Bush tax cuts: Two more years!

President Barack Obama said he would agree to sustain Bush-era tax cuts for high-income taxpayers in exchange for extending federal unemployment insurance and cutting the payroll tax by $120 billion for one year. Obama said he would accept lower rates on high earners' income, dividends, capital gains and multimillion-dollar estates for the next two years to break a stalemate over extending the Bush administration's tax cuts for middle-class taxpayers before Congress adjourns. The current tax rates, enacted in 2001 and 2003, are set to increase Dec. 31. Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday. He said he still believes that the nation can't afford to permanently extend the reduced top tax rates. “This compromise is an essential step on the road to recovery,” said Obama, who criticized Republicans for insisting on permanent tax cuts for the wealthiest Americans “regardless of the cost of impact on the deficit.” Obama spoke in Washington after a White House meeting with Democratic congressional leaders. They and the Republican leadership still have to sell the plan to their caucuses. Obama called it a “framework” for a deal. 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. Markets Rise Stocks rose, copper and gold climbed to all-time highs and Treasuries fell after Obama agreed to extend the tax cuts, offsetting concern that Europe's debt crisis will spread further. The Stoxx Europe 600 Index climbed 1.3 percent at 7:25 a.m. in London, while Standard & Poor's 500 Index futures added 0.9 percent. The yield on the 10-year Treasury advanced seven basis points to 2.99 percent. The Dollar Index fell 0.3 percent. Copper rallied as much as 2.8 percent, gold jumped 1 percent to $1,428.55 an ounce and oil rose to a 26-month high. An administration official said the president was happy with the agreement because it would give the economy a boost. 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 percent reduction in payroll taxes, among other items, the official said. Camp Comment 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. Representative Dave Camp of Michigan, who will become chairman of the tax-writing House Ways and Means Committee when Republicans take control of the chamber in January, welcomed Obama's announcement. “This framework will allow us to extend all current tax rates, and give economic recovery and job creation a chance,” Camp said in a statement. Some Concessions 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. “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.” Some lawmakers said they would take a stand now. “This is a very bad agreement,” Vermont Senator Bernie Sanders, an independent who caucuses with the Democrats, told MSNBC television. Sanders vowed to “do what I can” to block Senate passage. 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. “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.” ‘Cautiously Optimistic' 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. Vice President Joe Biden is scheduled to attend the Senate Democratic Caucus lunch. Mitch McConnell of Kentucky, the Senate Republican leader, 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.” 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. Payroll Tax 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. The 2 percent 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. 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. Estate Tax 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, two administration officials said on the conference call. 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. Obama also endorsed allowing a full deduction for equipment purchases that currently must be deducted over time. The proposal would accelerate $200 billion in tax savings for companies in the first year and benefit 1.5 million companies and several million individuals who run businesses, according to White House estimates. Total revenue lost from the so-called expensing proposal over 10 years would be $30 billion; companies taking the immediate deductions wouldn't be able to write off their expenses through depreciation in years to come. Negotiations The administration officials said some elements of the plan still have to be negotiated by Treasury Secretary Timothy Geithner, Budget Director Jack Lew, Camp and three other lawmakers. They include whether to renew dozens of expired or expiring tax provisions. Among them: The Build America Bond program, the fastest-growing segment of the $2.8 trillion municipal debt market. The subsidy, which expires Dec. 31, was created by President Barack Obama's 2009 economic-stimulus plan. More than $173.5 billion of the taxable securities have been sold, according to data compiled by Bloomberg. The U.S. pays 35 percent of the interest costs on the debt. A Senate bill would cut that rate to 32 percent. Republicans may oppose the measure. —Bloomberg News—