While millions of Americans were sleeping off their late New Year’s celebration, Senate leaders on Capitol Hill were up until the early hours of the morning, voting to approve a last minute fiscal budget deal, only a couple of hours after the United States officially met the “fiscal cliff” and briefly went over the “cliff” amid partisan howls over tax increases screaming out on the way down.
The Senate bill passed decisively with 89 votes to only 8 who disapproved.
Yesterday both parties in the Democrat majority in the Senate worked out a scaled-down fiscal agreement over raising income tax rates for individuals making more than $400,000 a year and households making more than $450,000 a year, a higher level than the $200,000 and $250,000 threshold that President Obama campaigned with during the presidential campaign.
For individuals and households facing higher tax rates at the $400,000 and $450,000 levels, it amounts to returning to a Clinton-era tax rate of 39.6 percent versus the 35 percent level that all Americans currently pay as a result of Bush-era tax rates.
The higher tax rate on Americans earning above $400,000 is expected to generate $620 billion in additional tax revenues, a much lower level than the original $1.6 trillion level that President Obama first proposed with his budget proposal that eats away more significantly at the $16.4 trillion dollar federal deficit.
Under the Senate approved fiscal deal, the estate tax will be at the 40 percent level for Americans, only above the $ 5 million level while some tax breaks such as wind energy and corporate research will be extended through 2013.
Unemployment insurance will be extended through 2013. But the 2 percent payroll tax cut won’t be extended which means that 125 million households will see their paychecks shrink in 2013.
The payroll tax rate will jump higher from 4.2% to 6.2% on the first $113,700 in earnings.
A $50,000 wage earner will see their paycheck drop by nearly $1,000 a year since the payroll tax cut expired last night.
The automatic “across the board” sequestration spending cuts, which totals $110 billion, proved to be a major sticking point in yesterday’s fiscal talks and will be delayed for another two months.
Some Democrats such as Tom Harkin (D-Iowa), who voted against the approved Senate fiscal deal, had a difficult time supporting the $ 200,000 extra increase, up to $400,000 in the qualifying threshold limit that President Obama initially proposed.
Senator Harkin expressed concern that the the tax revenue shortfall will eventually hurt the still recovering American economy and make it challenging to produce more American jobs.
“The idea that people earning $300,000 to $400,000 a year could not pay the taxes they paid in the 1990’s, when the economy was booming, is just plain absurd,” Harkin said on the Senate floor.
“But that’s what we’re being told, that people who make $300,000 or $400,000 a year simply cannot pay the same taxes that they would have been paying in the Clinton years” he said.
On the other side of the aisle, Republican Senator Rand Paul (R-Kentucky) voiced some disapproval yesterday that Americans earning above $400,000 will be taxed at a higher rate.
Speaking yesterday on Bloomberg’s Taking Stock with Erik Schatzker, Senator Paul admitted, “I have always said that we are not quite addressing the real problem.”
“Everyone has acknowledged that everyones’ taxes going up is a bad thing but then on the same hand they say ‘well…. some people’s taxes going up is a good thing.’ “
“That to me is an inconsistency and has never made sense to me” Senator Rand said.
“So I think that taking more money out of the private sector and putting it in the hands of the government is a mistake” he said.
Following the early morning Senate vote, President Obama released a statement: “While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay.”
While barely missing the fiscal cliff deadline last night, the “fiscal cliff” attention today will move away from the White House and Senate and back to House Speaker John Boehner (R-Ohio) and the Republican majority House of Representatives which will conduct a unique noon New Year’s Day session.
House Speaker John Boehner (R-Ohio) was close lipped yesterday when the Senate compromise deal was beginning to take shape in the Senate.
Today the House will be faced with increasing pressure to re-examine the details of the Senate approved deal and eventually put it to a vote.
In late December, House Speaker John Boehner (R-Ohio) proposed a failed budget proposal known as “Plan B” that didn’t receive enough votes among House Republicans to move it to the House floor, partly due to the fact that some House Republicans knew that it would never obtain enough votes in the Senate and White House while other right wing House Republicans despised it because it contained some tax increases for the wealthiest Americans.
The details of “Plan B” essentially allowed income tax rates to rise for Americans earning more than $1 million per year while holding the income tax rate steady for all other Americans earning under $1 million.
There are still some Republicans in the House, especially those with Tea Party roots and Grover Norquist’s no taxation pledge underneath their skin, who have shown a great deal of antipathy over the past two weeks over President Obama’s scaled down but now newly Senate approved tax rate increase threshold to $400,000 and $450,000.
It remains to be seen if Republicans in the House will come together and approve the Senate packaged budget deal that contains some tax hikes for the wealthy.
But the future political costs for rejecting a Senate approved budget deal that lifted sentiment on Wall Street and gave some relief to Americans may prove to be stinging for stubbborn House Republicans who are hellbent on rejecting any tax hikes on the wealthiest Americans despite most Americans supporting them.
The debt ceiling issue, which terrified global markets in late 2011 and culminated in a credit downgrade for the U.S., is expected to re-surface from the depths of the U.S. debt pile and may even be used again as leverage by Republicans against Democrats in exchange for more federal budget cuts.
Last week Treasury Secretary Timothy Geithner sent a letter to Congress that stated the Treasury department would begin taking “extraordinary measures” to allow the government to save $200 billion in “headroom” beginning on Jan. 1st and avert the U.S. defaulting on its massive $ 16.4 trillion debt that the White House wants to raise once again. As a result of Secretary Geithner’s “extrordinary measures”, the U.S. government was given two more months before it has to increase the debt ceiling limit.
In 2011, Congress reluctantly agreed to raise the debt ceiling limit to $16.4 trillion from $14.3 trillion amid a lot of political wrangling between the White House, House Republicans, and Senate Democrats that resulted in a credit downgrade by Standard & Poor’s.
* Happy New Years everyone! Wishing you all the best in 2013. I typically don’t solicit money from my readers here on Schweitzfinance. But it is true that I pay out of pocket costs to keep this website operational for your benefit and would greatly appreciate any donation to help me to offset those costs. There is a paypal icon at the top of this website that is fully working and is ready to accept your donation, however large or small it may be. I appreciate any donation that you could offer. Thanks.