Category: Markets / Finance / January 2, 2013 4:35 PM EST
The United States averted economic calamity on Tuesday (January 1) when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the world's largest economy off a "fiscal cliff" and into recession.
The agreement hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.
The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only now beginning to pick up steam after the deepest recession in 80 years.
Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.
Income tax rates will now rise on families earning more than $450,000 (USD) per year and the amount of deductions they can take to lower their tax bill will be limited.
Low temporary rates that have been in place for the past decade will be made permanent for less-affluent taxpayers, along with a range of targeted tax breaks put in place to fight the 2009 economic downturn.
However, workers will see up to $2,000 more taken out of their paychecks annually with the expiration of a temporary payroll tax cut.
The non-partisan Congressional Budget Office said the bill will increase budget deficits by nearly $4 trillion over the coming 10 years, compared to the budget savings that would occur if the extreme measures of the cliff were to kick in.
As people returned to work on Wednesday (January 2) after the New Year's holiday, reaction to the deal was grim.
"I think, number one for there only to be one dollars worth of savings or one dollars worth of tax breaks for 41 dollars of tax hikes. That doesn't seem to make any sense when it comes to the math itself," said Traci Scott, who works near Wall Street.
"I think it had to be done. Something needed to be done about the economy. We can't just cross our arms. There is too much to do. Not only that but so many people have to suffer for this. It's unfair," said Victor Quintana.
The vote averted immediate pain like tax hikes for almost all U.S. households, but did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programs were only delayed for two months.
Obama urged "a little less drama" when the Congress and White House next address thorny fiscal issues like the government's rapidly mounting $16 trillion debt load.
"The goal of really resolving everything by the end of the year was pretty ambitious. So everybody thought ... something would be done, but it would be a lot shorter of what it was supposed to be. So that's basically what happened and some of the decisions will be responded to in another two months and in two months we will see again what happens," said Mohammed Elhioum.
When asked his thoughts about the rich paying more in taxes, Geraldo Lodolini added, "The working class always pays. The rich never does. I just don't believe any of it."
Meantime, U.S. stocks soared on the first day of trading in 2013 on the "fiscal cliff" deal.