Created on: January 02, 2013 Last Updated: January 03, 2013
On January 1, 2013 the U.S. House of Representatives voted on legislation called the American Taxpayer Relief Act of 2012. Before reaching the House, the bill was passed by the Senate earlier that same day with a majority vote of 89-8. Of the 257 House aye votes, 172 were cast by Democrats while only 85 were Republican. In the Senate, 47 yea votes were from Democrats, 40 were Republican and two were Independent. A key feature of this new legislation amends federal fiscal policy that regulates collection of government revenue.
In the short term, the Congressional bill does avert some of the more negative consequences of the “Fiscal Cliff”. It does this by extending Bush era income tax cuts for 99 percent of taxpayers, but at the same time increases payroll tax by two percent. Some industries including motor-sports, asparagus farming, and video media also benefit from the law per Business Insider. On the day following Congressional approval of the Act, stock markets around the world rallied on the news and the value of the U.S. dollar declined within currency markets; commodities such as gold and oil also experienced price increases.
The long term impact of the American Taxpayer Relief Act is expensive per the Congressional Budget Office. Moreover, the CBO projects $3.97 trillion will be added to the federal budget deficit over 10 years after the bill is signed into law. Despite this, the White House reports the deficit will be reduced by $737 billion. Analysts and strategists have pointed out disadvantages of the legislation and claim the law is insufficient at curbing spending and essentially “buys time” for lawmakers to deal with additional obstacles in fiscal policy.
The reasons why the new law is considered inadequate is because it does not deal with several large fiscal issues. For example, federal spending cuts are only delayed by two months per CNN Money and the legislative act does not address the recent federal government breach of its debt ceiling. It is also forecast to have a negative impact on economic growth per numerous financial professionals and organizations. The New York Times has reported growth of gross domestic product is expected to decline by .5 percent in 2013, and Zero Hedge cites a forecasted one percent decline in GDP growth.
The developments around these national economic issues are being watched by credit rating agencies such as Fitch and Moody's. Depending on the effectiveness of Congressional actions, the potential for a national credit rating downgrade exists. Congressmen such as Peter King (R), and Jim Moran (D) have warned against the negative consequences of the existing bill. Specifically, King has lambasted his fellow Republicans for short-changing those constituents who are now cut off from Hurricane relief funding, and Jim Moran has officially claimed the bill is inadequate in addressing three new fiscal cliffs that are to follow.
For now the American Taxpayer Relief Act of 2012 has saved the day, but a major part of the law only provides temporary fiscal relief to the country. Congress has much work ahead of it, and a Republican majority in the House of Representatives is sure to challenge incumbent spending policies in the near future. The overall effect of the law is intended to provide government revenue and expenditure solutions with as few disadvantages to the economy as possible. Since the economy is experiencing slow growth, it is especially sensitive to large disruptions in fiscal policy; this makes Congressional decisions around these issues particularly potent.
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Congress approves fiscal cliff agreement