The first thing that everyone points out about the proposed fiscal cliff deal between President Obama and Senate Minority Leader Mitch McConnell is that it lets the Bush tax cuts expire on income above $450,000. It also includes a one-year extension of unemployment insurance, ensuring that 2 million continue to receive benefits, while leaving out an extension of the payroll tax holiday. But there's actually a lot more that's in this possible agreement.
1. The working poor would benefit significantly from an extension of tax breaks for low-income families: The proposed deal includes a five-year extension of tax credits that Obama had expanded in the 2009 stimulus: The Earned Income Tax Credit was expanded to help more working poor, particularly those with big families; the Child Tax Credit was expanded to help the poorest Americans; and a more generous tax credit was given to families for college tuition.
Republicans had been willing to support a return to 2001 levels for these tax breaks, which benefit more than 27 million Americans. But preserving Obama's 2009 expansion on the Bush-era tax provisions means that 13 million low-income families would avoid an average $834 tax hike, according to the Center for Tax Justice.
2. The estate tax provision would benefit a very small number of people and an even smaller number of small businesses and family farms: Neither party wanted the estate tax to return to Clinton-era rates of 55 percent, but Democrats wanted to set it at 45 percent while Republicans wanted the keep the current rate of 35 percent. The proposed deal splits the difference by setting it at 40 percent and gives Republicans the higher exemption threshold of $5 million (Dems wanted it to revert to $3.5 million). Republicans and Democrats from rural districts were pushing for a more generous estate tax to avoid punishing family farms, among other things. But keeping the high $5 million exemption means that almost no small businesses at all will be subject to the estate tax: The Tax Policy Center estimates that only 40 small businesses and family farms would have paid any estate tax at all in 2012 with the $5 million exemption.
3. Businesses would continue to benefit from specially targeted tax breaks, including ones that support clean energy: The package also includes a one-year extension of the entire package of "tax extenders." Some of these were almost inevitably going to be extended: The R&D credit, for instance, has already been renewed 14 times since it was first introduced in 1981. But Obama has also managed to include others that benefit wind production and other clean energy sources, which Republicans oppose. Others are more obscure tax breaks like the NASCAR loophole, which benefits race car track owners.
4. The Alternative Minimum Tax would be permanently fixed to avoid burdening middle-class families: Like the doc fix, the so-called AMT patch is meant to fix a structural flaw in the tax code to avoid the unintended consequences of an old law. The AMT was passed in 1982 to ensure that wealthy Americans didn't use tax loopholes to avoid paying income taxes, but it didn't include an adjustment for inflation, so it's been patched as years have gone by. The proposal aims to fix this problem permanently, which would come at a major cost. A 10-year patch alone costs $1.9 trillion, according to the White House's budget office. The cost won't count toward the proposal's price tag, as a patch is in the current policy baseline.
5. Capital gains and dividends would be taxed at 20 percent for families with income above $450,000—a concession to Republicans: Boehner and Obama had already agreed to let taxes on capital gains rise from 15 to 20 percent weeks earlier for high-income Americans. Setting the dividend tax rate at 20 percent, however, is a significant concession to Republicans: Obama, in his most recent budget, proposed taxing dividends like ordinary income, with a top rate of 39.6 percent, as it's scheduled to revert to after Dec. 31.