King and New Jersey’s Rob Andrews. On Jan. 4, 2013, however, the House and Senate authorized $9.7 billion for Hurricane Sandy assistance.

Almost forgot– Congress also saved us from the dreaded “dairy cliff” and a doubling of milk prices.

White House White Board on ATRA.