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if a fiscal cliff deal is not reached in its entirety before December 31, at least a prequel deal is expected.

28 Dec 2012

By Rakesh Neelakandan
Time is running out for Congressional Republicans and Democrats as Obama is about to meet House Speaker John A. Boehner(Ohio Republican), Senate Majority Leader Harry Reid (Nevada Democrat.), Senate Minority Leader Mitch McConnell (Kentucky Republican.) and House Minority Leader Nancy Pelosi San Francisco Democrat) in the presence of Joe Biden, Vice President of US in a bid to clinch an 11th hour deal concerning the fiscal cliff.

Markets are cautious as they await Saturday morning (1.30 AM IST) discussion to seek clear direction. The picture as of now looks grim, yet not devoid of optimism.

On Thursday, Senate Minority Leader Mitch McConnell (Kentucky Republican) said to CNN that his party will not "write a blank check for anything Senate Democrats putforward just because we find ourselves at the edge of the cliff." Reid the Nevada democrat said somewhere else,”I don't know, time-wise, how it can happen now”

Meanwhile House Majority Leader Eric Cantor said the chamber is scheduled to meet on December 30 for its first Sunday session in more than two years.

Unless the fiscal cliff issue resolved before December 31, experts believe that the automated kicking-in of spending cuts and tax hikes to the tune of $600 bn starting January 1 would trigger a recession and a financial calamity.

However, if a fiscal cliff deal is not reached in its entirety before December 31, at least a prequel deal is expected:

Obama had called on the Congress to extend the tax cuts of Bush-era on American households earning below the threshold of $250,000 and suspend the spending cuts: many believe that the spending cuts can make US much more vulnerable to security threats.

A typical American household earns $50,000 a year. If the automated tax hikes (along with spending cuts) are initiated, 2% pay roll tax cuts would be terminated overnight. Some 125 million households earning $50,000 a year would see pay being cut at least by $1000. This would be prevented, if the sense of Congress wills it.

Alternative Minimum Tax issue should also be addressed as per Obama, “so that the tax filing season can proceed without the administrative nightmare of retroactive adjustment.” NYT said.

Some 28 million US people earning between $100,000 and $500,000 a year will have to pay the alternative minimum tax in 2013 for the period of 2012. (The tax was actually targeted at multimillionaires who in turn outmaneuvered the system and managed to stay away from the ambit of tax). The 28 million have pegged their hopes on Congress exempting “them from the tax that they were never intended to pay.”; New York Times pitied.

Since either sides do not want to go off the cliff, chances are more that a prequel deal would be agreed upon. It would save the face of the leaders from both sides and may bring about some common ground from where further negotiations could be launched. Most importantly, it would avert a financial calamity by a big extent and help the markets trade wiith confidence.(rakesh@commodityonline.com)

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