How Obama’s Tax Deal Is a Compromise of Details, Not Principles

Some Democrats say the president is compromising on his principles, but the tax deal is all about details.

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Nearly 10 years ago, President George W. Bush signed into legislation sweeping tax cuts for all federal income tax brackets, including various tax credits and estate tax exemptions. Many Americans saw an immediate tax savings, and now those tax cuts are set to expire on December 31, 2010—unless Congress votes to extend them. In most cases this would lead to a great debate between Republicans and Democrats, but instead the parties are negotiating a deal that extends the Bush tax cuts and satisfies everyone.

With an economy going nowhere and a high unemployment rate showing no signs of dropping, President Obama sees the need to naturally stimulate the economy. His previous economic stimulus tactics haven't worked, so he understands that he needs to extend the Bush tax cuts to organically put money back in the pockets of Americans. Last week, Obama and Vice President Biden came up with a plan that they thought would satisfy both Republicans and Democrats. However, House and Senate Democrats were originally furious over the compromise.

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Here are a few highlights from the deal:

  • All income tax cuts will be extended for two years, including the tax cuts for those making over $250,000 per year.
  • Estate tax exemptions of up to $10 million dollars will be extended.
  • Unemployment benefits will be extended for an additional year.
  • A tax holiday from social security tax will be implemented for a year.
  • A two-year extension of refundable tax credits from the 2009 stimulus package for college students and middle class workers.
  • Understanding the ideologies of Republicans and Democrats is a key factor in grasping why the Democrats were so outraged by this proposed tax cut deal.

    Many Democrats, including President Obama, stated on the election trail that Republicans cared only about saving money for the wealthiest Americans and were out of touch with the needs and struggles of middle-class American workers. They pointed to the Bush tax cuts of 2001 and 2003 as evidence of this, calling them a "tax cut for the rich." But this isn't necessarily true, as the tax cuts significantly decreased income taxes for all income tax brackets.

    On the other hand, Republicans were not happy with the Democrats' original tax-cut proposal, which was to extend only a portion of the Bush tax cuts, effectively increasing the taxes of those making over $250,000 and not extending the federal estate tax exemption. The ideology behind their disdain over this issue is that the economy will not be sufficiently stimulated if only a portion of Americans receive a tax cut.

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    President Obama did the right thing, and the compromise he came up with is likely the closest plan anyone will come up with that satisfies both Republicans and Democrats. The fact is we need this tax cut extension to go through. And leaving out the wealthiest Americans from a tax break is a mistake in a battered economy. This is especially true because many of those wealthy Americans are the ones who own businesses and employ the middle class. They're the ones who invest in other companies through various types of investments. They're also the ones who spend money on a lavish lifestyle, which fuels the economy and helps create new jobs.

    Obama is showing great leadership by coming up with a deal that is fair and has the potential to help stimulate the economy without printing new money. House and the Senate Democrats need to realize that President Obama is not compromising on principles in this instance, but rather details. In the Obama tax plan, the president promised that he would never raise taxes of those making less than $250,000. However, he never promised that he wouldn't lower taxes for those making over $250,000. So his tax-cut deal does not compromise the principles he ran on to win the presidential election. Instead it is merely a compromise in the details of the tax-cut plan.

    Erik Folgate is a top contributor for the Money Crashers personal finance blog, where he discusses various money topics like banking, getting out of debt, smart spending, and improving overall "financial fitness."