From then on, there could be a running political battle for the next two years in a “divided government” where the Democrat President will have to contend with the Republican Congress. Meanwhile, many Democrats feel he has needlessly given in to Republicans not only on extending the tax cuts for the rich but also for a large cut in estate tax, and all this while they kept obstructing any relief for the unemployed over the last two years.

To this, President Obama’s answer is: “My number one priority is to do what’s right for the American people, for jobs, and for economic growth. I’m focused on making sure that tens of millions of hardworking Americans are not seeing their paychecks shrink on January 1st just because the folks here in Washington are busy trying to score political points.” Because of this agreement, he said, middle-class Americans won’t see their taxes go up on January 1st,the promise he had made during the campaign and as President. The rise for these families would have been 3000 dollars a year.

Also, he said, two million Americans who were losing unemployment insurance at the end of November would continue to have it till end of 2011. In exchange for a temporary extension of the high-income tax breaks he had opposed but Republicans were unwilling to budge on, the agreement preserved additional tax cuts for the middle class that “I fought for and that Republicans opposed two years ago”.

Announcing the “framework for a bipartisan agreement” on December 6, after a week of tough negotiations through a task force, the President said his concern was “not to let working families become collateral damage for political warfare in Washington”. Hence he agreed to a two-year extension of the tax cuts of 2001 and 2003, due to expire at the end of 2010, for all.

At the same time, the deal has been broadened to provide not only for the continuance of working class tax cuts put in place as part of the American Recovery Act 2009 and extension of unemployment insurance to two million workers. but also reduction in pay-roll tax for employees for one year and other measures to foster growth and job creation.

These additional measures which would cost some 200 billion dollars would not have been possible through a separate legislation, given the Republican opposition to any further increase in deficit. However, President Obama also yielded to the Republicans who wanted “more generous treatment” on estate tax than, he thought, was “wise or warranted”. The tax exemption has been raised to first five million dollars and after that, the top rate has been reduced from 55 per cent to 35 per cent. This is another sore point with Democrats who are being persuaded with difficulty to get this deal through both houses of the Congress before they adjourn for the year-end holidays.

President Obama said he remained opposed to the extension of tax cuts for the “millionaires and billionaires”, which has become a 'holy grail' for Republicans, but a long political battle with them would be bad for the economy and for the recession-weary Americans. So this compromise must be seen as an essential step on the road to economic recovery, he said.

A solid liberal wing of Democrats maintains strong reservations on the deal because it ran counter to the campaign promise of the President and his Party to extend the tax cuts only for the 95 per cent middle classes whose incomes had declined. The President had rejected extension of tax cuts for the wealthy, as it would cost 700 billion dollars over a decade at a time when they had to bring down Federal deficits.

In the current lame-duck session, House Democrats voted a bill on December 2 limiting the benefit to the middle class but later an identical measure failed to get the required 60 votes in the Senate, where Democrats have a majority of 57 out of 100. Republicans had given advance warning of their determination to block all legislation until the tax cuts have been extended as they desired. For the President, imbued with a sense of urgency to secure ratification of the new START (Strategic Arms Reduction Treaty) with Russia, a deal on tax cuts had become imperative.

Mr Obama has assured his partymen he would get back to fight in 2012 when the tax cuts would expire again (the time for the Presidential election and a new Congress) thereby making the point he had not gone back on his opposition to the economic doctrines of Republicans including tax cuts for the millionaires and billionaires. The agreement has protected the key tax cuts for working families, students and children extended during the last two years, he pointed out.

The President also got Republicans agree to a two per cent cut (from 6.2 to 4.2 per cent) in the pay roll tax for workers in 2011 at all income levels. It would provide tax relief of about $120. Businesses would be allowed 100 per cent write-off for investments in plant and equipment in 2011. It should help businesses to make new investments and create jobs.

Since these tax cuts would all expire in two years, the President said, the focus would be on growing the economy and making “tough choices” about bringing deficit down and secure the future of the nation. The entire package of two-year extension of Bush era tax cuts as well as others, unemployment insurance for 2011 and cut in pay roll taxes would all add upto 900 billion dollars for two years, according to White House estimates.

President Obama will shortly begin to discuss with his economic team the broad elements of the budget he will present in February for fiscal 2012 (October-September). He also plans to have meetings with business and other leaders in regard to budget as well as longer-term policies, keeping in view the vision of making America “strong, growing and competitive” in the 21st century.

The Administration now attaches high priority to deficit reduction over the long term. However, the concerns are the pace of recovery, though economy keeps growing, and unemployment which edged upto 9.8 per cent in November. Officials expect the reduction in pay roll tax and investment incentives announced now would help to boost economic recovery and job creation in the coming months.

The bi-partisan National Fiscal Commission has presented its report to the President with proposals to trim deficit by about 3.9 trillion dollars over the years 2012-20, A major recommendation is to simplify the tax code with three rates 12, 22 and 28 per cent (as against the half a dozen rates from 10 to 35 per cent at present) and remove most of tax breaks and exemptions. It has also suggested reducing corporate tax from 35 to 28 per cent. The Commission says any plan to reduce the deficit must be gradual and should promote economic growth and not undermine recovery. (IPA Service)