US averts fiscal cliff

A weary Congress sent US President Barack Obama legislation to avoid the economy-threatening "fiscal cliff" of middle-class tax increases and across-the-board spending cuts late on Tuesday night, hours before financial markets reopened after the New Year's holiday.

The bill's passage on a 257-167 vote in the House of Representatives sealed a hard-won political triumph for the president less than two months after he secured re-election while calling for higher taxes on the wealthy.

Speaker of the House John Boehner (center) leaves the second House Republican Caucus meeting of the day with House Ways and Means Committee Chairman Dave Camp during a rare New Year's Day session on Tuesday in Washington. The House approved a Senate 'fiscal cliff' bill to avoid massive tax hikes and spending cuts. [Photo/Agencies]

The economic and political stakes were considerable. Economists have warned that without action by Congress, the tax increases and spending cuts that technically took effect with the turn of the new year at midnight could cause unemployment to spike and send the economy into recession.

The extraordinary late-night House vote took place less than 24 hours after the Senate passed the measure in the pre-dawn hours of New Year's Day. The legislation cleared the Senate hours after Vice-President Joe Biden and Senate Republican Leader Mitch McConnell, veteran negotiators, sealed a deal.

In addition to neutralizing middle class tax increases and spending cuts that technically took effect Monday at midnight, the legislation raises tax rates on incomes of more than $400,000 for individuals and $450,000 for couples. Remarkably, in a party that swore off tax increases two decades ago, dozens of Republicans supported the bill in both houses of Congress.

Supporters of the bill in both parties expressed regret that the bill was narrowly drawn and fell far short of a sweeping plan that combined tax changes and spending cuts to reduce federal deficits. That proved to be a step too far in the two months since Obama called congressional leaders to the White House for a post-election stab at compromise.

Majority Republicans did their best to minimize the bill's tax increases, just as they abandoned their demand from earlier in the day to add spending cuts to the package.

"By making Republican tax cuts permanent, we are one step closer to comprehensive tax reform that will help strengthen our economy and create more and higher paychecks for American workers," said Representative Dave Camp of Michigan, chairman of the tax-writing House Ways and Means Committee.

House Democratic Leader Nancy Pelosi also said the legislation included "permanent tax relief for the middle class," and she summoned lawmakers to provide bipartisan support as the Senate did.

The bill would prevent an expiration of extended unemployment benefits for an estimated 2 million jobless, renew tax breaks for businesses and renewable energy purposes, block a 27 percent cut in fees for doctors who treat elderly Medicare patients, stop a $900 pay increase for lawmakers from taking effect in March and head off a spike in milk prices.

The bill would also raise the top tax rate on large estates to 40 percent, from 35 percent, and taxes on capital gains and dividends over $400,000 for individuals and $450,000 for couples would be taxed at 20 percent, up from 15 percent.

It would stop $24 billion in spending cuts set to take effect over the next two months, although only about half of that total would be offset with spending reductions elsewhere in the budget.

The fiscal cliff measure had cleared the Senate on a lopsided pre-dawn New Year's vote of 89-8, and House Republicans spent much of the day struggling to escape a political corner they found themselves in.

If the House had failed to pass the Senate bill, any fiscal deal would have had to start from the beginning when a new Congress, with dozens of new members, was seated on Thursday. And any change in the legislation would have required the Senate to re-pass the measure before it could go to Obama for his signature.

The non-partisan Congressional Budget Office said the measure would add nearly $4 trillion over a decade to federal deficits, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels. There was little or no evident concern among Republicans on that point, presumably because of their belief that tax cuts pay for themselves by expanding economic growth and do not cause deficits to rise.

Obama, who had campaigned for re-election on the promise of protecting households making less than $250,000 a year from a tax increase, praised the agreement after the Senate's vote. "While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay," Obama said in a statement. "This agreement will also grow the economy and shrink our deficits in a balanced way - by investing in our middle class, and by asking the wealthy to pay a little more."