FE Editorial : Scaling the cliff

Written by The Financial Express | Updated: Jan 2 2013, 09:29am hrs
Immediate crisis staved, tough decisions left for later

While purists argue President Obama has given away too much to the Republicans who will continue to bargain more since the debt-ceiling still remains unresolved, the deal is significant since, after many years, the US is actually raising taxes to deal with fiscal problems. The hiking of taxes to Clinton-era rates for families that earn more than $400,000 a yearassuming the Senate passes it tomorrowis much more generous than what Obama campaigned for. He wanted to apply these rates to family incomes of over $250,000, but keep in mind raising taxes is easier, and makes more sense, when the economy is doing well as it was when Clinton was president. Which is why the White House has claimed it has managed to get 80-85% of what it wantedthe concession to the rich, presumably, was bartered for being allowed to retain other benefits such as on unemployment insurance, tax-credits for low-income families and a reduction in the impact of the alternative minimum tax on middle-class families. Estate duties have been raised from 35% to 40% and dividend tax from 15% to 20%again, not as high as the Democrats wanted, but higher than the Republicans would have liked to concede. The $600 billion of extra taxes this will generate over a decade means average US taxes will rise between 1-1.25% instead of the 5% that would have taken place had the cliff not been resolved.

While that means a definite slowing of the US growth process, it probably wont be enough to tip the US back into recession. Indeed, what will help further bolster US consumer confidence that is just about coming back is, according to a calculation by Reuters Breakingviews, the saving in energy prices thanks to the fracking revolutionthis was around $107 billion in 2012, working out to around $926 of savings through lower gas prices per household. The tax impact of the cliff not being resolved, according to the Tax Policy Centre in Washington, as quoted by the NYT, would have been higher taxes by $3,446 per household.

The unfortunate part of the deal, however, is that nothing has been achieved on the larger issue of the dramatic hikes in entitlement expenditure or trying to simplify the US tax code which is so complex few even understand it. Nor is there any word from the White House as to when, or whether, this is to be tackled. NYT columnist David Brooks points out the average Medicare couple contributes $109,000 while getting $343,000 of benefits out of it. But given how the US political system has divided power among the House, the Senate, the White House and the Supreme Courteach body must agree if a Bill is to become lawunsatisfactory compromises are the order of the day.