Special Market Commentary

by Jim Baird on January 4, 2013

Cliff Notes: Policymakers Strike a Deal

Executive Summary

  • President Obama recently signed a bill to avert the so-called “fiscal cliff,” as policymakers struck a deal in the eleventh hour. 
  • The bill’s focus was predominately aimed at addressing tax policy issues, but also postponed automatic spending cuts for two additional months.   The bill also extended long-term unemployment benefits, and addressed estate taxes, AMT, and other business tax breaks.
  • Prevailing income tax rates were preserved for most taxpayers, an outcome that was well-received by the markets and was a relief to most households. As expected, high income taxpayers did not fare as well, as the deal raises rates on ordinary income, capital gain, and dividend tax rates subject to certain income thresholds effective for 2013.   
  • Though largely overlooked in the public discourse in recent weeks, most households will be negatively impacted by the expiration of the payroll tax holiday.  Discretionary income for working households will be reduced as applicable FICA tax rates rise 2% to revert back to prior levels. 
  • Overall the bill provides greater clarity on tax policy, but also sets the stage for a second act as fiscal policymakers reconvene to debate spending and the debt ceiling in the months ahead.

After many months of wrangling, policymakers in Washington finally reached a deal shortly after the new year to avert the full impact of the now-cliché “fiscal cliff” of tax hikes and spending cuts that were set to occur on January 1. The final agreement was largely focused on tax policy, with any hopes of reaching a larger deal that incorporated more meaningful deficit reduction and spending cuts deferred for consideration down the road.

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