The Fiscal Cliff Deal Explained

Owen Poindexter
Despite some major doubts, a fiscal cliff deal was reached when Republicans and Democrats came together to agree on tax policy going forward. Taxes are going up on the wealthy, and get ready for another "fiscal cliff" style deal in a few months, because some of the big decisions were kicked down the road.

President Obama and John Boehner were key negotiators throughtout the fiscal cliff deal negotiations. IMAGE: Reuters

At last, a deal averting the “fiscal cliff” was passed by both the Senate and (amazingly) the House. Taxes will go up on income over $400,000 for individuals and $450,000 (so even for the 1%ers, their income remains at Bush tax cut levels for their first $400,000 every year as a result of the fiscal cliff deal). The estate tax goes up to 40% (from 35%) with a $5 million exemption, so, again, under the fiscal cliff deal, the first $5 million one inherits is exempt from taxes, and that number is now indexed to inflation, meaning it will gradually go up. The payroll tax holiday will be allowed to expire, and this is the one piece of the fiscal cliff deal that will hit the middle class. While it’s not a large jump—the payroll tax goes back to 6.2% from 4.2% it’s interesting (telling) that for all the kicking and screaming, mostly from Republicans, over raising taxes on the wealthy, we heard very little about this increase that hits the entire middle class.

As for all the cuts in spending, those are kicked various distances down the calendar by the fiscal cliff deal. The “sequestration cuts” are put off for two months, when there will be another “fiscal cliff” style fiasco, which the savvy reader will start getting tired of now to save yourself the trouble in a few weeks. The fiscal cliff deal happens to time this next round of negotiations with the need to increase the debt ceiling, which, if you thought the fiscal cliff deal negotiations were fun, is going to be a real blast.

In the end, the fiscal cliff deal showed that the leadership of both parties can come together when necessary. The major players ended up being President Obama and John Boehner with a crucial second act from Joe Biden and Mitch McConnell. Neither side is thrilled with this fiscal cliff deal (and many Republicans hate it), but that’s how negotiating works.