Happy New Taxes Year: Deal Done

Photograph by Brendan Hoffman/Pool via Bloomberg

President Barack Obama arrives to deliver a statement in the Brady Press Briefing Room at the White House in Washington, D.C., on Jan. 1, 2013. The House of Representatives passed legislation averting income tax increases for most U.S. workers after Republicans abandoned their effort to attach spending cuts that would have been rejected by the Senate.

On the first day of this odd new year (2013):

Democrats in Washington have fought to the end of a protracted debate to preserve the tax cuts that former President George W. Bush won for most American taxpayers.

Republicans in Washington have embraced most of the tax increases that President Barack Obama sought for the nation’s top-earning taxpayers.

The president, triumphant in compromise, has returned to Hawaii for vacation.

The dual across-the board tax increases and far-reaching spending cuts that were supposed to force a commitment by New Year’s Eve to confront the underlying causes of a growing national debt instead have yielded one big group punt: A can of budgetary decisions kicked down the road for another couple of months.

It’s remarkable that, in a town so famously polarized, the Senate approved a tax deal averting a so-called fiscal cliff at the re-opening of the nation’s financial markets today by a vote of 89-8 in the predawn hours of New Year’s Day, and the House approved it by 257-167 near midnight of New Year’s Day. (85 Republicans joined 172 Democrats in passing the bill through the House; 16 Democrats joined 151 Republicans in opposing it.)

The Republican-run House, most of its members signatories to Grover Norquist’s pledge against new taxes, has signed on to this arrangement — calling it a historic tax cut. The Democratic-run Senate, with the help of Vice President Joe Biden in final negotiations with Republican Leader Mitch McConnell, defined the details of the final deal.

The Jan. 1, 2013, vote means that most Americans will be spared increases in federal income taxes this year — for households earning up to $450,000 a year, 99 percent of all taxpayers, income tax increases ready to take effect this year have been averted. Yet a lot of people still will be paying more taxes: 77.1 percent of U.S. households will pay higher taxes in 2003, largely because of the expiration of a two-year break in payroll taxes for Social Security, according to the Tax Policy Center. While this is a matter of simply returning to the payroll taxes that existed before a two-year break approved as an economic stimulus, the center says this will pull more than $100 billion out of the economy in 2013.

Still, the greatest burden of new taxes will fall on households earning more than $450,000 a year: With the expiration of the Bush-era tax cuts, the top personal income tax bracket will return to 39.6 percent, up from 35 percent, and the top 1 percent of U.S. taxpayers, those with incomes above $506,000 a year, will pay an average of $73,633 more in taxes.

The president, who campaigned for re-election with a pledge to protect the middle class from higher income taxes while demanding that the top-earners pay more, hailed the agreement as a “step” toward fiscal balance and boarded Air Force One at midnight for a return to Hawaii and the second half of his own Christmas holiday and New Year’s break.

“I think we all recognize this law is just one step in the broader effort to strengthen our economy and broaden opportunity for everybody,” Obama said in the press briefing room of the White House after 11:20 pm. “The fact is the deficit is still too high, and we’re still investing too little in the things that we need for the economy to grow as fast as it should. ”

“But we are continuing to chip away at this problem, step by step,” Obama said. “Tonight’s agreement further reduces the deficit by raising $620 billion in revenue from the wealthiest households in America” over the coming decade.

“And there will be more deficit reduction as Congress decides what to do about the automatic spending cuts that we have now delayed for two months,” he said. `But we can’t simply cut our way to prosperity.  Cutting spending has to go hand-in-hand with further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans… So we’re going to have to continue to move forward in deficit reduction, but we have to do it in a balanced way, making sure that we are growing even as we get a handle on our spending.”

They’ll be back at this debate in a couple of months, when the deferred sequestration of spending cuts approved in this New Year’s deal arises again, and when Congress confronts the federal debt ceiling that has been reached once again — $16.4 trillion at the start of this odd new year.

“We not only need to grow the economy, but we also need to address the fundamental causes of our debt and deficits, and that’s out-of-control spending,” said Rep. Dave Camp of Michigan, chairman of the tax-writing House Ways and Means Committee, who was given the party’s honor of blessing the tax bill passed last night as “the largest tax cut in American history” — for all those households under $450,000 spared the return of pre-Bush tax rates.

The new Congress still must act as early as mid-February to prevent a default, evoking memories of the 2011 standoff that led to a downgrade of the U.S. credit rating.

“People will remember, back in 2011, the last time this course of action was threatened, our entire recovery was put at risk,” Obama said at the White House.  “Consumer confidence plunged. Business investment plunged. Growth dropped. We can’t go down that path again.”

“And today’s agreement enshrines, I think, a principle into law that will remain in place as long as I am President: The deficit needs to be reduced in a way that’s balanced,” he said. “Everyone pays their fair share. Everyone does their part. That’s how our economy works best. That’s how we grow.”

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