US Senate passes 'fiscal cliff' deal to avoid tax rises

 

President Obama said a larger deal could be accomplished "in several steps"

The US Senate has approved a deal to avert general tax hikes and spending cuts known as the "fiscal cliff".

The bill, which raises taxes for the wealthy, came after lengthy talks between Vice-President Joe Biden and Senate Republicans.

The House is due to consider it later. Spending cuts have been delayed for two months to allow a wider agreement.

Congress missed the deadline to pass a bill, but few effects will be felt as Tuesday is a US public holiday.

Tax cuts approved during the presidency of George W Bush formally expired at midnight (05:00 GMT).

Without approval in the House, huge tax rises for virtually all working Americans will kick in automatically.

Analysts warned that if the full effects of the fiscal cliff were allowed to take hold, the resulting reduction in consumer spending could spark a new recession.

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American politicians certainly know how to take it to the wire - and just a little bit beyond”

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The compromise deal reached on Monday seeks to avoid this by extending the tax cuts for Americans earning under $400,000 (£246,000) - up from the $250,000 level Democrats had originally sought.

A huge spending cut that would see $1.2tn shorn from the federal budget over 10 years has been deferred for two months, allowing Congress and the White House to reopen negotiations.

The Senate approved the compromise bill by 89-8. "If we do nothing, the threat of a recession is very real," Senate Majority Leader Harry Reid, a Democrat, said. "Passing this agreement does not mean negotiations halt, far from it."

In addition to the income tax rates and spending cuts, the package includes:

What is the fiscal cliff?

  • On 1 January 2013, tax rises and huge spending cuts come into force - the so-called fiscal cliff
  • The deadline was put in place in 2011 to force the president and Congress to reach agreement on the budget over the next 10 years
  • Date coincides with expiry of Bush-era tax cuts
  • There are fear that raising taxes while massively cutting spending will have a huge impact on households and businesses
  • The fiscal squeeze could also push the US into recession, and have a global impact

• Rises in inheritance taxes from 35% to 40% after the first $5m for an individual and $10m for a couple

• Rises in capital taxes - affecting some investment income - of up to 20%, but less than the 39.6% that would prevail without a deal

• One-year extension for unemployment benefits, affecting two million people

• Five-year extension for tax credits that help poorer and middle-class families

'Imperfect solution'

President Barack Obama welcomed the Senate vote.

"Leaders from both parties in the Senate came together to reach an agreement that passed with overwhelming bipartisan support today that protects 98% of Americans and 97% of small business owners from a middle class tax hike," he said in a statement.

Press reaction

Jennifer Steinhauer in The New York Times writes: "The confusing struggle to head off a national fiscal crisis has made one thing crystal clear: The era of the Big Deal is over."

In The Washington Post, David A Fahrenthold says:"The New Year's Eve agreement between [Vice-President Joe] Biden and [Senate Minority Leader Mitch] McConnell provided a glimpse at the ways that personality quirks and one-to-one relationships can still change the course of Washington politics."

The Wall Street Journal says: "The wider deal doesn't do much to control the US's long-term budget woes, which are driven largely by entitlement spending, especially on health care, left untouched in this agreement."

"While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay."

Senate Minority Leader Mitch McConnell, a Republican, said: "It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort."

The BBC's Mark Mardell in Washington says many of the Republicans who dominate the House dislike the deal and may stand on their principle.

Speaker John Boehner said the House would consider the deal but left open the possibility of amending the Senate bill - which would spark another round of legislation.

"Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members... have been able to review the legislation," Mr Boehner and other House Republican leaders said in a statement.

The current House can legislate until Wednesday, when it is replaced by a new chamber chosen during last November's election.

 

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  • rate this
    +7

    Comment number 288.

    As usual, it will be the poor and the elderly who will suffer the brunt of these cuts while the military and the foreign governments receving U.S. aid will remain relatively unscathed. The rich will again get away with paying minimal taxes. This has been going on since the 1950's.

  • rate this
    -1

    Comment number 209.

    The issue with most middle and upper middle class Americans is not that we don't want to pay more taxes, it is about cutting spending in numerous areas to realistically bring the budget down. Both parties act like speculators. Business borrows to invest, this is their challenge to succeed or fail. Govt should not borrow to spend, spend only what is in the budget from the previous tax year.

  • rate this
    +8

    Comment number 115.

    This deal was agreed after the deadline. What was the point of a 'deadline' if it is going to be ignored for sake of expediency? The automatic changes should be inforce now - but they are all pretending the deadline didn't really matter. In the meantime, share values here fell. Ridiculous posturing and gamesmanship has no place in serious politics - but perhaps they are not serious.

  • rate this
    +15

    Comment number 98.

    Modern American governments have shunned their responsibility to represent the People. The Fiscal Cliff is only one aspect of how the government has become dysfunctional. But even this is only a symptom of a nation in decline. Real wages have declined, education has declined, goodwill from other nations has declined and the government has declined, declined to function.

  • rate this
    -5

    Comment number 53.

    The US has the same problem as the UK and most of Europe. Politicians who are unable to understand basic facts. Since 2000 federal and state taxes are about 35% of GDP and spending about 40% of GDP. In recessionary times this is fine but politicians keep at this level in good times. This is not about how you tax the rich, spending is too high in good times

 

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