Obama Confronts Democrats' Pushback Over Deal on Tax Cuts

By Ryan J. Donmoyer and Mike Dorning
Column appeared on Bloomberg.com, December 7, 2010

President Barack Obama confronted pushback from fellow Democrats today as he begins the job of selling his agreement with congressional Republicans to temporarily sustain all the Bush-era tax cuts.

After almost a week of negotiations between an administration team led by Treasury Secretary Timothy Geithner and budget director Jack Lew, Obama announced last night he’ll accept a deal that would extend current tax rates for high- income taxpayers for two more years in exchange for extending federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year.

While Republicans such as Senate Minority Leader Mitch McConnell welcomed the compromise, Democrats said they haven’t committed to the plan and party activists mounted campaigns to kill it. Vice President Joe Biden is being dispatched to the Senate Democratic Caucus lunch this afternoon to lobby lawmakers.

“House Democrats have not signed off on this deal,” Maryland Representative Chris Van Hollen, a member of the House Democratic leadership, said today on Bloomberg Television. “I have some serious reservations.”

Obama said he made the compromise to break the stalemate over taxes to ensure rates don’t rise for middle-income Americans when the current ones, enacted in 2001 and 2003, expire on Dec. 31. He said that while he still believes the nation can’t afford to permanently extend the reduced top tax rates, raising taxes for the rest of taxpayers would damage the fragile economic recovery.

‘Collateral Damage’

Without the deal, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday. He criticized Republicans for insisting on permanent tax cuts for the wealthiest Americans “regardless of the cost of impact on the deficit.”

In addition to preserving the status quo on Bush policies, the proposal creates more than $300 billion in new tax cuts for wage-earners, wealthy families, and corporations.

Stocks rose, copper and gold climbed to all-time highs and Treasuries fell after word of the agreement, offsetting concern that Europe’s debt crisis will spread further.

The Standard & Poor’s 500 Index jumped 0.8 percent to 1,233.10 at 9:57 a.m., reaching its highest levels since September 2008. The Nasdaq Composite Index rose 0.9 percent 2,617.71. The Dollar Index fell 0.3 percent. Copper rose to a 31-month high in New York and gold for delivery in February jumped to as much as a record $1,430.50 an ounce.

White House Meeting

Obama met yesterday afternoon at the White House meeting with Democratic congressional leaders to outline what he called a “framework” for compromise tax legislation.

Van Hollen characterized those discussions as “lively,” though “not overheated.”

Van Hollen said he understood that the president “doesn’t’ want to play Russian roulette” with the economy. Still, he said, “a number of us think there could have been a better result here.”

House Democrats will meet later today to air some of their concerns, he said. One of the sticking points is the provision that would set the top rate of the tax on estates at 35 percent, which applies after a $5 million tax allowance per individual.

“The question is, was that really necessary as part of this package,” Van Hollen said. “I’m not convinced it was.”

In a letter to House Speaker Nancy Pelosi of California circulated yesterday, Representative Peter Welch of Vermont and at least five other Democrats urged her not to agree to the administration’s deal.

Resistance

“We support extending tax cuts in full to 98 percent of American taxpayers, as the president initially proposed,” Welch wrote. “He should not back down. Nor should we.”

Jim Manley, a spokesman for Senate Majority Leader Harry Reid of Nevada, was noncommittal.

“Now that the president has outlined his proposal, Senator Reid plans on discussing it with his caucus tomorrow,” Manley said.

McConnell, of Kentucky, said in a statement that he was “cautiously optimistic” that congressional Democrats “will have the same openness to preventing tax hikes that the administration has already shown.”

An administration official said the president was happy with the agreement because it would give the economy a boost.

Unemployment Aid

Obama won his biggest prize: a 13-month extension of unemployment insurance, the official said, speaking on condition of anonymity. The White House also counted as a win an agreement from Republicans to renew a refundable child-care tax credit, the earned income tax credit, tuition tax credits and a 2 percentage point reduction in payroll taxes, among other items, the official said.

The compromise amounts to a couple hundred billion in tax cuts that no one thought possible just days ago, the official said, adding that the deal will play better across the country than in Washington, D.C.

The Office of Management and Budget said it doesn’t yet have an estimated cost estimate for the package, spokeswoman Meg Reilly said in an e-mail.

Lawrence Mishel, president of the Economic Policy Institute, a Washington group funded in part by labor unions, said Obama extracted some concessions from Republicans that may help the deal advance in Congress.

Future Fight

“Economically, if you were going to do a deal, I think this is better than expected and will provide some help to the economy, but we need a lot more help,” he said. “I think people generally wanted to have a fight to show who was for the rich people and who was for the rest of us. That fight now will take place in the 2012 election.”

If Congress agrees, the deal would leave in place the 10, 15, 25, 28, 33 and 35 percent marginal tax rates created in 2001. It would also preserve for two years the 15 percent tax rate on most capital gains and dividends, and would temporarily index the alternative minimum tax for inflation.

In addition, the plan outlined by Obama would extend aid for the long-term unemployed for an additional 13 months. To help spur hiring, the payroll tax -- which funds Social Security and Medicare -- would be cut by 2 percentage points during 2011.

The payroll tax cut would apply to all wage-earners, an administration official told reporters on a conference call. That would be an $800 savings for individuals with an income of $40,000. Those who earn salaries of more than $106,800 would save a maximum of $2,136. The proposal would cost the government $120 billion, another administration official said.

Payroll Taxes

The 2 percentage point cut represents a savings of about a third on the 6.2 percent share of the tax workers normally pay. Their employers get no benefit under the proposal.

The unemployment rate rose to a seven-month high of 9.8 percent in November as payroll growth slowed to 39,000 from 172,000, according to the Labor Department.

The compromise plan would set the estate tax at a top rate of 35 percent, which applies after a $5 million tax-free allowance per individual. That rate would be the lowest since 1931 --not counting 2010, when the rate was zero and replaced with a complicated capital gains tax that applies when inherited assets are sold.

Lee Farris, who tracks estate tax policy for the liberal advocacy group United for a Fair Economy in Boston, called Obama’s acceptance of the 35 percent rate “inconceivable.”

“A weaker estate tax, coupled with the extension of the Bush tax cuts for the wealthy, is only going to end in the richest 1 percent owning even more of our country’s wealth,” she said. (emphasis added)

Read the rest of this column on Bloomberg.com.