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'Fiscal Cliff' Deal Saves Big Hurt, Creates More Anxieties
January 2, 2013

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The deal struck by Democrats and Republicans to avert the worst of the twin-whammy tax increases and spending cuts, the so-called "fiscal cliff," has relaxed several anxieties while creating some more.

Technically, the United States Government went off the "cliff" because President Obama didn't sign a law before the end of the year. However, the law that he eventually did sign included language to backdate any changes to existing agreements.

In essence, individuals making up to $400,000 a year and families making up to $450,000 a year will see the Bush-era tax cuts expire on their brackets, meaning that, effectively, their taxes will go up, or back to where they were in 2001 or 2003. In real terms, that means that 99 percent of American taxpayers will not see an increase in income tax. The deal was a shift of sorts for many Republicans, who had long insisted that they would not approve of any tax increases.

However, the deal struck by Congress and approved by the President does not include a continuation in another tax cut, that of Social Security payroll tax. The Social Security payroll tax cut was a program pushed by President Obama and has expired after two years. In 2012 dollars, that tax cut was of 2 percent; so if a taxpayer makes $50,000 a year, then he or she will pay $1,000 a year more going forward.

In addition, the deal included an extension of unemployment benefits for millions of Americans and an extension of a tax break for the TV and film industry. Both extensions will result in hundreds of millions of revenue that would otherwise have come into federal coffers.

Even though the "fiscal cliff" deal effectively raised taxes on people in higher income tax brackets, investors in stock markets in the U.S. and around the world greeted news of the deal with fresh buying, driving stock prices up across the board. Had the deal not been passed, the combination of tax increases and spending cuts would, many analysts had predicted, have sent the country back into recession.

As it is, the "fiscal cliff" deal didn't include any decisions on spending cuts. The law effectively postponed a decision on whether to enact the nearly $600 billion cuts mandated by a 2011 law for another two months, about the time when a debate on whether to raise the debt ceiling will occur. The partisan wrangling that lengthened this latest deal has many analysts worried that a larger, longer-term deal will be even harder to seal. And the new deal, although it avoided a huge number of painful episodes for most taxpayers, added $4.6 trillion to the federal deficit for the next decade. That as well has economic analysts worried.

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