Tentative 'fiscal cliff' deal emerges

A sign showing the US national debt is displayed in New York.

A sign showing the US national debt is displayed in New York.

Published Dec 31, 2012

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Washington - US Senate leaders were hammering out a last-minute deal to avoid the “fiscal cliff” on Monday, but it was still unclear if rank-and-file lawmakers would back the agreement, particularly those in the Republican-led House of Representatives.

A deal to avert the fiscal crisis was said to be in the works in the Senate that would raise tax rates on household income above $450 000, said a source familiar with the talks. The agreement would permanently extend the lower tax rates for those below the $450 000 cut off. These lower tax rates have been in place for all taxpayers since the Bush administration.

US stocks rose modestly on the news, with the benchmark Dow Jones industrial average up less than one percent at 13 011.

President Barack Obama - who has said that failure to avoid the fiscal crisis would be a self-inflicted wound to the economy by Congress - was set to speak at 1.30pm ET (18.30 GMT) on Monday.

With only hours to go before the midnight deadline, the source said, the Senate deal would permanently fix the alternative minimum tax and postpone for an undetermined period the automatic, across-the-board federal spending cuts in defence and domestic programs.

The estate tax on inherited assets would increase under the Senate proposal. Corporate tax benefits would be extended, including the research and development tax credit, and unemployment insurance benefits for the long-term jobless would be extended for a year, the source said.

Dividends and capital gains would be taxed at 23.8 percent for high-income households under the Senate package. That would be an increase from the existing rate of 15 percent.

A Democratic aide cautioned that no deal was complete until all the elements were addressed and said it was unsure whether the package being negotiated could pass the Senate.

Republican Leader Mitch McConnell, walking into the Capitol after working late into the night on Sunday, told reporters he had been speaking with Democratic Vice President Joe Biden.

Senate leaders and Biden have been working to forge a pact that would have a chance of passage in both chambers.

From wage-earners to investors, Americans were all but certain to face higher payroll taxes and investment income taxes even if Congress can pull off a deal to avoid the fiscal cliff.

The source made no mention of a tentative Senate compromise to extend Obama's payroll tax holiday that Americans have enjoyed for two years. Support for such an extension seems to have faded away, in part because the payroll tax funds Social Security. If it ends, the current 4.2 percent payroll tax rate paid by about 160 million workers will rise to the previous 6.2 percent rate after Dec. 31.

That will be the most immediate hit to consumers, who will feel a squeeze on their wallets. Economists have warned that a recession could result if the full sweep of the fiscal cliff is allowed to take hold in January.

At midnight, low tax rates enacted under former President George Bush in 2001 and 2003 are set to expire. This remains the most contentious part of the ongoing negotiations, which has many other facets, including investment income tax increases.

A main sticking point has been whether to raise taxes on the wealthy. Republicans had opposed any tax rate hike, while Democrats for most of this year argued that household incomes above $250 000 should see higher tax rates.

If no deal is reached, the tax increases that will result from plunging off the fiscal cliff could be curbed later with retroactive legislation, but some economic damage seemed likely, dependent in part on the reaction of financial markets. - Reuters

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