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Congress Agrees on Fiscal Plan; Difficult Decisions Still Ahead

By Shar Adams
Epoch Times Staff
Created: January 4, 2013 Last Updated: February 27, 2013
Related articles: United States » National News
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House Speaker John Boehner (R) (R-Ohio) and Rep. Eric Cantor (L) (R-Va.) walk to a meeting with House Republicans at the U.S. Capitol on Jan. 1, 2013, in Washington, D.C. The House approved the Senate's proposal on the fiscal cliff 257 to 167, but only 85—just over half—of the House Republicans voted for it. (Molly Riley/AFP/Getty Images)

House Speaker John Boehner (R) (R-Ohio) and Rep. Eric Cantor (L) (R-Va.) walk to a meeting with House Republicans at the U.S. Capitol on Jan. 1, 2013, in Washington, D.C. The House approved the Senate's proposal on the fiscal cliff 257 to 167, but only 85—just over half—of the House Republicans voted for it. (Molly Riley/AFP/Getty Images)

 WASHINGTON—It was beyond the 11th hour when Congress finally reached an agreement on a plan to address the fiscal cliff Tuesday, Jan. 1. 

But agree they did, with enough House Republicans approving the Senate proposal for the bill to pass. While it is positive that one hurdle has been crossed, there are plenty more to come, and the wrangling over the debt ceiling, spending cuts, and sequestration, which has now effectively been delayed for two months, is likely to continue.

“The good news is that the Congress acted and prevented what might have been a pretty hard hit on the economy,” said Carol Weissert, Ph.D., professor of political science at Florida State University. “The bad news is that more hard decisions still remain if the Congress is to deal with the still-rising deficit.”

“Spending cuts and entitlements are on the table and will not be easy,” she wrote in an email.

The fiscal cliff, a term coined to sum up the expiring Bush-era tax cuts and the enactment of sequestration, automatic cuts in military and non-discretionary spending, has been mostly curtailed by the agreement.

The plan will see the tax cuts remain permanently for the middle class and for individuals earning under $400,000, plus couples earning under $450,000. Tax rates for those earning above those figures will rise from 35 percent to the former 39.6 percent, marking the first time in around 20 years that federal income tax rates have gone up for any Americans.

The decision on sequestration, however, has been postponed for two months, till March 1.

Tax Revenue

President Obama had originally wanted the cut-off figure to be at $250,000, but while that was not realized in terms of tax rates, it was through itemized deductions. Expenses reported to reduce taxable income will now be capped for individuals earning at least $250,000 and for married couples earning at least $300,000. 

Revenue raised as a result of the restored tax rate and the deductions cap is expected to be around $700 billion dollars over 10 years, according to a White House fact sheet

President Obama, who flew back to his family in Hawaii Tuesday night, reviewed the legislation from there, and it was signed by autopen Jan 2 according to the White House. 

Obama described the agreement in a New Year’s Day statement as a step “to strengthen our economy and broaden opportunity for everybody.”

“Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up,” he said.

Essentially, the politicians punted.

—Jeff Rosensweig, professor, Emory University’s Goizueta Business School

Financial markets, concerned about a recessionary effect from the fiscal cliff, reacted positively to news of an agreement, the Dow Jones up 2.4 percent at close Wednesday and European shares up around 2 percent the same day.

Despite the relief, there remain concerns about the agreement. As part of the package, payroll tax cuts were allowed to expire, ensuring that not only the wealthy but also “every working man and woman in the country” will experience a tax hike, said William Gale, tax policy expert at Brookings Institution, a Washington think tank. 

“For most households, the payroll tax takes a far bigger bite than the income tax does,” Gale said on his blog, pointing to Congressional Budget Office (CBO) figures that indicate the former as a more effective stimulus than income tax cuts. 

“The payroll tax cuts hit lower in the income distribution and hence were more likely to be spent,” Gale wrote. 

There are also concerns that the revenue raised from taxes is not only too little, but that the lower tax rates will be locked in permanently, as opposed to having an expiration date as in the Bush tax cuts. 

“The bill substantially reduces future tax revenue relative to current law,” said Gale.

While many were crowing that the “No-New-Taxes” pledge by Grover Norquist, founder and president of Americans for Tax Reform, was broken, Gale argued that because the agreement was made on Jan. 1, 2013, after the Bush-era tax cuts were due to expire at the end of 2012, technically no Republicans violated the pledge. 

It was not “a legislated tax increase on high-income households,” Gale explained. “The tax increase occurred automatically at the beginning of the year, due to the expiration of previous cuts.”

Spending Cuts, the Next Bout

The lack of spending cuts remains the biggest concern for Republicans. Tax credits aimed at low-income households and college students were renewed in the bill, and unemployment benefits were extended, but there were no cuts in Social Security benefits, Medicaid, or Medicare. 

“I personally hate it,” said Rep. John Campbell (R-Calif.), according to PBS Newshour. “We wanted spending cuts. This bill has spending increases. Are you kidding me? So we get tax increases and spending increases? Come on.”

The bill passed 89–8 in the Senate in the early hours of New Year’s Day, but it was touch-and-go in the House later that day, with the finally tally at 257 to 167. 

Speaker John Boehner (R-Ohio) and Rep. Paul Ryan (R-Wis.), House Budget Committee chairman and 2012 vice presidential nominee, were among the 85 House Republicans who voted for the legislation, while second and third-ranking House Republicans, Eric Cantor (R-Va.) and Kevin McCarthy (R-Calif.), were among the 151 House Republicans who voted against it. 

Economist Jeff Rosensweig, professor of finance at Emory University’s Goizueta Business School in Atlanta, Ga., said that the agreement may have prevented a recession, but an opportunity to address deficit concerns had been lost.

“Essentially, the politicians punted,” he said, adding that, rather than face the issues now, they have merely been put off to a later date.

“The downside is that massive government deficits will continue,” he wrote in an email.

Now that President Obama has the promised tax increase, however, some argue that debt-ceiling negotiations may be the leverage Republicans are looking for to extract greater spending cuts. 

Whatever the outcome, it is unlikely to be smooth sailing for Congress in the months to come.

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