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No Fiscal Cliff, But It’s Not Downhill For Obama

President Barak Obama has pulled the US economy back from running headlong over the fiscal cliff – for now.

Heralded as the economic saviour of the US with his deal with Congress, the small print reveals the threat that could have plunged the country back to the brink of recession is merely a stop-gap.

Over the past few weeks, many critics have been worried that tax hikes for those earning more than £246,000, coupled with severe budget cuts of around £67 billion, which would hurt the American economy.

Because the USA is the world’s leading economy, there were fears that most other countries would follow America in to recession.

The political showdown came about because tax caps introduced in previous years were due to expire and President Obama had campaigned for re-election saying he would ‘tax the richest 2% of Americans’.

Tax rates go up

In the deal agreed by Congress, only those earning more than £246,000 (£276,000 for couples) rather than the £153,000 President Obama campaigned for, will be hit. The tax rate will rise from 35% to 39.6% for those high earners.

Politicians have also agreed that estates will be taxed at a top rate of 40% – up from 35% – but the first £3 million is exempt – £6.1 million for family estates.

Investors will also see their tax rate for capital gains and dividend income rise from 15% to 20% on income over £246,000.

However, around 30 million middle and upper income taxpayers who also faced a tax hike of around £1,800 will not now face that.

In other moves, the deal also sees a cut in Medicare payments to doctors and the payroll tax of 6.2% will be restored – which is in effect a two percentage point reduction.

Budget cuts delayed

As for the controversial budget cuts, they have been delayed by around two months.

That means £67 billion of cuts to the budgets of Pentagon and domestic agencies will not begin this week.

President Obama said: “When the law to raise taxes on the wealthiest 2% of Americans lands on my desk, I will sign it.”

He added that the US deficit will still ‘too high’ and there was still a ‘lot of work to do’ in the coming weeks and months since under American law the ‘debt ceiling – which is the government’s borrowing limit – cannot be exceeded.

That means there are still major budget cuts – especially to America’s welfare bill – to be agreed.

President Obama said there was a path that took America forwards but only ‘if we focus not on politics but what is right for the country.’

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