Monday, December 31, 2012

the fiscal cliff

[2/19/13]  Holding their noses, senators of both parties came together to pass overwhelmingly (89–8) a tax bill that preserves the Bush-era income tax rates for 99% of Americans. After some rumbles, the House of Representatives cleared the measure the next day by a solid bipartisan majority.

I’m not happy with everything in the new law. (It does nothing to alter the 3.8% Obamacare surcharge on high earners’ investment income, for example.) However, I’m pleased that the basic 15% tax rate on dividends and long-term capital gains has been made permanent for most taxpayers. Even the “rich” will pay a lower rate on dividends under Obama than they did under Ronald Reagan!

Far from being an economic disaster, the new tax regime should promote growth, at least marginally, by reducing uncertainty and preserving significant incentives to save and invest.

[Profitable Investing February 2013]

[1/1/13] WASHINGTON (Reuters) - The U.S. Congress approved a rare tax increase on Tuesday that will hit the nation's wealthiest households in a bipartisan budget deal that stops the world's largest economy from falling into a deep fiscal crisis and recession.

By a vote of 257 to 167, the Republican-controlled House of Representatives approved a bill that fulfills President Barack Obama's re-election promise to raise taxes on top earners.

The Senate passed the measure earlier in a rare New Year's Day session and Obama is expected to sign it into law shortly.

The United States will no longer go over a "fiscal cliff" of tax hikes and spending cuts that had been due to come into force on Tuesday but other bruising budget battles lie ahead in the next two months.

It was a reversal for House Republicans, who were in disarray despite winning deep spending cuts in earlier budget fights. But they saw their leverage slip away this time when they were unable to unite behind any alternative to Obama's proposal.

House Speaker John Boehner and other Republican House leaders stayed silent during the debate on the House floor, an unusual move for a major vote.

The deal shatters two decades of Republican anti-tax orthodoxy by raising rates on the wealthiest even as it makes cuts for everybody else permanent.

[12/31/12] WASHINGTON » Squarely in the spotlight, House Republicans were deciding their next move today after the Senate overwhelmingly approved compromise legislation negating a fiscal cliff of across-the-board tax increases and sweeping spending cuts to the Pentagon and other government agencies.

In a New Year's drama that climaxed in the middle of the night, the Senate endorsed the legislation by 89-8 early Tuesday.

It would prevent middle-class taxes from going up but would raise rates on higher incomes. It would also block spending cuts for two months, extend unemployment benefits for the long-term jobless, prevent a 27 percent cut in fees for doctors who treat Medicare patients and prevent a spike in milk prices.

The measure ensures that lawmakers will have to revisit difficult budget questions in just a few weeks, as relief from painful spending cuts expires and the government requires an increase in its borrowing cap.

House Speaker John Boehner met with rank-and-file GOP lawmakers to gauge support for the accord, and an aide said GOP leaders would not decide their course until a second meeting later in the day. That suggested that House voting might not occur early.

*** [11/17/12] What happens if we fall off the cliff?  According to Dan Newman (relaying the CBO):

The deficit would shrink to 0.4% of GDP by 2018 compared to 4.2% (in the alternative scenario where all tax cuts except the payroll tax cut are extended, the alternative minimum tax is indexed for inflation, Medicare payment rates are not cut, and the automatic spending cuts don't happen.)

Debt would go down to 60% of GDP compared to 90%.

Unemployment would rise to 9% compared to 8%, but would go down to about 5% in 2022 in either scenario.

GDP growth would go down to 0.5% compared to about 1.7%.  However by 2022, GDP growth would be about 2.3% compared to about 2.0%.

[So, according to this, falling off the cliff would actually be better in the longer run.]

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