DAVID GREENE, HOST:
It's MORNING EDITION from NPR News. Good morning, I'm David Greene.
STEVE INSKEEP, HOST:
And I'm Steve Inskeep. Happy New Year.
Let's start with the upside. Congress has yet to rattle the financial markets so far in 2013.
GREENE: Of course, the markets are closed on this New Year's Day, as the House considers a deal on taxes and spending. The Senate has already approved that plan by a huge majority.
INSKEEP: It would raise taxes on the wealthy, extend the tax cuts for everybody else, and temporarily put off the big spending cuts that are due later this year.
NPR's John Ydstie is with us to talk through this deal, what it means for all of us. John, good morning.
JOHN YDSTIE, BYLINE: Good morning, Steve. Happy New Year.
INSKEEP: Thank you very much. OK, so it is January 1st, they have not changed the rules -tax laws or spending laws - which means technically we've gone over the fiscal cliff. How's it feel in the air here?
YDSTIE: Well, technically the Bush tax cuts expired at midnight, that's true, along with some Obama era tax cuts. But most of those tax cuts are reinstated by this deal so the effects are minimal. In addition, it's New Year's Day, as you said, the markets around the world are closed so there's no danger of markets going off the rails, as the House debates this.
INSKEEP: As the House debates, yeah.
YDSTIE: Right. As for the hundred and $110 billion in spending cuts that were part of the fiscal cliff, this deal would push that deadline off for two months setting up yet another battle. At the same time, the Congress and the president will once again be required to raise the debt ceiling - so look for another fight in two months.
INSKEEP: Well, wait. The debt ceiling, so they've avoided this opportunity to implode the economy, but they have better chances up ahead.
YDSTIE: Exactly.
INSKEEP: OK, we'll look forward to that. But meanwhile, there is this deal which the House we expect will take up today, consider today. They haven't promised to vote for it but they're going to consider today. What would it do to everybody's taxes if it becomes law?
YDSTIE: Well, honestly, the biggest effect is that the Bush era tax cuts will be extended for all individuals with incomes below $400,000 and households below $450,000.
INSKEEP: OK.
YDSTIE: But taxpayers above those levels would see their top tax rates go to 39.6 percent for their earned income over those amounts. The deal also calls for high income people to pay higher tax rates on dividends and capital gains - the profits they make on the sale of stocks and other assets. That rate would rise from 15 percent, where it is now, to 20 percent.
INSKEEP: I want to ask you about something, John Ydstie. The president campaigned in the 2012 election on raising taxes or letting taxes go back up on the wealthy. He defined as people earning more than $250,000 a year. You just said 400, $450,000 a year, whether you're single person or a couple. That's a different benchmark.
YDSTIE: Yeah, obviously the president did compromise. But the deal does call for individuals above $250,000, and households above $300,000, to take a bit of a hit. That's because tax credits and tax deductions for things like mortgages, just would be phased out, starting at those income levels.
INSKEEP: OK, so they'll pay a little more...
YDSTIE: Right.
INSKEEP: ...depending on who you are and exactly what your tax return has set. Now, below $250,000, does nothing change from 2012?
YDSTIE: To a large extent, no - nothing changes. Tax rates on earned income will remain where they were last year. The tax rates those folks paid, below $250,000 on dividends and capital gains, remains at 15 percent. And middle-class folks won't be threatens any longer by the Alternative Minimum Tax, which actually treats them as if they were rich - that's been patched, permanently.
there are also a number of tax credits, enacted under President Obama, largely favoring lower income people, that will be extended for five years by this deal, including college tax breaks, enhanced child and earned income tax credits as well.
INSKEEP: OK, but there's also the matter of the payroll taxes that millions of Americans pay that support Social Security, Medicare and Medicaid. There's been a brake on those the last couple of years. What happens to that now?
YDSTIE: Right, the idea was to keep money in people's pockets so they could spend it to stimulate the economy. But now we'll go back to paying the full 6.2 percent Social Security payroll tax on annual earnings of $113,000. That's two percent more than we paid last year. For taxpayers who make $50,000 a year, it means their take-home pay, over the course of 2013, will be a thousand dollars less.
INSKEEP: OK. So the payroll tax break goes away. Now, what about the estate tax, taxes on inheritance, which they were also negotiating?
YDSTIE: Well, this deal keeps the threshold for estate taxes at $5 million for individuals and $10 million for couples, but the tax rate on estates above those values will go up from 35 to 40 percent.
INSKEEP: OK, so that changes.
YDSTIE: And another very important part of this deal is that unemployment benefits have been extended for two million of the long term unemployed who would have lost their benefits at the end of January.
INSKEEP: Let me just mention that those long term unemployed are left over from the last recession. There was fear that the fiscal cliff could lead to another recession. Have they changed things enough, very briefly, John, for a recession to be avoided here?
YDSTIE: I think they probably have, Steve, but this deal doesn't do very much to reduce long term deficits.
INSKEEP: Which was the other problem they were discussing. John, thanks.
YDSTIE: You're welcome.
INSKEEP: That's NPR's John Ydstie. Transcript provided by NPR, Copyright NPR.
