Obama reaches tax cut compromise

In response to the recent Republican takeover of the U.S. House of Representatives, President Barack Obama was compelled to compromise on one of his key campaign pledges, a compromise that could have a large effect on the world’s biggest economy. The compromise centred on tax rates for Americans making more than US$ 200,000 per year, which were cut during the Bush administration. During the 2008 presidential campaign, Barack Obama pledged to maintain all of the tax cuts passed by George W. Bush, except for those that went to individuals making over $200,000.

The Republican Party’s official position was to maintain all of the tax cuts, including the so-called “tax cuts for the rich.” The argument by the Republicans was that with the U.S. economy still growing slowly, any tax increase could threaten to derail the recovery. President Obama countered with the argument that the economy grew strongly long before the Bush tax cuts, and that an increase in taxes for those of high income levels could help close America’s more than $1 trillion budget gap.

All of the tax cuts were set to expire on Jan. 1, 2011, which meant that if Congress did not act, taxes would rise for every American. Unemployment benefits were also set to expire, which would have left countless individuals with no source of income while they search for a new job. It was in Obama’s interest to come to an agreement as soon as possible, since the Republicans will officially takeover the Congress in January, and his bargaining position would have been weakened.

The resulting agreement appears to demonstrate that bipartisanship is possible in the United States and that there is some political common ground on economic issues. The two most focused on aspects of the compromise are the extension of all tax cuts, for all income levels until 2012, and the extension of unemployment benefits for one year. Obama conceded on the extension of the tax cuts for individuals of higher income levels, and Republicans conceded on the extension of unemployment benefits.

In addition to these two aspects of the compromise, there are numerous other tax reductions and tax credits. Payroll taxes, the taxes paid by workers into the social security system, will decline from 6.2 per cent to 4.2 per cent. A tuition credit of $2,500 for students will be extended for an additional two years. Under the agreement, U.S. businesses will be able to write-off all investments made in 2011, which will result in a corporate tax cut of around $100 billion.

One of the more controversial parts of the compromise, especially among some on the left of the political spectrum in the U.S., is cuts to the estate tax. The estate tax is the tax applied on the transfer of the wealth of a deceased person, most often conducted via a will. Under legislation passed during the Bush Administration, the estate tax was reduced to zero per cent in 2010. Obama had favoured raising the estate tax back to 45 per cent, with an exemption for estates of up to $3.5 million. The final agreement, however, features an estate tax of 35 per cent, with an exemption for estates of up to $5 million.

As mentioned before, there are aspects of this compromise that will be disliked by various groups. That is an essential part of compromise and is often necessary to find a realistic, middle path. It is essential that America is able to transcend its political divisions when it comes to the economy, as their actions have a ripple effect throughout the entire world, especially here in Canada, which depends on the United States for about 75 per cent of our export economy.