WASHINGTON (AP) — Rich and poor, young and old would be affected by the tentative Monday night deal to ease or avoid the effects of the “fiscal cliff.”
Everyone would pay higher taxes, including the working poor but especially the wealthy. More than 98 percent of taxpayers would escape more sweeping tax increases.
The unemployed would get extended benefits. Doctors would avoid a planned cut in Medicare payments, one that might have led many to stop taking patients covered by the program. Heirs of big estates would pay more, but not as much as had been feared. Anyone who collects Social Security benefits will continue to get annual increases without the restraint of a new, less generous cost-of-living formula.
The deal still must be approved by Congress, which missed a Monday night deadline to pass an alternative to many expiring tax cuts but which could presumably make its action retroactive. The House planned to return to session Tuesday; the Senate sometime later. Other deadlines lay ahead, with unemployment benefits expiring Wednesday and $109 billion in budget cuts not scheduled to start going into effect until Wednesday.
Some details remained to be worked out Monday evening, particularly whether to delay the scheduled start of the spending cuts. But the rest of the deal offered a look at how it would affect taxpayers.
The broadest effect was the apparent decision not to extend a temporary cut in the payroll tax that finances Social Security. As a result, every worker will pay more taxes immediately as the rate rises from 4.2 percent of their pay to 6.2 percent. The tax is taken out of roughly the first $102,000 in income.
The end to the payroll tax cut will mean that a worker earning $40,000 will pay about $2,480 in payroll tax in the coming year, up from $1,680. That will cut take-home pay by about $30 every two weeks.
For individuals making up to $200,000 and families making up to $250,000, the rest of their taxes would remain the same, as the Bush-era tax cuts were made permanent for them.
The wealthy would get less generous tax breaks.
For single filers with taxable income above $250,000 and couples with income over $300,000, the tax credits and deductions enjoyed by most taxpayers would be phased out starting at those thresholds. The deal would limit the number of personal tax exemptions they can claim when filing income-tax returns, and limit the value of the itemized tax deductions they take.
Individuals with taxable income above $400,000 and families with income over $450,000 would pay a top tax rate of 39.6 percent, up from 35 percent. They would also pay 20 percent on capital gains and dividends, up from 15 percent. It could have been worse for such taxpayers: Taxes on dividends were poised to revert to the rate of taxpayer’s ordinary income, as it was in the pre-Bush years.
In another compromise, lawmakers agreed to a raise the inheritance tax, sometimes called the estate tax, from 35 percent to 40 percent on inheritances above $5 million. This is an issue of great interest in farm states, where many properties are left to children. Although the compromise reflects an increase, it is below the 45 percent rate sought by President Barack Obama on inheritances valued above $3.5 million.
More than 4.8 million U.S. workers in December were counted as unemployed for six months or longer, roughly 40 percent of all unemployed. Lawmakers Monday tentatively agreed to extend unemployment insurance benefits. The last 2012 checks were sent out on Dec. 29, and the long-term unemployed had faced the prospect of a very grim start to 2013.
For older Americans, it was what’s not in the deal that mattered. House Speaker John Boehner, R-Ohio, had pushed for a less generous measure of how Social Security benefits are adjusted annually, to cut $200 billion in spending over 10 years. That was left out of the deal, after opposition from AARP, the powerful lobby for seniors.
Similarly, doctors from coast to coast were bracing for a cut of nearly 27 percent in reimbursement for services already rendered. Year after year, estimates for Medicare costs are low, and Congress is left with the choice of finding more money or cutting what is already owed to doctors. The “doc fix” had not been dealt with in all of 2012, and had it not been corrected, even tentatively, by midnight Tuesday, the cuts would have taken effect, encouraging more doctors to refuse to take Medicare patients and, perhaps, to lay off health-care workers.
“The last-minute fiscal cliff deal prevents some of the major tax increases that would have occurred. With no time left before all tax rates would rise, the Chamber understands why lawmakers would choose to support it,” said Bruce Josten, vice president of government affairs for the U.S. Chamber of Commerce.
While the deal averted major tax increases for every taxpayer, it did not address most other tough issues and ensured that the matters of debt, budget deficits and future spending on Medicare will hang over the economy in 2013.
It’s why budget watchdogs were far from impressed with the New Year’s Eve deal.
“Basically a pathetic Band Aid just to make markets happy with their nanosecond mentality,” said Steve Bell, director of economic policy for the Bipartisan Policy Center and a former Republican chief of staff on the Senate Budget Committee.
Josten said: “The new Congress and the administration must begin work immediately to slow runaway spending through structural entitlement reforms and spur faster economic growth through comprehensive tax reform and a rapid expansion of American energy. This is the only formula that can reduce budget deficits and control our unsustainable national debt.”