The bottom line: The agreement mitigates the full impact of the scheduled tax hikes and spending cuts but is incomplete in many ways.
-Russ Koesterich, global chief investment strategist, BlackRock
18 Implications of the Last-Minute Agreement
The New Year began with Congress finally agreeing to a partial deal to avoid (or at least delay) the worst of the much-discussed “fiscal cliff” of scheduled tax increases and spending cuts. We provide an overview of the deal and discuss what it means for the economy and financial markets.
What does the fiscal cliff agreement include?
1. Here’s a quick summary of what the fiscal cliff agreement reached late on January 1 covers:
- Permanent extension of the Bush-era tax rates for individuals with income up to $400,000 and couples with income up to $450,000.
- Permanent maximum 15% tax rate on dividend income and long-term capital gains for individuals and couples up to those same income levels, with a 20% rate for those with higher incomes.
- Permanent lower estate tax rates for estates worth up to $5 million.
- Permanent fix for the Alternative Minimum Tax.
- Two-month delay of scheduled spending cuts (known as the “sequester”).
- One-year extension of unemployment benefits.
- One-year freeze on scheduled cuts in doctors’ Medicare payments (the “Doc Fix”).
- Five-year extension of stimulus-related spending cuts.
2. Significantly, the deal did not include an extension of the payroll tax holiday, any entitlement reform, any restructuring of personal or corporate tax codes or any increase in the debt ceiling.
3. The bottom line: The agreement mitigates the full impact of the scheduled tax hikes and spending cuts but is incomplete in many ways. The compromise will still produce a modest fiscal drag, fails to address the longer-term fiscal challenges facing the United States, and leaves the debt ceiling as an unresolved, near-term issue.
What does the deal mean for the near-term economic outlook?
4. The fiscal drag left in place by the deal, coupled with the lingering uncertainty surrounding the debt ceiling, leads us to expect a weak economic start to 2013. The market consensus currently is for first-quarter growth to be roughly 1.6%, a rate we find to be overly optimistic. We do expect the US economy to rebound later this year, but it is unlikely to accelerate above a 2% annual growth rate.