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Although in technical terms the US does “go over the cliff”, the deal reached by the Obama Administration and Republicans ensures that the negative impact on American taxpayers is minimized.
The House of Representatives is not expected to vote on the deal until later in the week, the earliest being Tuesday; this means that a few tax increases and programme spending cuts would automatically roll over into the New Year.
Earlier, in a mid-afternoon televised address US President Barack Obama said that an agreement between his administration and Republicans to avoid a budgetary crisis was “within sight”.
Although he acknowledged some issues remained unresolved, he explained that the prospective deal with Republicans would continue tax credits for children and university tuition, prevent a tax hike on the middle class and extend unemployment insurance.
The payroll tax cut from 2010, however, will not be extended. Analysts say that with or without a deal, Americans should expect changes that will affect their savings.One of the thorniest issues has been the estate tax, which Republicans have demanded remain the same without any amendments at 35 percent for homes worth more than $5 million. A compromise deal appears to increase the tax to 40 percent – well below the 55 percent Democrats had sought – with the first $5 million home value exempt.
Another issue was increasing taxes on the rich and super-rich; by early evening Democrats and Republicans had agreed to raise taxes on household incomes above $450,000. Individuals making below $400,000 will continue to enjoy income tax cuts.
The compromises came after a rollercoaster weekend that saw a disappointing reversal of fortunes for Americans hoping that the Obama Administration and Congress could reach a deal to resolve the crisis.
Sunday began with cautious optimism as both Republican and Democratic negotiators told the media that a “small deal” could be reached to bridge a fiscal cliff that threatened to plunge the US into another recession.
But by late afternoon, news was being leaked to US media that negotiations had reached an impasse when Republicans demanded far-reaching cuts to Social Security benefits in exchange for President Obama’s request to extend emergency unemployment benefits.
Democratic leaders said this was a new demand at 11th hour negotiations.
Within hours the thorniest issues such as income and estate taxes, as well cuts to the Pentagon budget were undergoing a number crunch between the offices of Democratic Majority Leader Harry Reid and Republican Minority Leader Mitch McConnell.
If Congress was unable to pass a bipartisan proposal ahead of the December 31 deadline, the Obama Administration had signaled that it may endorse its own plan and force Republicans to accept or oppose it.
On December 31, more than a decade of tax cuts, including the 2009 stimulus tax and the Social Security payroll tax, will expire.
The White House says that US economic recovery is at stake and is particularly emphasizing the negative impact going over the fiscal cliff would have on the middle class.