Over the past few days the House and Senate passed a bill to avoid the so-called “fiscal cliff.” Some key features of the deal include the following:
- The top tax rate on regular income will go back up to 39.6% from 35%. In addition, high-earners will again face phase-outs for personal exemptions and itemized deductions, resulting in any even higher effective marginal rate.
- Other regular income tax rates, for middle and lower earners, were made permanent.
- The top tax rate on capital gains and dividends will rise from 15% to 20% (23.8% including a new tax in the health reform law). Without a deal, the top dividend rate would have risen to 39.6%.
- The top tax rate on estates was increased to 40% from 35%. Without a deal, the rate would have risen to 55%. The exemption amount was kept at $5 million and will grow with inflation.
- The exemption amounts for the Alternative Minimum Tax were permanently indexed for inflation, so no more need to “patch” the AMT each year.
- Extended unemployment benefits and 50% accelerated depreciation were extended one more year.
- Allow pre-tax 401k (and similar) retirement accounts to be converted to “Roth” accounts.
By far, the biggest problem with the deal is the failure to address our long-term entitlement problems. The deal postpones the spending sequester negotiated back in August 2011 to March 1. Meanwhile, largely due to extra unemployment compensation and higher Medicare provider payments, spending will be about $50 billion higher in the current fiscal year.
Tax rates will be higher in 2013 and beyond, but without any changes to entitlement programs, so the US’ fiscal path remains unsustainable.