Tax Deal Offers Relief, and One Surprise

The compromise agreement between the Obama administration and Congressional Republicans that seeks to extend the Bush-era tax cuts for two more years was greeted Tuesday by many with relief and a sense of inevitability.

“I think a two year extension of the Bush tax cuts is a net plus. Not having my taxes go up -- that makes me happy,” said Bernard Kiely, an accountant in Morristown, N.J.

“I pretty much expected what happened,” Kiely added. “I’m a small business owner and if you raise taxes on small business owners they are less inclined to hire.”

President Obama, in a move that continues to roil politics in Washington, D.C., reached agreement with Republican leaders on a broad package of tax measures that staves off a tax increase for nearly every American at least through 2012.

The deal extends Bush-era income tax cuts for two years, cuts employee payroll taxes for one year and offers tax breaks to businesses for investment purposes.

Obama and many Democrats had argued that the tax cuts should not be extended to the wealthiest tax payers, or those families making more than $250,000, and some powerful elements of the Democratic Party on Tuesday were critical of the deal.

Indeed, House Speaker Nancy Pelosi and Majority Leader Steny Hoyer suggested that the package may not glide easily to passage.

The news initially gave stocks a jolt, but enthusiasm faded a bit as the session moved on and Democratic resistance grew.

Obama acknowledged his own party’s disappointment with the deal. “I know there’s some people in my own party, and in the other party, who would rather prolong this battle." he said in brief comments. “But I’m not willing to let working families across this country become collateral damage for political warfare here in Washington."

Outside of Washington, some form of compromise was widely expected after months of contentious debate and a firm Dec. 31 deadline rapidly approaching. If no action is taken, tax rates on virtually every American who pay income taxes would rise on Jan. 1, a situation widely seen as unhelpful as the U.S. struggles to recover from the worst economic downturn since the Great Depression.

Politicians from both parties would undoubtedly have come under sharp criticism if no deal was reached.

“This isn’t a surprise at all,” said Chris Ciovacco, president of Ciovacco Capital Management in Atlanta. The only element that surprised Ciovacco was the payroll tax reduction, which reduced the rate from 6.2% to 4.2% and would provide an employee making $40,000 a year with an extra $800 in spending money.

While Ciovacco praised the overall deal, he said the payroll tax reduction only helps consumers and described it as “a short-term stimulus.”

“From a hiring perspective it was disappointing,” he said. “It benefits the end worker rather than the employer. So the benefit shows up in our paychecks, but it doesn’t provide incentives for businesses to hire and that’s shortsighted.”

“But that’s the only negative thing I saw,” he added.

Meanwhile, the deal was praised by many as a sign that Obama will be more willing to work with Republicans during the next two years of his presidency and as he undoubtedly gears up for a re-election bid.

In addition to allowing the tax cuts to go forward even for the wealthiest, Obama acceded to Republican demands on the federal estate tax, by agreeing to a maximum 35% tax with a $5 million individual exemption level.

The president acknowledged he found some aspects of the compromise distasteful.

"I have no doubt that everyone will find something in this compromise that they don't like," Obama said. "In fact, there are things in here that I don't like -- namely the extension of the tax cuts for the wealthiest Americans and the wealthiest estates. But these tax cuts will expire in two years."

Nevertheless, a deal was necessary, he said.

"We cannot play politics at a time when the American people are looking for us to solve problems," Obama said. "I am confident ultimately that Congress is going to do the right thing."

That remains to be seen.

Extending all the tax cuts for two years would cost $501 billion, according to the Congressional Budget Office, at a time when Obama is under pressure to cut the $1.3 trillion budget deficit. The CBO said renewing the rates will boost the economy in the short term but be harmful in the long term.

Obama's concessions reflected a new political reality. Republicans were emboldened after scoring big gains in the November 2 elections, which were seen as a verdict on Obama's handling of the economy and stubbornly high unemployment.