While Tuesday’s 154-pages worth of new tax legislation may not be the deal either Democrats and Republicans were hoping for, it will allow the U.S. to avoid the so-called “fiscal cliff” and is slated to raise $620 billion in federal revenue.
The central provision of the package, of course, is the increased income tax rate for wealthy Americans. The rate increases from 35% to 39.6% for individuals making more than $400,00 and families with incomes above $450,000. The legislation also allows the Obama Social Security payroll tax holiday to expire, allowing that tax to increase from 4.2% to 6.2% for all Americans earning up to $113,700 in 2013.
President Obama called the measure “just one step” in working to strengthen the economy. “The fact is the deficit is still too high, and we're still investing too little in the things that we need for the economy to grow as fast as it should,” he said.
But the good news is that by avoiding major tax increases, the U.S. likely prevented a recession from occurring in 2013, said Wells Fargo Advisors Chief Macro Strategist Gary Thayer. But he added that the payroll tax and income tax on the wealthy could act as a drag on economic activity.
“Consequently, the U.S. economy is likely to grow at only a modest rate, not a normal healthy rate,” Thayer said in a statement. “We believe the U.S. economy will start the year off with slow growth but strength as the year progresses.”