For months now, U.S. President Barack Obama watched as the expiration date for the Bush tax cuts drew closer and closer – with no signs of compromise among Congressional Republicans.
So in an attempt to beat the Dec. 31 deadline – and the big tax increase facing American individuals and businesses – President Obama on Monday struck a controversial compromise with Republicans.
Pundits are now questioning his call. Did President Obama cave to pressure, or did he pull off a sly political coup? Will this decision aid a still-struggling U.S. recovery, or will it add to the mountain of existing U.S. debt and stick future generations with the tab?
Needless to say, the deal has fired up tempers on both sides of the political aisle.
President Obama's outlined tax deal includes a concession to Republicans with a two-year extension on all Bush tax cuts. This goes against the president's seemingly steadfast opposition of continued tax breaks for individuals earning over $200,000 and families over $250,000. But with a rapidly approaching deadline, President Obama said he feared dragging out the debate would result in a stalemate, allowing the tax cuts to expire on Dec. 31 for all taxpayers.
"It's not perfect, but this compromise is an essential step on the road to recovery," said President Obama. "I am not willing to let working families across this country become collateral damage for political warfare here in Washington."
While the surprising agreement with Republicans brings the country a step closer to resolving the great Bush tax cuts battle, it infuriated some Democrats. They plan to fight hard against the proposed solution, saying President Obama gave in too easily to Republicans and hurt party unity.
Democrats also feel the proposed estate tax revision is too weak, taxing 35% of estates totaling over $5 million.
President Obama was able to negotiate a 13-month extension of long-term unemployment benefits, a one-year reduction in the payroll tax to 4.2% from 6.2%, a childcare tax credit, tuition credit and business tax breaks.
But many thought President Obama would never accede to the Republican demand to continue tax cuts for the richest 2% of Americans.
"Everything President Obama has done has signaled weakness and has sent a signal to Republicans that if they block tax cuts long enough, at the end of the day he will pass whatever comes across his desk," said Adam Green, an official with the Progressive Change Campaign Committee. "That is not how you negotiate."
Democrats also argue that if they now prevent the proposal's approval, they will be blamed for expiring tax cuts, when the Republicans could have allowed a deal that removed breaks for the country's richest taxpayers.
"The facts of the matter are the Republicans have run circles around us on messaging recently," former Rep. Martin Frost, D-TX, told NPR. "The best the president can do is say, ‘We did not harm; we did not make the economy worse.'"
Experts estimate the bill will cost $700 billion to $800 billion, roughly equal to the $787 billion stimulus package that the Obama administration signed in 2009. And this new deal will add significantly to a U.S. deficit that's already estimated at $1.3 trillion.
But on the flip side, some economists predict the tax deal will provide a much-needed economic stimulus.
"The proposed temporary tax cuts and spending increases will provide a substantial boost to growth in 2011," said analyst Mark Zandi from Moody's Analytics. "Instead of another year expanding at no more than the U.S. economy's potential growth rate, real [gross domestic product] GDP growth will accelerate to 4%, job gains will pick up to 2.8 million, and the unemployment rate will decline to around 8.5% by year's end."
This brings us to next week's Money Morning "Question of the Week: How do you feel about President Obama's proposed tax deal? Was it a shrewd maneuver, or did he cave to Congressional Republicans? Will it help or hurt the U.S. economy? How will it affect you and what – if anything – would you like to see changed in the proposed tax bill?
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News and Related Story Links:
- Money Morning News Archive:
Bush Tax Cuts Stories
- The New York Times:
Tax Deal Suggests New Path for Obama
- The Wall Street Journal:
Deal Struck on Tax Package
Democrats Frustrated Over Obama Tax Deal With GOP
- Money Morning News Archive:
Question of the Week Feature