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The fiscal cliff deal still means US taxes are going to rise

Happy New Year!

Last night I was on BBC World News and BBC Radio talking about the fiscal cliff. I stressed the fact that the deal being worked out in Washington will still see a hefty rise in taxes for the middle class via the payroll tax and for wealthy Americans via a lapse of the Bush tax cuts. Moreover, under the deal approved by the US Senate, the automatic spending cuts have simply been delayed two months and the US is still over the debt ceiling. The House of Representatives still has not approved the deal – and there is some resistance to it.

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The Bush tax cuts have been taken off the table below income for families over $450,000 and for individuals over $400,000. I believe the AMT provisions have been taken care of as well though I am not sure. The payroll tax cut is gone. I haven’t heard anything about the Affordable Care Act tax increases and the reductions of payments to healthcare providers. The ‘sequester’ automatic spending cuts have simply been delayed for two months This means that at best the fiscal cliff has become a clifflet. There will be an economic drag of perhaps 2% of GDP. In addition, we still have the potential for a voluntary default on US debt because of the debt ceiling. And more fiscal drag could come if the automatic spending cuts are not dealt with in the next two months.

Isn’t this what we should have expected? As early as August, we carried a post by Sober Look which warned that Obamacare tax increases and the payroll taxes, baskets one and two of the fiscal cliff items, would likely phase in. That is what has happened. AND we got tax increases on income over $250,000 on top of that. That’s where the 2% drag comes.

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About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.