Fiscal Cliff: Deal reached on taxes but not on cuts

WASHINGTON -- The White House and congressional leaders reached a deal Monday to avert sweeping tax increases set to start today.

The bargain would extend permanently most of the Bush-era tax cuts set to expire at 12:01 a.m. today, while allowing them to expire and taxes to increase on higher incomes. It would allow tax increases on every U.S. worker, however, because it would not extend the temporary cut in the payroll tax that finances Social Security.

The parties missed a New Year's Eve deadline to get legislation through Congress before the tax cuts expired at the end of the year. But action by the House and Senate by Wednesday, if they approve the deal, was expected to come in time to stop the broad income tax increases that were to go into effect today.

With labor unions and liberal groups lobbying against the deal late Monday, Vice President Joe Biden went to Capitol Hill to meet with Senate Democrats, presumably to press for approval. The Democratic-controlled Senate had hoped to vote Monday night; the Republican-run House will return today, New Year's Day, for the first time in decades.

Senate Minority Leader Mitch McConnell, R-Ky., urged his colleagues to pass the tax agreement immediately and debate spending cuts in coming months.

"We will continue to work on finding smarter ways to cut spending, but let's not let that hold up protecting Americans from the tax hike," McConnell said. "We can do this. We must do this."

The spending cuts, known as sequestration, would slash defense and domestic spending starting Wednesday.

The tentative bargain includes significant concessions by Democrats and Republicans, though perhaps more for the GOP, which had been against any tax increase. It would extend permanently most of the Bush-era tax cuts, while allowing them to expire on higher incomes, individuals who make $400,000 and families who make $450,000.

Paychecks, however, would shrink for every U.S. worker because a temporary cut in the payroll tax, enacted in 2011 to boost the economy, would end.

The income for individuals earning more than $250,000 and couples earning more than $300,000 would still be taxed more because some of the value of their exemptions and itemized deductions would be phased out.

The scaled-back package, which would raise about $600 billion in new revenue over the next decade from the wealthiest 2 percent of households, also would:

Extend unemployment benefits for 2 million Americans.

Prevent about 30 million taxpayers from having to pay the alternative minimum tax.

Keep Medicare payments to doctors at the current rate.

Extend tax credits for children and college tuition.

Provide tax breaks to clean-energy companies.

Raise the estate tax, but significantly less than Democrats had wanted. The value of estates over $5 million would be taxed at 40 percent, up from 35 percent.

Taxes on capital gains and dividends would remain the same, 15 percent, for most taxpayers, but they would climb to 20 percent for top earners.