Fiscal cliff deal leaves lots of issues dangling

Hopes of wrapping the issue into the year-end negotiations were dashed, setting up the potential for another standoff. House Speaker John Boehner says any debt increase must be paired with equal spending cuts. Obama says the debt ceiling is too important to negotiate.

The last time such a showdown brought the nation close to default, in the summer of 2011, it roiled the financial markets and contributed to Standard & Poor's decision to strip the U.S. government of its AAA bond rating.

A government shutdown?

Yet another deadline looms on March 27. The stopgap measure that funds government activities expires; congressional approval will be needed to keep the government running. It's another chance to fight over spending.

In 2011, the nation came within hours of a partial government shutdown that would have furloughed an estimated 800,000 government workers, closed national parks and halted the work of the IRS.

The national debt

The fiscal cliff deadline was originally designed to force lawmakers to confront trillion-dollar annual budget deficits that pile the nation's debts higher each year. As larger and larger numbers of baby boomers receive retirement benefits in coming years, the strain on the budget will be unsustainable.

Obama says Medicare's climbing costs must be addressed to fix this. Republicans want to rein in Medicare, Social Security and other entitlement programs more sharply. Many Democratic lawmakers object. And tampering with programs so popular with voters is never easy.

The fiscal cliff was supposed to be a way to force Washington to confront the long-term debt problem. The next two months will be another opportunity to come up with a plan or dodge the issues again.

The tough, unpopular decisions are further complicated by concerns that cutting spending too quickly could damage the nation's sluggish economic recovery.

What's done

The year-end fiscal cliff deadline did inspire compromise between Republicans and Democrats on some hotly debated tax questions. Some of the issues settled:

• Payroll taxes are going back up, after being trimmed for two years to help stimulate spending and boost the economy. For most workers, that means paychecks will shrink by 2 percent—another $1,000 for someone earning $50,000 a year. The wealthiest pay a lower share of their income, however, because the Social Security payroll tax applies only to the first $113,700 of earnings.
• The top 1 percent are getting socked with higher income tax rates. Income over $400,000 for individuals or $450,000 for couples will be taxed at a top rate of 39.6 percent, up from 35 percent. Everyone else gets to keep their current income tax rates, which date back to the George W. Bush-era tax cuts.
• The wealthiest Americans will pay higher taxes on their investments. Rates for their capital gains and dividends are rising from 15 percent to 20 percent. And the tax on estates worth more than $5 million will go up to 40 percent, from 35 percent.
• The alternative minimum tax—designed to keep the wealthy from using loopholes to avoid taxes—will be permanently indexed for inflation so it doesn't catch millions of middle- and upper-middle-income people in its net.
• Tax breaks for families with children, college tuition and low-income workers will continue for five years. A diverse group of temporary business tax breaks were extended for one year.
• Emergency federal unemployment benefits to help 2 million people out of work for at least six months will be extended a year.
• A scheduled 27 percent cut in Medicare payments to doctors will be held off for a year in what's become a congressional ritual.

See also:

• House passes fiscal cliff deal
• Tax reform: The battle has just begun
• Senate makes estate tax permanent