The USA Falls off the Fiscal Cliff (For Now)

The United States begins 2013 without being able to avoid a time called the fiscal cliff. The massive rise in taxes has officially been in effect since midnight. Although the beginning of an agreement already exists, the House of Representatives, with a Republican majority, will not vote on any legislation tonight.

The cliff may last only a couple of hours if Congress approves a decrease in taxes this Tuesday and a delay in cuts of public expenses for a few more months. The pact is practically closed already, but loose ends have prevented that it arrive on time.

In a very quick negotiation, Democratic and Republican leaders reached a minimum agreement in order to avoid the tax increase and the spending cuts that could lead the United States into a recession this year. According to the preliminary agreement, only households that earn more than $450,000 a year will pay more to the tax office.

Obama, Optimist

“Now, today it appears that an agreement to prevent this New Year’s tax hike is within sight, but it’s not done,” announced Barack Obama, who appeared in the White House this New Years Eve with a group of citizens that supposedly represented the middle class about to be free from the widespread tax increases. The president said that not increasing the tax burden faced by the majority of taxpayers is “a modest goal that we can accomplish.”

Although he has already conceded, Obama boasted that at least Republicans agree to raise taxes for some and assured that he will not support cuts that will hurt elders or students “without asking also equivalent sacrifice from millionaires.”

“…[I]f we’re going to be serious about deficit reduction and debt reduction, then it’s going to have to be a matter of shared sacrifice — at least as long as I’m President. And I’m going to be President for the next four years, I think,” said Obama, who will spend New Years Eve waiting in Washington instead of on the beach in his native Hawaii.

The Republicans’ Reproaches

Few Republicans of Congress liked his comments or the fact that he appeared to be surrounded by cheering supporters like at a rally. Senator John McCain accused Obama of ridiculing the opposition and reproached him for making jokes. The president joked that one of his supporters could invite him to dinner.

It the agreement is passed, the personal income tax of families that earn $450,000 or of individuals that earn more than $400,000 will increase more than four percent, up to 39.6 percent, the level it was in the 1990s. For the rest of taxpayers, the temporary tax cuts approved by the Bush administration in 2001 and 2003 should be extended. Additionally, taxes on dividends will increase from 10 to 15 percent. The inheritance tax burden will rise by five points to 40 percent instead of the 20 planned.

However, the plan will only be finished if Congress passes this agreement, and the cliff will remain a scare for a few hours.

The Concessions

Obama has bowed to the demands of the Republicans. The initial proposal from the White House was to establish a threshold of $250,000, already high for some Democrats in Congress. “No deal is better than a bad deal, and this looks like a very bad deal the way this is shaping up,” said Senator Tom Harkin (D-Iowa), who opened the New Years Eve session in the Senate. “I, for one, do not fear going back to a system of taxation that basically worked very well for our country. It was only the Bush tax cuts that messed everything up,” Harkin complained.

The increase in taxes on a group of rich people will do little to placate the public deficit or debt, which already reaches $16.4 billion. Obama’s initial proposal already supposed less than 10 percent of the public deficit, which in 2013 could once again go above one billion dollars.

With this agreement, the Treasury will remain in the same state. The debt, in fact, just reached the legal ceiling. Congress will have to increase it in the next two months in order to avoid a suspension of payments.

Ben Bernanke, the president of the Federal Reserve, used the expression “massive fiscal cliff” in February and for a year and a half, Congress knew that spending cuts would meet tax increases by the end of the Bush temporary cuts. However, they will negotiate until the last hours of New Years Eve.

The negotiations between Vice President Joe Biden and his old friend from the Senate, Republican Minority Leader Mitch McConnell, have allowed the two positions to come closer together in the last few hours. The two get along well, have known each other for more than two decades, and have forged compromises, but each one has to convince his party.

Congress will probably prevent massive tax increases from coming to fruition, but it will leave open the underlying problems of an indebted country with a welfare state burdened by the retirement of the baby boomers.

The great negotiation over spending stands. This Wednesday, cuts valuing $110,000 on subsidies or military spending can come into effect for 2013. However, in any case, an agreement that guarantees a reduction in the deficit that the Obama administration seeks in its second term is lacking.

This Congress finishes its mandate in January with the fewest number of laws passed in decades. In the past two years, it has accepted 146 pieces of legislation, the fewest since 1948.