The fiscal cliff is done. But the era of cliffs has just begun.
Last night, the House of Representatives signed off on a deal to avert the massive tax hikes and spending cuts known, nearly posthumously, as the "fiscal cliff." Today we are a presidential signature away from the official end of this absurd national nightmare. But did the president make a bad deal? Did he make a secretly ingenious deal? What's in it, anyway? Those are questions. These are our answers ...
What's in the fiscal cliff deal?
The Tweet-length version of this deal is: No more payroll tax holiday, higher taxes for the super-rich, and we'll figure out the rest later.
The centerpiece of the deal is an increase in the top marginal rate to 39.6 percent on all income over $400,000 (for individuals) and $450,000 (for families). It is the first major tax increase since the early 1990s. The other rates from the Bush tax cuts are made permanent. Here's how it changes our taxes.
The end of the payroll tax holiday will reduce take-home pay for lower-income families by hundreds of dollars. But the tax changes at the top are measured in the hundreds of thousands of dollars.
Also in taxes: the Alternative Minimum Tax is permanently "fixed"; high-earners will pay 20 percent on income from capital gains and dividends; high earners will be privy to fewer deductions and exemptions; the estate tax is trimmed; and more. Crucially for the jobless, unemployment insurance is extended for the rest of the year.
What's not in the deal is just as important: payroll taxes, spending cuts, and the debt limit. The payroll tax holiday is officially over. That means payroll taxes will rise by 2 percentage points on all workers. There are no spending cuts in the fiscal cliff deal. But there is also no guarantee to raise the debt limit, in the next two months. Republicans want to use the debt limit debate for force spending cuts. President Obama has repeatedly promised not to negotiate over the debt limit, since failing to raise it could trigger a financial crisis.
What's the best reason for us to like it?
Deficits won't kill the U.S. economy in 2013. But austerity might. In a weak economy, we want taxes low and short-term deficits high. This deal preserves both.
Don't think of the U.S. as having "a deficit crisis." That's too simple. Think of us as having three deficit challenges. In the short term, we need high deficits to support weak growth. In the medium term, we need higher revenue and slightly less spending. In the long term, we need to make health care more affordable -- not just for the government, but for everybody.
This deal doesn't fix our health care problem, but that's a multi-decade problem that we don't have to "fix" (as if we even could) in January 2013. This deal doesn't raise taxes as much as we ultimately need to, nor does it touch spending, but that's okay for now, because those are medium-term goals. In the short term, we need more jobs, more spending, more economic activity, especially around housing. High deficits can't save an economy. But austerity can strangle it.