Here's what the new bill contained:
- Bush tax cuts were kept on incomes below the threshold ($400,000 for individuials, $450,000 for married couples). Incomes at and above the threshold will now be taxed at 39.6%.
- Capital gains and dividends taxes were raised from 15% to 20% for families at the threshold and above. Estate taxes were raised to 40% of estates above $5 million for those at and above the threshold.
- The 2% payroll tax credit was allowed to expire.
- The income level at which the alternative minimum tax kicks in was permanently raised, so it doesn't affect middle-income taxpayers. It is indexed for inflation, so that it doesn't have to be patched year after year.
- The extended unemployment benefits will continue for a year.
- Sequestration has been postponed for two months. The spending cuts that Republicans want will be part of the normal FY 2014 budget negotiations -- as they should be.
Other Provisions of the BillSome exemptions and deductions were extended, such as the mortgage insurance premium (through 2013), the American Opportunity Tax Credit (through 2017) and the Earned Income Tax Credit (permanently). Others will be limited on incomes above $250,000 ($300,000 for married couples. For details on these, see House Approves Taxpayer Relief Act.
The bill takes action on other important points:
- It prevents a 37% decline in Medicare payments to doctors.
- It extends federal dairy subsidies through the end of FY 2013. This prevents a hike in milk prices.
- It does not include a .5% pay raise for Congress proposed by President Obama.
What Made the Vote Possible:
Congress wanted to vote on the measure before newly elected members took office on Thursday. This shifted the voting power more toward the Democrats, even though the House retained a Republican majority. For more, see House Approves Fiscal Cliff Bill -- What It Means to You.
The Disaster That Was Averted:
- Expiration of Bush tax cuts and the ARRA - $229 billion.
- Expiration of the 2% payroll tax holiday, part of the Obama tax cuts, - $95 billion.
- Expiration of partial expensing of investment properties - $65 billion.
- Obamacare tax increases - $18 billion.
Worst Case Scenario:
Best Case Scenario:
A healthy economy can grow its way out of a high debt-to-GDP ratio. The higher the GDP, the lower the ratio -- as long as spending doesn't increase. For proof, notice that the national debt by year keeps increasing. Even though the debt from World War II has never been paid off, it doesn't matter. Economic growth has since dwarfed it.
However, it's highly unlikely that Congress would support this scenario. Way too many elected officials think that the Federal debt is unsustainable at even a 90% debt-to-GDP ratio. (Source: CBO, Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, May 2012) Article updated January 3, 2013