U.S. President Barack Obama last week struck a controversial compromise with Republicans on the expiring Bush tax cuts in an attempt to beat the Dec. 31 deadline – and the big tax increase facing American individuals and businesses.
Pundits immediately questioned 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 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 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.
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 said President Obama gave in to Republicans too easily and hurt party unity.
Democrats also criticized the weak proposed estate tax revision, 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.
Still, 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."
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, predicting gross domestic product (GDP) growth of 4% next year and a lower unemployment rate of 8.5%.
This prompted last 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?
The reader response was overwhelming, with over 70 readers writing in to share their thoughts and concerns on U.S. tax policy.
While many felt that President Obama's proposal was a political decision to appease Republicans and voters for a shot at re-election, others also felt his concession was disloyal to his supporters.
Most readers wrote passionately against the failure to let tax cuts expire for the wealthiest taxpayers and expressed concern over the direction of a country saddled with trillions of dollars in debt.
Following is a collection of those responses.
And the Rich Get Richer…
Some of the most egregious "tax breaks" that should have been stopped are the hedge fund managers and their unbelievable payouts being taxed at only 15%! Their huge salaries and the money they make for their privileged clients will only be reinvested to make them more money to be taxed at 15%.
So much for stimulating job growth or reducing the debt.
The congressmen of both national parties have "sold out" the American people – rich or not – in deliberately avoiding this ultra distortion of the tax code.
– Jim S.
To exempt the super rich from a tax increase is a real travesty! What a trade-off: The unemployed will get to eat rice and beans with their tax cuts extension, while the rich get to buy more fancy homes, cars, boats, or whatever. Is this a great country or what?!
Maybe the worst of the "in your face" decisions is to add another $1 trillion to the national debt. The economic and political system desperately needs structural changes if this once great country is to be saved.
– Don L.
Why Did Republicans Fight?
I am confused as to why the Republicans would go to the mat on extending the current tax rates. Their position is crystal clear with the electorate. If they are so convinced that raising taxes would smother the economy, why wouldn't they let President Obama finish his political suicide?
Let's have a full-blown two-year test run of Keynesianism, and take a look at the results.
– Darren H.
I think President Obama wants to get re-elected in 2012 and doesn't give a hoot about America.
It would have been better for Republicans to hold their ground on not making any tax increase with no earmarks and no welfare given out and let the Democrats cry like a babies.
– Melinda O.
Tax Brackets Need a Shift
President Obama should have at least gotten a deal where the taxes for those making more than $1 million would go up to the old rate. Even better would be another tax bracket where those making over $5 million would have to pay 50%.
Back in the 1960s when the top tax bracket paid over 70%, that bracket was at $400,000 – which is equivalent to over $4 million in today's dollars. Why should the last tax bracket be $250,000? Why not have one at $1 million and $4 million?
– Fred U.
I really believe that the Republicans would have agreed to an exemption up to $2 – $3 million. They would have appeared somewhat victorious, and not alienated 75% of the electorate that were against the unlimited exemption for the very wealthy.
As an Independent voter with a history of voting for either party for five decades, the Republican stance smacks of pure greed, benefiting neither economy nor party. The rationale for this stance escapes me. The fact that President Obama agreed to what he did is either a shrewd move that will play out in the future, or he is simply a weak negotiator (that would be of great concern for me and my country).
– Jim S.
The current tax package may be just what the American people think they want, and what President Obama sees as the best possible deal he can get for them at this political moment, but it will only lead to an even bigger financial collapse than we experienced in 2008, and in a much shorter time frame (look how scared the bond market is). America cannot afford this.
The notion that wealthy people will create jobs with their piles of cash has been disproved over and over again. What makes anyone think that the outcome of these cuts will be any different from President Bush's version? That's the definition of insanity. In every era wealthy people say as often and as loudly as possible if you take away some of our money, everyone will suffer. Well, everyone will suffer, but not in an organized, strategic way.
We need to have a reasonable level of belt-tightening for everyone and reasonable levels of investment in young entrepreneurs and infrastructure, not handouts to the wealthiest Americans who have no incentive to do anything other than stockpile their wealth.
And get Goldman, Morgan Stanley, et al away from the Fed trough. Nothing screams unfair advantage more than this travesty, except maybe high-frequency trading.
– Ronnie B.
A Sly Political Maneuver
In Congress, as in nature, to every action there is a reaction. The president is very sly. His decision to compromise with the Republicans on this issue is an attempt to control the reaction.
There is no question that the bill will stimulate the economy. Businesses will not have to wonder what is going to happen. They will be able to move forward. Workers will have a little more money in their paychecks. The social and business climate will become more comfortable. The Democrats resisting his decision will over time come to realize that the people are happier and will credit the Democrats for the improvements. That will be good for them come election time.
Republicans will have to continue to remind the people that it was indeed their actions that created the scenario that brought about the improvements in the economy. Heaven help us if the president's plan works. A second term under the present leadership is unacceptable. We've changed enough as it is.
– Michael G.
Time to Stop Spending
I can't see how any deal that increases the federal deficit by nearly $1 trillion can be good for the country. That is, if the bill is passed as it currently stands, the federal deficit for 2011 will be closer to $2.5 trillion than the $1.5 trillion that was the previous estimate.
A deficit of this size is like drinking sweetened poison. It may taste good up front, but it is still lethal. And what do we do if the economy is still dragging along (or worse) a year from now?
As a nation, we are already on the fast track to bankruptcy, and at this point I don't see any way to avoid it, but just because we are rolling toward a cliff, and the brakes have failed, is no reason to step on the accelerator. Separately, I can see why each part of the bill has advocates that are pushing for it, but the composite will not be beneficial.
Personally, I hope the compromise bill fails to pass. Ending the Bush tax cuts for everyone would be painful, and would probably not do the economy any good, but dumping an extra $1 trillion on the national credit card, on top of what we are already borrowing, will be catastrophic. Deficits do matter, especially when they become unsustainable.
– Gordon F.
Was There Any Other Option?
President Obama did the right thing. Cutting the taxes for the top 2% who are unlikely to spend it and stimulate the economy was wrong, but the other stimulus actions were right for the economy now.
The longer-term challenge remains to find a steady way to bring the deficit down. His commission has provided a base of good ideas. Will President Obama and Congress have the courage to pursue? It takes two hands to clap.
– Bobby A.
I am conflicted. I think that all of the Bush tax cuts should be permitted to expire as they never should have been enacted. If they worked then we never should have been in the dire economic straits we are in; if they will work by continuing them then they surely would have worked by having been in effect for the past nine years. There is no justification for continuing them for the richest 1% or 2% of the population; it is pure baloney that they will create jobs.
On the other hand, letting them expire at this time would afflict entirely to much pain upon the unemployed and others hurting because of the bad economy created by Republicans who appear ready to inflict more pain if necessary in order to get their way.
It would only be fair if they were punished by the electorate for their obstructive behavior, but they were not, and they succeeded in getting the Democrats blamed for what they did. There is nothing these politicians can do at this point to correct that and it would not be good government to let so many suffer just to prove a point. There is not going to be a way to get additional stimulus passed with the Republicans taking over the House next month. They will be able to block all new initiatives. At this point it would really hurt Obama to have his own party turn on him. That in turn will hurt the Democrats overall, leading a worse disaster in 2012 and handing the Republicans an even bigger victory.
– James L.
[Editor's Note: Thanks to all who responded to last week's "Question of the Week" regarding President Obama's tax proposal.
Be sure to answer next week's question about the U.S. healthcare law: Should the U.S. government require everyone to buy health insurance? Is it constitutional, or does it extend Congress' authority too far over Americans' decision-making? Would it truly help "fix" the U.S. healthcare system, or is it an abuse of government power?
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Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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