Fiscal Cliff

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“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect. Three hours before the midnight deadline on January 1, the Senate agreed to a deal to avert the fiscal cliff. The Senate version passed two hours after the deadline, and the House of Representatives approved the deal 21 hours later. The government technically went "over the cliff," since the final details weren't hashed out until after the beginning of the New Year, but the changes incorporated in the deal were backdated to January 1. The key elements of the deal are: an increase in the payroll tax by two percentage points to 6.2% for income up to $113,700, and a reversal of the Bush tax cuts for individuals making more than $400,000 and couples making over $450,000 (which entails the top rate reverting from 35% to 39.5%). Investment income is also affected, with an increase in the tax on investment income from 15% to 23.8% for filers in the top income bracket and a 3.8% surtax on investment income for individuals earning more than $200,000 and couples making more than $250,000. The deal also gives U.S. taxpayers greater certainty regarding the alternative minimum tax, and a number of popular tax breaks - such as the exemption for interest on municipal bonds - remain in place.

The fiscal cliff agreement is good news to some extent, although it shouldn't be ignored that lawmakers had 507 days (since the August, 2011 debt ceiling agreement) to address this problem, but still came down to the final hours before they were able to reach a solution - an unnecessary, self-inflicted burden on the economy and financial markets. What's more, the agreement addressed only the revenue side (taxes) but postponed any discussion of spending cuts - the so-called "sequester" - until March 1. The fiscal cliff was a concern for investors and business since the highly...
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