Taxpayers foot the bill for US 'fiscal cliff' deal

It was a face-saving agreement for politicians. Now 160 million voters must pay for it

President Barack Obama has pressed the House of Representatives to vote in favour of a Senate-backed deal that would avert the swingeing cuts and soaring tax rates of America’s so-called “fiscal cliff”.

The country passed its deadline for an agreement on new budget legislation at midnight on New Year's Eve, but after Vice-President Joe Biden and Republican Senate Minority Leader Mitch McConnell brokered a last-minute compromise, the Senate approved it overwhelmingly at 2am, by 89 votes to eight.

In a statement, Mr Obama said, "While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay." The House convened at midday, and theoretically has until the end of tomorrow to vote on the measures before the new Congress elected in November takes office, but the bill's passage was far from guaranteed.

Republican House Speaker John Boehner did not endorse the deal, and many of his GOP colleagues said they would oppose it. House Majority Leader Eric Cantor emerged from an afternoon meeting with fellow Republicans telling reporters he could not support the Senate's bill as it stood, increasing fears that the legislation would be amended by the Lower House and sent back to the Senate. A statement issued by Mr Cantor's spokesman said: "The lack of spending cuts in the Senate bill was a universal concern among members in today's meeting."

The agreement reached by the Senate would see tax rates rise for individuals earning more than $400,000 per year, and families earning more than $450,000 per year – a defeat for Republicans, but higher than the $250,000 threshold originally demanded by Democrats, including the President. It is the first time Republicans have approved a rise in income tax for two decades, since President George H W Bush famously broke his "read my lips" campaign promise. The new deal also raises the Estate Tax on inheritances to 40 per cent for estates worth more than $5m. However, the spending cuts threatened by the fiscal cliff would be postponed for two months.

Mr Obama claimed in his statement that the agreement "protects 98 per cent of Americans and 97 per cent of small business owners from a middle- class tax hike." But the deal does spell the end of the payroll tax holiday, which means that taxes on 160 million Americans, many of them middle class or poor, will indeed rise: by two per cent, from 4.2 per cent to 6.2 per cent.

The deal came together after days of frantic back-office negotiations at the Capitol. After a breakdown in talks between Boehner and the White House before Christmas, Mr Obama summoned Congressional leaders to the Oval Office on Friday, where it fell to the Senate to craft an agreement over the weekend. But Mr McConnell and Democrat Senate Majority Leader Harry Reid were also unable to resolve their differences, and on Sunday Mr McConnell called on Vice-President Joe Biden to be his "dance partner" and broker a compromise.

The two men, who served together in the Senate for more than 20 years, finally reached a deal at around 9pm on Monday night, but legislators were made to wait while the Congressional Budget Office performed its calculations. After seeing in the New Year on Capitol Hill, Senators finally cast their votes at around 2am on New Year's Day. Only three Democrats and five Republicans rejected the bill.

Republican House members met this afternoon to discuss their response to the Senate deal, with some still bullish in opposition. Representative Tim Huelskamp, from Kansas, told CNN he would vote against the legislation, which he believed would hurt small businesses. Steve LaTourette, a Republican Representative from Ohio, dismissed the Senators who had passed the measures as "sleep-deprived octogenarians".

Under the Senate bill, the debate on spending cuts would be drawn out for two more months, during which time Congress must also resolve the question of the debt ceiling. Republicans are expected to demand deep cuts to entitlement programmes such as Medicare and Social Security, in return for agreeing to a rise in the debt ceiling, which currently stands at $16.4 trillion.

Winners and losers: The concessions

Taxing the wealthy

Before the deal was struck, the Republicans were resolutely opposed to any tax rises for the rich. Now, the GOP has agreed that, to a get package through Congress, rates on dividends and capital gains will be allowed to rise permanently for families earning more than $450,000, and individuals making more than $400,000 a year. For months now, President Obama has pressed the case for imposing tax rises on households making more than $250,000. But under pressure from the Republicans, the Democrats have now had to accept a higher threshold.

Estate taxes

The Republicans (and some rural Democrats) have also been against raising the levy on inheritances known as the estate tax. They loathe the principle, calling it the 'death tax', and at the very least wanted it to remain at the current level of 35 per cent for estates worth over $5m. Under the deal, it will climb to 40 per cent.

While Republicans have had to agree to a slightly higher estate tax, they Democrats have, arguably, conceded even more. They had argued for a deal that would have driven up the levy to 45 per cent on inheritances of more than $3.5m. In the end, they had to shelve that battle to get a broader agreement.

Spending cuts

The Republicans gave in on spending cuts after resisting any delay in the package of reductions worth more than $100bn known as the 'sequester'. They have now been pushed back by two months, and will be for partly by raising new revenue, and partly by other cuts. The Democrats had pushed for a delay of at least a year.

Nikhil Kumar

Timeline: How the deal was done

30 December

9am Barack Obama accuses Republicans of intransigence on tax. GOP Senator Mitch McConnell calls the remarks 'discordant'.

1pm The Senate convenes as behind- the-scenes talks continue between the Democratic Senator Harry Reid and the Republican Mr McConnell.

2pm Democrats reject McConnell's plan, which includes welfare cuts. Mr McConnell calls on Vice-President Joe Biden to help resolve the impasse.

4pm McConnell and Biden begin talks that will finally lead to a compromise. The Republicans agree to drop their proposals for social security reform.

5.30pm Harry Reid tells the Senate there will be nothing to vote on until the following day.

31 December

11am The Senate reopens for business. Mr McConnell and Mr Biden continue their negotiations.

1.45pm Obama says deal is in sight, joking that he hoped for a larger bargain "but with this Congress that was … a little too much to hope for".

2.15pm Republicans criticise Obama. John McCain says his "ridiculing of Republicans exercise" has set back the talks.

4pm Leaders in the House of Representatives say they will hold no votes until Tuesday, as they wait for the Senate to come to a resolution.

8.45pm A deal is reached between Mr Biden and Mr McConnell. The Vice-President heads to the Capitol to brief Senators.

1 January

12am America officially goes over the fiscal cliff.

2am The Senate passes its fiscal cliff deal by 89 votes to eight.