Bush Tax Cut Deal: Obama Extends Cuts, Unemployment Benefits

Bipartisan agreement would keep tax cuts in place for two years—at expense of budget deficit

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President Barack Obama said in a speech Monday night that he will go along with Republican demands for an extension of the Bush tax cuts in exchange for a 13-month extension of unemployment insurance for the long-term jobless.

The bipartisan agreement, which will make the U.S. budget deficit deeper, will allow Americans at all income levels over the next two years to keep their tax cuts. In exchange for an extension of the tax cuts for the wealthiest Americans, the middle class will continue to benefit from the earned income tax credit, the child tax credit and the American opportunity tax credit that covers college students and their families.

In a 10-minute statement on tax cuts and unemployment benefits, Obama said that he “completely disagreed” with Republicans’ desire to make permanent the tax cuts for the wealthiest 2% of Americans, and he insisted that the Bush tax cuts would not be made permanent. But he was willing to go along with a compromise that helped working families, he said.

“Allowing taxes to go up on all Americans would have raised taxes by $3,000 for a typical American family. And that could cost our economy well over a million jobs. At the same time, I’m not about to add $700 billion to our deficit by allowing a permanent extension of the tax cuts for the wealthiest Americans,” Obama said.

Congressional Democrats, who still maintain large majorities, have not yet agreed to the compromise.

Economists said the bipartisan agreement comes at the expense of efforts to reduce the nation’s budget deficit.

“Essentially it was a compromise of convenience for both sides,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. “Somebody had to say that the economy couldn’t be held hostage to political intransigence, so Obama took the high ground publicly. If Obama simply said, 'no, upper-income households can’t get a tax break; if you want to give a tax break to everybody and cut off unemployment insurance to 2 million people, go to it,' would the Republicans have blinked? We’ll never know.He wasn’t willing to take the chance that they wouldn’t blink. What was very clear was that when push came to shove, the budget deficit is largely irrelevant to everybody in Washington.”

Raymond James Chief Economist Scott Brown said the tax agreement isn’t a huge positive for GDP growth, but it would help prevent the economy from getting weaker during the next few quarters.

“It’s good news, but not great news in terms of the pace of the economic recovery,” Brown said. “It does relieve some level of uncertainty. Taxes are the cloud that has been hanging over investors’ heads for awhile. The consensus had been leaning toward some extension of most of the tax cuts, so relative to expectations it’s not a huge positive, but it is a positive.”

There’s plenty of excess capacity in the economy now, so efforts to encourage more investment won’t provide “a whole lot of bang for the buck,” Brown asserted. “The tax breaks themselves don’t really do a lot because this really isn’t a supply-side recession; it’s a demand-side recession.”

As for the budget deficit, he said it will be bigger in the short term, but that it isn’t much cause for worry. “When coming out of a recession, you want to be running large deficits,” Brown said.

Obama Tax Plan Highlights

Cost: Obama’s tax package would cost about $900 billion over the next two years. The President’s proposal would fund the tax cuts entirely by adding to the national debt.

Jobs Creation: Incentives for businesses to invest and create jobs by allowing them to write off their investments in 2011.

Tax Breaks for Wealthy Americans: Extension of the income tax rates on income above $250,000 for couples and $200,000 for individuals. Also, the federal estate tax would set an exemption of $5 million per person and a maximum rate of 35%.

Tax Breaks for the Middle Class: All wage earners would get a 6.2% reduction in the Social Security payroll tax—a break of two percentage points—for one year. For example, a family that earns $50,000 annually would see a savings of $1,000. Workers paying the maximum tax of $6,622 on income of $106,800 or more would save $2,136.

Other Tax Breaks: The top 15% rate on capital gains and dividends would stay in place for two years, while the alternative minimum tax would be adjusted so that as many as 21 million households would not be affected.

Extension of Unemployment Benefits: Two million jobless Americans will see unemployment insurance extended for another 13 months.

Read an analysis about Obama's compromise with Republicans at AdvisorOne.com.

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