Breakthroughs and Letdowns in the Fiscal Cliff Deal

The stock market liked the fiscal-cliff deal, with a 2 percent gain the day after Congress passed it. But CEOs and economists said it wasn't enough, and even President Barack Obama acknowledged that it's barely a start.

[ENJOY: Political Cartoons on the Fiscal Cliff]

So is the American Taxpayer Relief Act, as it's officially known, a breakthrough or a letdown? Actually, it's both. Here are a few major things it accomplishes, along with a couple of things it fails to do:

BREAKTHROUGHS

A permanent set of tax brackets. Most Americans know their income-tax rates won't be going up in 2013, because the cliff deal held rates where they are for all but the top earners, whose tax rates will be higher in 2013. But it did more than that. The deal made permanent all tax brackets, which will help alleviate one source of uncertainty that has held back businesses and consumers.

The Bush tax cuts that went into effect in 2001 and 2003 became a considerable source of turmoil in the U.S. economy because they were scheduled to lapse in 2010. The backers of those tax cuts knew, of course, that after several years of lower taxes it might be politically impossible to push them back up to earlier, higher rates. But two costly and prolonged wars, a deep recession and close to $2 trillion in stimulus spending created a pressing need to raise revenue, in order to start paying down the national debt.

[RELATED: Middle-Class Taxes Just Went Up]

In 2010, the Bush tax cuts were extended for two years, but that still left most Americans guessing about what their tax rates would be in 2013. That's not a problem any more. A permanent set of tax rates makes at least one important thing about the economy predictable.

A permanent fix for the alternative minimum tax. The AMT, a complex part of the tax code that forces higher earners to pay more than they would under the normal rules, has been another source of instability because it's not indexed for inflation. So every year, Congress has hiked the AMT threshold, although occasionally delayed such action, keeping more and more middle-class taxpayers guessing about whether they'll be snared in a tax scheme not intended for them. Now, the cliff deal will automatically adjust the AMT threshold every year to account for inflation, another breakthrough that will reduce uncertainty.

A repudiation of the no-tax pledge. There's nothing inherently good about higher taxes, but legislators need the flexibility to raise taxes if necessary to address national priorities. The no-new-taxes pledge promulgated by anti-tax activist Grover Norquist and signed by nearly all Congressional Republicans stood in the way of rational governing. That spell is broken now that dozens of Republicans have voted for higher tax rates.

LETDOWNS

A pass on spending cuts. Raising taxes only addresses a small part of the government's budget problem. A real fix also requires major spending cuts, to include costly entitlement programs such as Medicare and Social Security. The cliff deal contains no spending cuts, and in fact it delays for two months $110 billion worth of cuts that were due to begin January 1. "The principal fiscal uncertainties are now on the spending side," forecasting firm Macroeconomic Advisers explained in an analysis of the cliff deal.

[RELATED: Get Ready for the Next Fiscal Cliff]

A looming debt-ceiling showdown. The cliff deal also did nothing to address the need for Congress to raise the U.S. borrowing limit again by mid February or so. That is now looking like it could be a bigger and more serious battle than the fiscal cliff was, since it portends a possible default on U.S. debt, which would send markets into a tailspin. In fact, the stock-market rally following the cliff deal only seemed to last one day, before investors turned their attention to the next battle in Washington. It turns out there's more than one fiscal cliff.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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