Technically, the U.S. went over the fiscal cliff January 1 -- but most of the tax hikes were eliminated by subsequent legislation and automatic spending cuts have been delayed for two months. Meaning the fiscal can has been kicked a bit further down the road.
Despite a major split among House Republicans, enough went along with Democrats to approve an emergency Senate measure crafted by Minority Leader Mitch McConnell (R-Ky.) and Vice-President Joe Biden. Here's what it means:
For most taxpayers, rates remain the same. The legislation reset tax rates for those earning less than $400,000 a year, or couples earning less than $450,000 a year, to where they were after the Bush-era tax cuts -- enacted after the 9/11 terrorist attacks
For individuals earning $400,000 or more a year, and families earning $450,000 or more, the tax rate rises from 35 percent to 39.6 percent. In addition, the tax rate on investment income for those in that tax bracket also rises by five percent.
All employees, however, will see a slightly smaller paycheck from now on. That's because the temporary reduction in the payroll tax expired at the end of the year and the new legislation did not extend it.
The tax is 12.4 percent on wages up to $113,700, but employees only pay half of that; their employers pay the other half. Two years ago, in an effort to stimulate the economy, Congress temporarily reduced the employee portion of the tax from 6.2 to 4.2 percent. For the average family that amounted to about $1,000 a year, or $19 a week.
Few supporters of extending the payroll tax cut
Neither Republicans nor Democrats backed extending the tax cut further, since Social Security and Medicare benefits are supposedly based on what an employee has contributed to the system and both programs face severe shortfalls as it is.
The emergency legislation that passed the Congress was designed to prevent all tax rates from reverting to their pre-Bush tax cut levels. Economists warned that, with the fragile state of the economy, that would have brought on a recession.
The measure also extended provisions of the Farm Bill, preventing a huge spike in the price of milk. The measure extended present dairy policy, giving lawmakers more time to approve a new Farm Bill.
The bill did nothing to cut spending and, in fact, increases it by $4 trillion over the next 10 years, according to an analysis by the Congressional Budget Office. Lawmakers have said they will address spending in a separate measure and Thomas Donohue, president of the U.S. Chamber of Commerce, says time is of the essence.
Focus now on spending
"The new Congress and the administration must begin work immediately to slow runaway spending through structural entitlement reforms,” Donohue said in a statement. “They must also spur faster economic growth through comprehensive tax reform and a rapid expansion of American energy, which would create jobs and generate government revenues. This is the only formula that can reduce budget deficits and control our unsustainable national debt.”
But that sets up new conflicts in Congress, all but guaranteeing another contentious encounter when lawmakers consider a measure next month to raise the debt ceiling.