Obama Cuts Deal With GOP on Tax Cuts

WASHINGTON ( TheStreet) -- Calling the decision an "essential step on the road to recovery," President Barack Obama announced plans for a compromise with the Republicans on the tax-cut debate late Monday.

"For the next two years, every American will keep their tax cuts," Obama said. Other provisions of the expected legislation, including the extension of unemployment benefits for another 13 months, a one-year reduction in the payroll Social Security tax rate to 4.2% from 6.2%, and a provision for businesses to write off all investments for the next year, the president said.

Stock futures turned mildly positive in the wake of the speech. The markets churned in a tight range during Monday's session as the negotiations played out. The Dow Jones Industrial Average closed 20 points lower, or 0.2%, at 11,362. The S&P 500 slipped nearly 2 points to 1223, while the Nasdaq Composite rose 4 points, or 0.1%, to 2595.

As for the status of the compromise, Obama characterized the negotiations as having "arrived at a framework for a bipartisan agreement."

Obama's announcement marked a dramatic reversal of his long-held insistence, originally laid out in his 2008 campaign, that tax cuts should only be extended at incomes up to $200,000 for individuals and $250,000 for couples. At the same time, it signaled the arrival of a new era of divided government following midterm elections in which Republicans won control of the House and strengthened their hand in the Senate.

The president acknowledged the deal would upset members of the Democratic Party.

"I have no doubt that everyone will find something in this compromise that they don't like, there are things that I don't like," he said in the speech, which was streamed live on the White House's Web site as well as televised by a number of outlets, specifically mentioning the cuts for the wealthy and keeping the status quo on the estate tax.

The president repeatedly hammered away at the continuation of the tax cuts for the wealthy, saying there was no evidence that these kind of cuts fostered economic growth and he reiterated that the extension was temporary a number of times.

But Obama also stressed his belief that a deal needed to be made at this time in order to keep the economic recovery on track and not have the middle- and low-income families impacted this winter.

"I'm not willing to let our economy slip backwards just as we're pulling ourselves out of this devastating recession," Obama said, adding later: "We can't play politics at a time when the American people are expecting us to solve problems."

Officials said that under the plan, unemployment benefits would remain in effect through the end of next year for workers who have been laid off for more than 26 weeks and less than 99 weeks. Without an extension, two million individuals would have lost their benefits over the holidays, the White House said, and seven million would have done so by the end of next year.

The Social Security tax cut would apply to workers, not employers. The White House said the result would be to fatten take-home pay by $120 billion over the course of the year.

In addition, administration officials emphasized that the agreement would extend a variety of other tax breaks for lower and middle-income families, including the Earned Income Tax Credit and the child tax credit.

The estate tax provision under discussion would mean the first $5 million would pass tax-free to heirs. Anything over that would be taxed at a rate of 35 percent. Democrats favored a $3.5 million threshold, with a 45 percent tax on anything higher.

In a sign of Democratic discontent, Senate Majority Leader Harry Reid (D., Nev.) reacted curtly to the president's announcement.

"Now that the president has outlined his proposal, Senator Reid plans on discussing it with his caucus tomorrow," his spokesman, Jim Manley, said in a written statement.

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.

>To submit a news tip, send an email to: tips@thestreet.com
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks. The Associated Press contributed to this report.