The US Senate has decided to approve a deal to avert general tax hikes and spending cuts known as the “fiscal cliff”.
The bill, which raises taxes for the wealthy, came after lengthy talks between Vice-President Joe Biden and Senate Republicans.
The House is due to consider it later. Spending cuts have been delayed for two months to allow a wider agreement.
Congress missed the deadline to pass a bill, but few effects will be felt as Tuesday is a US public holiday.
Tax cuts approved during the presidency of George W. Bush formally expired at midnight.
Without approval in the House, huge tax rises for virtually all working Americans will kick in automatically.
Analysts warned that if the full effects of the fiscal cliff were allowed to take hold, the resulting reduction in consumer spending could spark a new recession.
The compromise deal reached on Monday seeks to avoid this by extending the tax cuts for Americans earning under $400,000 – up from the $250,000 level Democrats had originally sought.
A huge spending cut that would see $1.2 trillion shorn from the federal budget over 10 years has been deferred for two months, allowing Congress and the White House to reopen negotiations.
The Senate approved the compromise bill by 89-8.
The US Senate has approved a deal to avert general tax hikes and spending cuts known as the fiscal cliff
“If we do nothing, the threat of a recession is very real,” Senate Majority Leader Harry Reid, a Democrat, said.
“Passing this agreement does not mean negotiations halt, far from it.”
In addition to the income tax rates and spending cuts, the package includes:
• Rises in inheritance taxes from 35% to 40% after the first $5m for an individual and $10m for a couple
• Rises in capital taxes – affecting some investment income – of up to 20%, but less than the 39.6% that would prevail without a deal
• One-year extension for unemployment benefits, affecting two million people
• Five-year extension for tax credits that help poorer and middle-class families
President Barack Obama welcomed the Senate vote.
“Leaders from both parties in the Senate came together to reach an agreement that passed with overwhelming bipartisan support today that protects 98% of Americans and 97% of small business owners from a middle class tax hike,” he said in a statement.
“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.”
Senate Minority Leader Mitch McConnell, a Republican, said: “It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort.”
Many of the Republicans who dominate the House dislike the deal and may stand on their principle.
Speaker John Boehner said the House would consider the deal but left open the possibility of amending the Senate bill – which would spark another round of legislation.
“Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members… have been able to review the legislation,” John Boehner and other House Republican leaders said in a statement.
The current House can legislate until Wednesday, when it is replaced by a new chamber chosen during last November’s election.
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Republicans have cancelled a tax vote in the US Congress, less than two weeks before a deadline for budget reform.
Republican House speaker John Boehner proposed the bill, which would have raised taxes on high earners. But right-leaning Republicans rejected it.
Analysts say the rejection has weakened John Boehner’s position in negotiations with the White House.
Politicians need to agree fiscal rules by January 1st 2013, or steep tax rises and deep spending cuts will take effect.
Analysts say the so-called fiscal cliff could take the US into recession.
Despite the failure of the vote, major stock markets were little changed, as most analysts had expected this to be a long, drawn out process. European markets were down in the first half hour of trading, but by less than 0.5%.
John Boehner said he had been unable to garner sufficient votes to secure passage of the bill.
Although it would have ensured a tax cut for 99.8% of Americans, it would have imposed a rise on those earning more than $1 million.
He said in a statement that the bill “did not have sufficient support from our members to pass”.
Shortly after, the White House said President Barack Obama would work with Congress.
The White House statement said it was “hopeful that we will be able to find a bipartisan solution quickly”.
Republicans have cancelled vote on John Boehner’s fiscal cliff Plan B, less than two weeks before a deadline for budget reform
Earlier on Thursday, the House narrowly passed a companion bill that would cut domestic spending while protecting the defence budget.
The House is controlled by the Republicans, but the Senate is Democrat-led.
John Boehner’s plan would have had little chance of passing a Senate vote.
Analysts say it was in effect an effort to tell the US public that the Republicans should not be blamed if a deal could not be reached.
But some believe that the White House has now been strengthened by John Boehner’s failure.
White House spokesman Jay Carney earlier said John Boehner’s plan was a “multi-day exercise in futility at a time when we do not have the luxury of exercises in futility”.
John Boehner announced the bill on Tuesday, saying he would bring forward a measure that extended Bush-era tax cuts for those earning less than $1 million per year – but would not address the automatic spending cuts.
On Wednesday, the Republican leadership added a companion bill that would replace the automatic cuts with a proposal to remove cuts from defence and government operating budgets. They would be offset by reductions elsewhere in the budget.
The proposal would cut food stamps, benefits for federal workers and some social services programmes.
Barack Obama had sought tax rises for the wealthy, but was pushing for a lower threshold of $400,000.
He also offered a change to the way Social Security cost of living adjustments are made for some recipients, cuts from government healthcare programmes and a two-year extension of the debt ceiling.
John Boehner’s office called the proposal “a step in the right direction” but not fully “balanced”.
Analysts have painted a grim picture of the consequences of going over the cliff, with some warning that the impact could push the US back into recession.
The Organization for Economic Co-operation and Development (OECD) said in its latest economic outlook that the recession from the cliff could become global.
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