Obama Announces Possible Compromise On Tax Cuts

by Mike Godfrey, Tax-News.com, Washington

08 December 2010

In a statement from the White House, the United States President Barack Obama has announced the framework for a bipartisan agreement between Democrats and Republicans over the renewal of the Bush tax cuts.

During this lame duck session of Congress, before the Republicans become the majority party in the House after the mid-term elections, the main point of contention between the Democrat and Republican parties has been whether it will be possible to extend some or all of the individual tax cuts enacted under the presidency of George W. Bush, which are due to expire at the end of this year.

While Republicans have proposed extending the tax cuts in their entirety, since they believe that nobody, and particularly small business owners, should be subject to higher taxes as the pace of the economic recovery is still uncertain, both President Obama and Democrats have insisted that Congress should only extend the Bush tax cuts for those taxpayers making less than USD250,000 a year, due to the high USD700bn fiscal cost entailed in their extension for those earning above that amount.

Despite the fact that negotiations were being held to discuss the possibility of common ground between the two sides, Democrats in the US House of Representatives went ahead and voted through their version of extending part of the Bush tax cuts on December 2. This provoked the expected extremely negative reaction from Republicans in both Houses, and the non-passage of the proposal in the Senate.

However, President Obama has now proposed a compromise which had been presaged over the last few weeks – that all of the Bush tax cuts will be extended for two years, including those for the wealthiest families.

In addition, he proposed that “in exchange for a temporary extension of the tax cuts for the wealthiest Americans, we will be able to protect key tax cuts for working families - the Earned Income Tax Credit that helps families climb out of poverty; the Child Tax Credit that makes sure families don’t see their taxes jump up to USD1,000 for every child; and the American Opportunity Tax Credit that ensures over 8m students and their families don’t suddenly see the cost of college shooting up.”

Under the agreement, unemployment insurance, which is also due to expire at the end of the year, would be extended for a further another 13 months, and there would be a 2% employee payroll tax cut for workers in 2011. The latter, he said, is the “tax cut that economists across the political spectrum agree is one of the most powerful things we can do to create jobs and boost economic growth.”

Finally, President Obama added that incentives would be provided “for businesses to invest and create jobs by allowing them to completely write off their investments next year. This is something identified back in September as a way to help American businesses create jobs.” While “Republicans have asked for more generous treatment of the estate tax than I think is wise or warranted,” he disclosed, “we have insisted that that will be temporary.”

In a first reply to the President's proposals, the Republican leader in the Senate, Mitch McConnell adopted a positive tone, saying that he appreciated “the determined efforts of the President and Vice President in working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth. Their efforts reflect a growing bipartisan belief that a new direction is needed if we are to revive the economy and help put millions of Americans back to work.”

He confirmed that “Members of the Senate and House will review this bipartisan agreement, but I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown."

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