(This post has been updated to reflect the House vote on the fiscal-cliff package.)
It was a nail-biter, but almost no one expected otherwise. Congress on Jan. 1 finally voted to avoid most of the $600 billion in tax increases and spending cuts that threatened to send the U.S. economy into the Dumpster. Technically, the U.S. went over the fiscal cliff. But, like in the Road Runner cartoons (an apt metaphor in more ways than one), lawmakers stopped the anvil from crushing us in midfall.
In case you were watching football all New Year's Day, here's what you need to know to sound smart on Wednesday:
1. If you thought the fiscal-cliff imbroglio was all about cutting the $16.4 trillion national debt, silly you. The fight was really over which party would take the biggest political hit by trampling on core ideological beliefs, such as no tax increases (Republicans) or no safety-net cuts (Democrats). The deal, in fact, won't reduce the deficit but add to it, by failing to tame runaway entitlement spending. According to the Congressional Budget Office, the package will reduce revenue by $3.6 trillion over 10 years, using current law (assuming everything expires as current law is written) as the baseline. A less- pessimistic view from the deficit hawks at the Committee for a Responsible Budget is that the package would decrease the national debt by $650 billion over 10 years, if the baseline assumption is current policy (which more realistically accepts that annual patches, including fixes to the alternative minimum tax, are essentially permanent).
2. The biggest winner, politically speaking, is President Barack Obama, who has made good on his campaign promise to raise taxes on the rich, even if he had to redefine "rich" as individuals earning more than $400,000 and couples making more than $450,000. And he'll be soaking them in several other ways, including by raising taxes on investment income, restoring limits on deductions and exemptions that the Bush tax cuts had ended, and raising taxes on inherited estates. Obama wins in other ways, including with a one-year extension of unemployment benefits beyond the typical 26 weeks most states allow, and by forcing Republicans to back down from entitlement cuts or changing the way Social Security cost-of-living increases are calculated.
3. The biggest losers are Republicans who signed Grover Norquist's no-tax- increase pledge, as well as Norquist himself. All but five Senate Republicans plus 85 out of 236 House Republicans voted to raise taxes. It will be the largest tax increase since 1990, when President George H.W. Bush broke his "read my lips" convention promise -- and paid the price by losing his re-election bid two years later.
4. Taxes will go up on the rich only, right? Wrong. Federal taxes will rise for 77 percent of Americans because the two-percentage-point payroll tax cut has now expired. A person earning $50,000 and who is paid twice a month will lose $41.67 a paycheck. For the truly rich, those households whose income is $1 million or more, the average tax hit will be $171,330, per the Tax Policy Center. Households earning between $500,000 and $1 million will, on average, pay $15,055 more. All told, the new taxes (not counting payroll taxes) will affect only 0.7 percent of households, according to the Tax Policy Center.
5. The award for the most illogical reason to vote "no" goes to Senator Marco Rubio, the Florida Republican who has his eye on a 2016 run for the White House. "Thousands of small businesses, not just the wealthy, will now be forced to decide how they'll pay this new tax and, chances are, they'll do it by firing employees, cutting back their hours and benefits," the senator said in a release explaining why he was one of eight "no" votes. As Bloomberg View has written, Rubio is dead wrong on this point: First, small businesses destroy almost as many jobs as they create. Second, only a tiny percent of small-business owners would fall into the new upper-income brackets subject to higher taxes. Third, many businesses counted as small aren’t engaged in traditional small-business activity. Instead, they are partners in hedge funds, law firms and private- equity shops, or they are highly paid actors, athletes, speakers and authors.
6. The MVP award for best negotiator goes to Vice President Joseph Biden. The agreement, reached in the waning hours of 2012, was brokered by Biden and Senator Mitch McConnell of Kentucky, the chamber's Republican leader. Obama met with his staff until 2 a.m. on Dec. 31, but it was Biden who went to the Capitol to sell the agreement to Senate Democrats in a two-hour New Year's Eve session.
7. The fiscal cliff has not been averted. If anything, the U.S. faces an even more ominous deadline in a few months. The debt ceiling was hit as of New Year's Eve. The U.S. Treasury will dip into its tool bag to keep the country's borrowing ability going, but that will last only about two months. Also in early March, the sequestration -- $110 billion in across-the-board spending cuts, half in defense and half in domestic programs -- springs back to life, unless Congress finds a way to offset it with other spending cuts. Weeks later, the law that keeps the government funded expires. It all means that, in late February and early March, Congress will face a sequestration, a government default and a government shutdown. Republicans say they'll use the leverage created by the debt ceiling to force Obama to accept spending cuts, particularly in entitlement programs. Obama resisted that notion on Dec. 31, saying he wants more tax increases and won't accept Republican plans to "shove" spending cuts past him. "If they think that's going to be the formula for how we solve this thing, then they've got another thing coming," he said. It isn't clear how Obama plans to make his threat stick, especially if House Republicans are willing to throw the U.S. into default unless they get the spending cuts they demand.
8. The payroll tax cut expiration, combined with higher taxes for top earners, may slow the economy, reducing growth in the first quarter to 1 percent, from 3.1 percent in 2012's third quarter, according to economists at JPMorgan Chase & Co. But that's on paper. With the fiscal melodrama over (for a couple of months, at least), the mending economy, housing turnaround, pent-up consumer demand, rock-bottom energy prices and renewed business investment could result in robust growth in 2013.
9. The $110 billion in automatic spending cuts, which were the biggest stumbling block to a final Senate deal, will be delayed for just two months. Half of the $24 billion cost of delaying the sequestration will be covered by allowing 401(k) retirement account holders to convert some of their balances into Roth-style accounts that can be tapped tax-free in retirement. The change will raise revenue because people who do such conversions pay income taxes up front. Such conversions aren't currently allowed in 401(k) plans.
10. For individuals whose income is more than $400,000, and households earning more than $450,000, rates on capital gains and dividends will increase to 20 percent from 15 percent. But the true rate will be 23.8 percent once a 3.8 percent tax, created under the Affordable Care Act, is included. That tax, which takes effect today, is one of the measures Congress adopted to pay for the health-care-reform law.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)
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