President Barack Obama and congressional Republicans reached a compromise on a tax bill yesterday which will ensure that the Bush-era tax rates remain in effect for all income brackets. In order to reach the compromise, Republicans conceded to extend unemployment benefits for an additional 13 months. The bill also included a surprise cut in payroll taxes for the next year, which will amount to a 2 percent reduction for the majority of Americans, and a reduction in the maximum tax rate for estate taxes (it was set to rise to 55 percent, but the compromise puts the top rate at 35 percent with a $5 million exemption).
Republicans and Democrats agreed that the Bush-era tax rates should not be increased for lower and middle income families; the entire debate centered on what to do about upper-income tax rates, for those making $250,000 annually.
Democrats have responded with anger over what they perceive as a surrender by the Obama administration on the issue of tax breaks for the wealthy. Representative Anthony Weiner, a Democrat from New York, remarked, “I don’t think that the president should count on Democratic votes to get this deal passed.”
Republicans have, for the most part, been more upbeat about the compromise, and have characterized it as a legislative victory for the Obama administration. Nonetheless, many are still lukewarm about some aspects of the compromise. Republican Rep. Jeb Hensarling of Texas commented that he wanted to see a bill more focused on generating paychecks than unemployment checks.
On a more personal level, the tax cut compromise will equate to significant savings for the 2010 tax year. Being in the mid level 28 percent bracket, if the tax cut deal were not reached, my bracket would have expanded to 31 percent. Given expected income levels for 2010, my tax bill would inflate by $1,500 to $2,000.
And while I by no means consider myself to be financially unfortunate, it’s important to remember that brackets can be enormously fluid. As my spouse shifts to part time work in 2011 to accommodate having a family, our taxable income may drop by as much as 30-40 percent. Next year, that additional $1,500 to $2,000 of savings will be extraordinarily helpful.
Thankfully for myself and for the vast majority of Americans who count themselves as middle class, the Obama administration was able to reach a compromise with Republicans to pass a deal that will result in significant savings for most taxpayers.