US Senate approves fiscal cliff legislation

The Senate moved the U.S. economy back from the edge of a “fiscal cliff” on Tuesday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives, report Reuters.

us-senateIn a rare New Year’s session and two hours after deadline (at around 2 a.m. EST), senators voted 89-8 to raise some taxes on the wealthy while making permanent low tax rates on the middle class that have been in place for a decade. Senate passage set the stage for a final showdown in the House of Representatives, where a vote was expected later Tuesday or perhaps Wednesday.

“But the measure did little to rein in huge annual budget deficits that have helped push the U.S. debt to $16.4 trillion”, said Financial Times. The agreement came too late for Congress to meet its own deadline of New Year’s Eve for passing laws to halt $600 billion in tax hikes and spending cuts which strictly speaking came into force on Tuesday. But with the New Year’s Day holiday there wasn’t real world impact and Congress still had time to draw up legislation, approve it and backdate it to avoid the harsh fiscal measures. More, because the financial markets were closed, giving them a second chance to return to try to head off the fiscal cliff.

What means this deal ?

“Under the deal, taxes would remain steady for the middle class and rise at incomes over $400,000 for individuals and $450,000 for couples — levels higher than President Obama had campaigned for in his successful drive for a second term in office”, says USAToday.

“Spending cuts totaling $24 billion over two months aimed at the Pentagon and domestic programs would be deferred. That would allow the White House and lawmakers time to regroup before plunging very quickly into a new round of budget brinkmanship certain to revolve around Republican calls to rein in the cost of Medicare and other government benefit programs”

Shortly after the Senate vote, President Obama said, “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”.

One set of taxes is set to go up in 2013: The deal does not address the end of the payroll tax holiday on Tuesday. That tax will rise by 2%, back to its 2010 level.

The deal also stops scheduled pay increases for Congress set for spring 2013 and includes a nine-month extension of the farm bill, which had been delayed for months because of differences between the House and Senate versions of the legislation that sets U.S. agricultural policy every five years.

Update / 2 January 2013 – U.S. markets surged more than 2 percent Wednesday morning, hours after Congress approved a plan to avoid the “fiscal cliff” by raising taxes on American’s wealthiest households.

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