Republicans immediately turned to their next battle — a bid to use the need to raise the nation's $16.4 trillion debt ceiling to force Obama to accept cuts in entitlement programs such as Medicare. Congress must act as early as mid-February to prevent a default and the dispute may reprise a similar 2011 episode that led to a downgrade of the U.S. credit rating.

“Without meaningful reform of entitlements, real spending controls, and a fairer, cleaner tax code, our debt will continue to grow, and our economy will continue to stumble,” Boehner said in a statement after the vote.

Obama said he's “very open to compromise.” Medicare spending can be reduced, he said, yet “we can't simply cut our way to prosperity.”

Futures on the Standard & Poor's 500 Index expiring in March added 1.6 percent to 1,442.4 at 7:23 a.m. in New York. The equity benchmark surged 1.7 percent on Dec. 31, the biggest rally on the final day of a year since 1974, as Republican and Democratic lawmakers made last-minute concessions to finalize the deal. Dow Jones Industrial Average futures soared 168 points, or 1.3 percent, to 13,200 at 7:23 a.m. The benchmark 10- year yield for Treasury bonds rose seven basis points, or 0.07 percentage points, to 1.83 percent at 7:33 a.m. in New York.

Payroll Taxes

The largest economic impact of the budget accord will come from ending a two-percentage-point payroll tax cut, a move that will shrink paychecks for U.S. workers immediately even as most income tax cuts that expired Dec. 31 are being extended permanently.

The payroll cut's lapse will pull more than $100 billion out of the economy in 2013 and is the primary reason why 77.1 percent of U.S. households will face higher taxes this year, according to the nonpartisan Tax Policy Center in Washington.

The Republican-controlled House yesterday almost unraveled a bipartisan agreement brokered over the waning days of 2012 by Vice President Joe Biden and Mitch McConnell of Kentucky, the Senate Republican leader. The Senate passed that bill 89-8 in the first hours of Jan. 1. In last night's House vote, 85 Republicans and 172 Democrats voted for the measure, while 16 Democrats and 151 Republicans opposed it.

Compared with continuing 2012 policies, the agreement would increase taxes by $620 billion over the next decade, according to the White House. The federal budget will be $4 trillion bigger than projected had all the scheduled tax boosts been retained.

Republicans claimed a victory because the bill ends the temporary nature of most of the tax cuts that President George W. Bush campaigned on in 2000 and were scheduled to lapse at the end of 2010 and then again in 2012.

“We're making permanent tax policies Republicans originally crafted,” said Representative Dave Camp, a Michigan Republican and the chairman of the tax-writing Ways and Means Committee.

In addition to tax increases on top earners, the bill extends expanded unemployment benefits and continues refundable tax credits for low-income families and college students. It would also delay by two months automatic cuts scheduled to start this month, offsetting the $24 billion cost with a blend of additional revenue and spending reductions, half of which would come from defense.

'More Spending'

“It's unbelievable that what you see in there is more spending as opposed to less spending,” said Representative Rob Woodall, a Georgia Republican, about the Senate-passed bill.

Boehner put the bipartisan Senate compromise to an up-or- down vote last night after it became clear that he couldn't add spending cuts with Republican votes alone, especially with fewer than two days before the new Congress is sworn in.

Yesterday's episode demonstrated again the fractiousness of House Republicans, who passed bills in 2012 that would extend the expiring tax cuts for all income levels and replace the automatic spending cuts with other policies.

They eventually ceded control of the fiscal-cliff debate to the administration and the Senate. Boehner couldn't reach an agreement with Obama, and he couldn't get House Republicans to back a plan that set the threshold for tax increases at $1 million in income.

Instead, at the last minute, he was forced to accept a deal that contained few of the Republican priorities he could have gotten by accepting what Obama was offering on Dec. 17.

Boehner's recent difficulty in getting his members to follow his recommendations “all rolls off his back” because “he feels pretty confident about his leadership, about the strength of his leadership,” said Florida Republican Rich Nugent, a first-year House member.

Boehner isn't “looking over his back and worried about it, at least he doesn't exhibit that to us,” Nugent said.

Nor should Boehner be worried about challenges to his speakership, said Nugent, a former sheriff.

“Having been a chief executive, there's always people who agree and disagree with your leadership,” he said.

The bill would reinstate tax cuts that expired Dec. 31 on taxable income of individuals up to $400,000 and of married couples of up to $450,000, leaving those top earners with a marginal tax rate of 39.6 percent, up from 35 percent last year.

Carried Interest

Those same households would pay higher tax rates on their dividends and capital gains, including private-equity managers' carried-interest income. The top rate will go to 23.8 percent, including taxes from the 2010 health-care law that took effect yesterday.

Many households with incomes above $500,000 won't face the higher rates at all, because deductions are subtracted from gross income before the rates are assessed.

Limits on itemized deductions and personal exemptions will also return, starting at $250,000 of income for individuals and $300,000 for married couples.

The deal would set the top estate-tax rate at 40 percent, splitting the difference between the parties' positions. The per-person exemption will be more than $5 million and indexed for inflation.

The burden of higher taxes will fall hardest on the top 1 percent and particularly on the top 0.1 percent of taxpayers. Those making more than $2.7 million will pay an average of $443,910 more in 2013, or 26 percent of the additional burden, according to the Tax Policy Center. Households with income between $500,000 and $1 million will pay an average of $14,812 more.

Miscellaneous tax breaks will get extended through 2013, including the production tax credit for wind energy and the tax credit for corporate research.

The boundaries of the fiscal debate have shifted repeatedly since Congress began focusing on deficit reduction in 2010.

Lawmakers missed an opportunity to use the fiscal cliff they created to force themselves to act, said Alan Simpson and Erskine Bowles, the co-chairmen of Obama's 2010 fiscal panel.

“Even after taking the country to the brink of economic disaster, Washington still could not forge a common-sense bipartisan consensus on a plan that stabilizes the debt,” they said in a statement.

Democrats Recover

What's happening instead is deficit reduction achieved in fits and starts. Democrats see a multi-stage game where they lost badly in 2011 and have now recovered their footing to insist on pairing tax increases with spending cuts.

In 2011, using the debt ceiling as leverage, Republicans got Obama to agree to more than $1 trillion in spending cuts plus another $1.2 trillion still set to start this year.

A 2011 deficit-reduction supercommittee deadlocked, pushing the issue into the 2012 election. Democrats were able to prevail only after Obama won a second term campaigning on tax increases, while Democrats gained seats in the House and Senate.

Republicans, particularly in the House, want to insist on spending cuts at every turn. Although they failed in this round, they drove that argument in last year's debt-ceiling fight, and they will replay it in the next few weeks.

The U.S. hit the debt limit Dec. 31 and the Treasury Department began employing so-called extraordinary measures to finance about $200 billion in deficits in 2013.

A debt limit increase will be needed as early as mid- February, according to the Congressional Budget Office, and the automatic spending cuts will start taking effect March 1.

Last night Obama said he won't “have another debate with this Congress over whether or not they should pay the bills they've already racked up.”

Republicans want to replay their demand that debt limit increases be matched dollar-for-dollar with spending cuts.

Obama said he wants future deficit-reduction deals to feature a “balanced” approach that includes spending cuts and further tax increases.

Bloomberg News

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