Obama Says Tax-Cut Deal Will Make `Real Difference' as Some Democrats Balk

President Barack Obama defended the tax-cut deal he reached with Republican leaders as a pragmatic compromise grounded in the realities of families who otherwise could have seen their taxes rise or jobless benefits halted.

Obama, confronting complaints from Democrats in Congress that he gave too much ground by keeping lower rates for the wealthiest Americans for two more years, made no apologies. He said he was unwilling to risk a broad tax increase on Jan. 1 that would have made middle-class families and the economic recovery “collateral damage” in “a political fight.”

“This isn’t an abstract debate,” Obama said at a news conference yesterday. “This is real money, for real people, that will make a real difference in the lives of the folks who sent us here.”

He said he’d fight to let the tax cuts for the highest- earning people expire in two years, as they would under the accord. Even as he justified yielding to Republican demands to extend the tax cuts enacted under President George W. Bush, he said his opponents shouldn’t read that as weakness.

“I will be happy to see the Republicans test whether or not I’m itching for a fight on a whole range of issues,” Obama said. “I suspect they will find I am.”

Photographer: Roger L. Wollenberg/Pool via Bloomberg

U.S. President Barack Obama. Close

U.S. President Barack Obama.

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Photographer: Roger L. Wollenberg/Pool via Bloomberg

U.S. President Barack Obama.

John Pitney, a government professor at Claremont McKenna College in Claremont, California, said Obama needs to convince his base he is still willing to stand up to the Republicans.

“He’s drawing lines in the sand after the sand has been kicked in his face,” Pitney said. “He’s trying to reassure his base this compromise is not necessarily a preview of the next two years.”

Echoes of Reagan

Pitney said Obama’s position bore “striking parallels” to a dilemma President Ronald Reagan faced when he agreed to tax increases in the early 1980s and also had to reassure core supporters.

Under the terms of the deal, which Obama discussed with Democratic congressional leaders last night, the president agreed on the two-year extension of all current tax rates in exchange for an additional 13 months of federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for a year.

House Speaker Nancy Pelosi said the response from Democrats “has not been very good.” The addition of an estate tax provision is a “bridge too far,” she told reporters.

House Majority Leader Steny Hoyer, a Maryland Democrat, said a continued tax break for the wealthiest Americans “is not warranted.” House Democrats haven’t decided whether they will support the compromise, he said, and Pelosi and Hoyer stopped short of saying they would block the deal.

‘A Long Game’

Senate Majority Leader Harry Reid of Nevada said Democrats in that chamber have “wide-ranging” concerns about the plan.

Obama said Democrats should remember that the two-year extension allows for renewed debate over the issue during the 2012 presidential campaign and that the struggle to enact the party’s priorities is “a long game” and “not a short game.”

He portrayed his Republican opponents as obstructionist “hostage-takers” whose “Holy Grail” is “tax cuts for the wealthy.”

He declined to say how quickly he expected the economy to accelerate or how fast unemployment, which was at 9.8 percent in November, will come down.

“This package will help strengthen the recovery,” he said. “That I’m confident about.”

Payroll Tax

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.

The agreement would extend aid for the long-term unemployed. And to spur hiring, the payroll tax -- which funds Social Security and Medicare -- would be cut by 2 percentage points during 2011.

The 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 capital gains tax that applies when inherited assets are sold.

The proposed payroll tax cut equals a $115 billion increase in wage and salary income that could result in Americans spending $108 billion more than has been forecast, according to Deutsche Bank Securities economists Joseph LaVorgna, Carl Riccadonna and Brett Ryan.

Boosting GDP

That would boost gross domestic product by an additional 0.7 percentage points, bringing inflation-adjusted growth for the fourth quarter of next year to a 4 percent annual rate, they said in a note to clients.

“The payroll tax holiday could give the economy an added fillip next year in addition to any incremental benefit from improving financial conditions, the full extension of the Bush- era tax cuts and the expanded business investment tax credit,” LaVorgna, Riccadonna and Ryan wrote.

Stocks rose and Treasuries fell yesterday, as the deal offset concern that Europe’s debt crisis will spread.

The Standard & Poor’s 500 Index rose 0.1 percent to 1,223.78 at 4 p.m. after earlier climbing as much as 1 percent. The 10-year Treasury yield jumped 20 basis points to 3.13 percent.

Biden’s Message

Vice President Joe Biden went to a lunch yesterday with the Senate Democratic Caucus to give the senators a more detailed presentation of the deal.

Senator Dianne Feinstein said Biden’s message was that the compromise represented the best deal possible. The California Democrat said she is reviewing the details and wants to see an assessment of the cost and impact on the economy.

“If we do vote for it, how sure can we be that it will in fact spawn jobs and pump up the economy?” she said.

Treasury Department aide Gene Sperling said most Democrats will end up backing the package.

Democrats “are going to want to be on the side of supporting something this strong for working-class families,” Sperling said on Bloomberg Television. “There is no question this package is going to make unemployment lower than what it would have been.”

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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