WASHINGTON — Congress agreed to a last-minute deal to increase taxes on high earners to avoid the “fiscal cliff” of broader tax hikes and spending cuts.
Under the new agreement, the tax rate for individuals with income of more than $400,000 and couples making more than $450,000 will increase to 39.6%, up from the current rate of 35%.
Of particular concern to business owners, the rate of taxes on inherited wealth — the estate tax — will increase to 40%, from 35%, but the threshold for estates that are exempt remains at $5 million, rather than reverting to the previous level of $3.5 million.
In addition, the payroll tax cut that finances Social Security that had been in effect for the last two years was allowed to expire. That tax, on the first $113,700 of income, will increase to 6.2%, from 4.2%.
Unemployment insurance was also extended for two years.
“The Administration and Congress did what was politically easy but will soon have to return to deal with issues that are economically critical if we are to sustain a growing and vibrant economy,” said Matthew Shay, president and chief executive officer, National Retail Federation, in a statement. “Congress and the White House still need to develop long-term plans dealing with tax reform and other fiscal issues. We have avoided the immediate crisis, but there’s much more to be done before our economy is fully restored.”
If tax hikes and spending cuts that make up the fiscal cliff had been allowed to go through, retail sales in 2013 would have been flat for the year, with negative growth in the first half of the year, according to an analysis conducted by NRF Chief Economist Jack Kleinhenz working with the economics firm Macroeconomic Advisors.
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