Analysis: Why the fiscal cliff drama isn't over yet

The last-minute US budget bill that avoided the recession-threatening fiscal cliff may have sent world stock markets higher but it doesn't solve the problem of the massive deficit.

Other market-moving legislative battles on deep spending cuts and the federal debt limit loom in the coming weeks and months.

A majority of legislators in both the Senate and the House approved the New Year’s Day compromise deal to avoid middle-class tax increases and spending cuts that would have sent the country over the so-called fiscal cliff.

But observers are saying the outcome is mainly because enough House Republicans did not want to face blame for blocking tax cuts for most American households.

Only five Republicans – and three Democrats – opposed the bill in the Senate while the House voted by 257 to 167, with 151 Republicans and 16 Democrats opposing the measure.

The bill will boost the top 35% income tax rate to 39.6% for incomes exceeding $US400,000 for individuals and $US450,000 for couples filing returns, while continuing decade-old income tax cuts for everyone else.

In his re-election campaign last year President Obama had vowed to boost rates on earnings at somewhat lower levels – $US200,000 for individuals and $US250,000 for families.

"A central promise of my campaign for president was to change the tax code that was too skewed towards the wealthy at the expense of working middle-class Americans," President Obama said at the White House before flying to Hawaii to resume his holiday break. "Tonight we've done that."

The Congressional votes ended a quarter-century of solid Republican opposition to boosting any tax rates at all.

The bill will also:
• Raise taxes top earners pay on dividends, capital gains and inherited estates.
• Permanently stop the alternative minimum tax from raising levies on millions of middle-income families.
• Extend expiring jobless benefits.
• Prevent cuts in Medicare reimbursements to doctors.
• Delay, for two months, billions in budget-wide cuts in defence and domestic programs slated for this year.

Both sides lamented their failure to reach a significant deficit-cutting agreement. But neither much mentioned another omission: The immediate expiration of a two-year, two-percentage-point cut in the Social Security payroll tax.

That break, which put an extra $US1000 in the wallets of typical families earning $US50,000 a year, was an Obama priority two years ago as a way to boost consumer spending and spark the flagging economy. But it fell victim this time to other priorities.

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3 Comments & Questions

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When spending someone else's money - either, eventually it runs out, or you have to pay it back... or default.

All measures taken so far have only kicked the issue further down the road. It still needs to be dealt with ... eventually.

The question is how? Spending your way out of debt doesn't appear to be an overly credible option though...

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The extra tax will never eventuate. Business will just contract with less employment and less production. It simply isnt worth the risk of sticking your neck out.
Resolving the so called fiscal cliff is only a temporary solution and almost meaningless.

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The American public should take their medicine.

You vote in governments that wage 10-year wars abroad which cost $2 trillion plus and then whinge about tax increases and reduction of services.

You reap what you sew...

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