(By Mani) The just legislated "American Taxpayer Relief Act of 2012" have helped the U.S. in averting the fiscal cliff.
Let's see what it means for the average American.
Higher Federal income taxes on families earning over $450,000 per year in taxable income are expected to lower personal saving rates as opposed to their consumption. As a result, their savings could come down impacting their spending decisions, especially on discretionary items.
"We estimate that 94% of overall personal saving is done by the 18% of households with over $100,000 in annual after-tax incomes, and that 63% of personal savings is done by the 7% of households with over $150,000 in annual after-tax income," UBS economist Maury Harris wrote in a note to clients.
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In addition, a rise in the top marginal income tax rate to 39.6 percent from 35 percent probably is not enough to blunt the incentive to expand by the relatively more successful small firms paying the individual income tax.
Meanwhile, terminating the temporary two-percentage point, payroll tax cut raises those taxes by around two-thirds of 1 percent of GDP.
"However, for the near-term, less uncertainty about income taxes should help support consumer spending, which was held back to some degree by such uncertainty at year-end when consumer sentiment declined and holiday spending was somewhat softer than expected, ," Harris noted.
While there remains uncertainty about the unresolved Federal spending issues, they generally impact a smaller part of the population compared to that potentially impacted by the potentially higher Federal income taxes that have not happened for almost all taxpayers.
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"We still believe that Federal spending cuts, to be addressed in the upcoming debt ceiling and delayed spending sequester debates, probably will be back loaded and not very convincing outside of defense," Harris said.
Estates are taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase to20 percent from 15 percent.
On the positive side, the deal permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
In addition, the deal extends jobless claims benefits for the long-term unemployed for one year. Allows a two percentage-point cut in the payroll tax first enacted two years ago to lapse, thereby restoring the payroll tax to 6.2 percent.
The deal prevents two million people from losing unemployment insurance (UI) benefits in January by extending emergency UI benefits for one year.
The lower tax rates, an expanded Child Tax Credit, and marriage penalty relief will provide certainty for 114 million households and together will prevent the typical family of four from seeing a $2,200 tax increase.
The agreement also avoids a 27 percent cut to reimbursements for doctors seeing Medicare patients for 2013 by fixing the sustainable growth rate formula through the end of next year (the "doc fix").
Tax credits that encourage the production of clean domestic energy, such as the Production Tax Credit (PTC) will be extended through the end of the year, and businesses will get to write off 50 percent of capital investments immediately, which were made next year, helping to create jobs in manufacturing and other sectors.
The deal also postpones the sequester for two months, giving Congress time to work on a "balanced plan" to prevent the automatic spending cuts of $109 billion. The postponement is paid for with $1 of revenue for every $1 of spending, with the spending balanced between defense and domestic: The agreement saves $24 billion, half in revenue and half from spending cuts, which are divided equally between defense and non-defense.
An upside forecast risk from fiscal policy could come from a boost to business confidence if there is more convincing than assumed legislation to control longer- term entitlements growth. On the other hand, a fiscal policy related downside forecast risk is possibly more than assumed near- term Federal spending cuts.