The last few months we've had quite a bit of uncertainty when it comes to what will happen to our 2011 marginal tax rates. The Congress and President Obama have gone back and forth trying to work out a deal on extending the current tax rates. First there was no consensus on whether they would extend them for all taxpayers, or only some. Republicans wanted them extended for everyone, while the Democrats wanted them extended for everyone except high income individuals.

After the election at the beginning of November, however, President Obama took on a decidedly different tone when it came to the tax rate extensions. His party had lost power in the House, and he was now more open to a compromise to get something done.  He doesn't want to risk having the rates go up on the middle class and poor, and admits that raising the rates while our economy is down like it is – wouldn't be the course he'd want to take.

Package To Extend Marginal Tax Rates For 2 Years

A couple of weeks ago President Obama met with Republicans and hammered out a tax cut package that would extend the current tax rates for another 2 years.  Also included in the package would be a social security tax holiday, in addition to an extension for 13 more months of unemployment benefits for the long term unemployed – which lapsed last month.  Details of what is included in the package:

• Extend Bush tax cuts for everyone, for 2 years.
• Reduce Social Security tax levied on a worker’s wages from 6.2%  to 4.2% for one year.
• Reinstatement of the estate tax at 35%
• Extension of jobless benefits for long term unemployed for another 13 months.
• Extend current tax rates on capital gains and dividends for two years, including for higher earners.
• Extend business tax breaks, including credit for spending on research

Where Is The Tax Cut Package Now?

As of this week the tax cut package is still working it's way through Congress.    Yesterday the Senate passed the package overwhelmingly, and it now moves on to the House.

The Senate approved a controversial $858 billion tax cut package Wednesday, overwhelmingly voting to extend the Bush-era tax reductions despite a series of objections from both the left and the right.

The measure passed 81-19 to advance to the House of Representatives, which will take it up on Thursday, according to Majority Leader Steny Hoyer, D-Maryland.

The package includes a two-year extension of the Bush-era tax cuts set to expire December 31. It also would extend unemployment benefits for 13 months, cut the payroll tax by 2 percentage points for a year, restore the estate tax at a lower level and continue a series of other tax breaks.

So one of the key hurdles, passage in the Senate, has now been cleared.The problem? In the House some of the Democrats have threatened to change certain provisions of the bill that they don't like, which could derail the compromise.

A number of House Democrats, including Speaker Nancy Pelosi, D-California, want to change the estate tax to levels previously approved in a separate House bill that would exempt inheritances up to $3.5 million and tax amounts above that at a 45% rate. Pelosi said Wednesday the change would bring in an additional $25 billion instead of providing tax protection to only 6,600 more families through the lower rate and higher exemption in the negotiated tax deal.

Some moderate Democrats have called for the House to pass the bill unchanged. So now we'll have to wait and see if the measure will be changed, and if so, what that means for hopes of it passing.

The House Rules Committee decided Wednesday night to allow a vote on changing the estate tax provision to the levels in the previously passed House bill. If approved, the changed bill would then go back to the Senate. If rejected, the House would then hold a separate vote on the Senate version, with approval sending the bill to Obama.

Republicans involved in the negotiations with the White House on the package have warned that any changes by the House could derail the entire proposal, causing tax rates to increase in 2011.

So now we wait and see what happens with the bill – if the House votes to change the estate tax provision, and if so, if the Senate will allow the changes. Some have said that such a change could derail the deal, and could mean that marginal tax rates go up on January 1st. We shall see!

UPDATE: Sounds like the House passed the bill now as well, 277-148. Both parties contributed almost an equal amount of votes to get it to pass –  139 Dems, 138 Republicans.  All that remains now is for the president to sign the extension.

What do you think will happen? Will the compromise package be passed, or will changes be made to the package that sends it back to the Senate. Tell us what you think in the comments!

We've been talking for months now about whether or not Congress and President Obama would be renewing the Bush tax cuts of 2001 and 2003.  We've looked at what the 2011 tax rates would be if they weren't extended, and talked about what some of the problems of not extending the Bush tax cuts would be.  In the end I wasn't sure that the Democrats and Republicans could find enough common ground on the issue to actually come up with a compromise solution.  But last night President Obama and Congressional Republicans agreed in principle to a deal to extend the Bush tax cuts for all taxpayers, including high income earners.  Not all Democrats are happy about the deal, so it still remains to be seen what they will do. Here is Obama announcing the deal.

In exchange for allowing an extension of the tax cuts, President Obama was able to get some concessions which are detailed below.

Deal On Extending The Bush Tax Cuts

Last night President Obama announced the deal (see the video to the right), and what it would entail.

President Barack Obama reached agreement Monday with Republican leaders in Congress on a broad tax package that would extend the Bush-era income tax cuts for two years, reduce worker payroll taxes for one year and give more favorable treatment to business investments.

Other elements of the deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed.

“We have arrived at a framework for a bipartisan agreement,” Mr. Obama said on Monday night, capping weeks of negotiations with leaders in Congress.

The outcome of the negotiations is vital, because the current tax levels signed into law by President George W. Bush expire on Dec. 31. Unless Congress acts, tax rates on virtually all Americans who pay income taxes will rise on Jan. 1. That could affect economic growth and even holiday sales.

What Is In The Deal?

To recap, the following were agreed to by President Obama and Congressional Republicans. (No Democrat nod to this plan as of yet).

• Extend Bush tax cuts for everyone, for 2 years.
• Reduce Social Security tax levied on a worker's wages from 6.2%  to 4.2% for one year.
• Reinstatement of the estate tax at 35%
• Extension of jobless benefits for another 13 months, beyond current 99 weeks.
• Extend current tax rates on capital gains and dividends for two years, including for higher earners.
• Extend a raft of business tax breaks, including credit for spending on research

Democrats Not On Board… Yet

So far the plan has been panned by Congressional Democrats and the liberal base, and Obama has admitted that there is a tough road to get this deal passed.

In reaching the deal, whose details still need to be worked out, Mr. Obama brushed past the demands of many in his own party to curb tax cuts for the wealthy. Some liberal lawmakers and activists were left seething, particularly over last-minute concessions to Republicans on the estate tax. Democratic leaders didn't agree to the deal during meetings on Monday with Mr. Obama and Vice President Joe Biden, according to a House aide.

“I can tell you with certainty that legislative blackmail of this kind by the Republicans will be vehemently opposed by many, if not most, Democrats,” said Rep. John Conyers (D., Mich.).

In the Senate, Tom Harkin (D., Iowa) called it “an understatement” to say he was disappointed.

So at this point liberal lawmakers and activists are “left seething” at the deal, and convincing them that his is a good idea isn't going to be easy.   Obama may need to rely on Republicans to help get this passed.

White House officials will now try to persuade Democrats to back the agreement, but anger on the left suggests that Mr. Obama might need to rely heavily on Republican support to move legislation through Congress.

Republican leaders spoke highly of the agreement. In a statement, House Republican Whip Eric Cantor said, “No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again.”

Senate Republican Leader Mitch McConnell also praised the deal and asked that Democrats in Congress now “show the same openness to preventing tax hikes the administration has already shown.”

The Republicans admit that they didn't want to extend unemployment insurance past the current 99 weeks or reinstate the estate tax, but that the political reality was that they would need to in order to come to a compromise.

If Tax Cuts Are Passed, Will It Lead To Growth And More Stability?

Many congressional leaders have stated that in order to get the economy moving again we need to pass something in order to restore a bit of stability for business.  They need to know what's going to be happening next year so that they can adjust payroll, plan expenditures and move forward in their planning for 2011.  Hopefully if this can get passed it will be a spark that we need to give business a boost.

What do you think about the deal that President Obama announced last night.  Do you think it's a good thing, and will congressional Democrats get on board? Tell us your thoughts in the comments.