Obama announces $500bn tax deal with Republicans

WASHINGTON // President Barack Obama has unveiled a compromise deal to extend all Bush-era tax cuts for two years, giving ground to emboldened Republicans who won big in last month's congressional elections.

After meeting Democratic leaders at the White House, Mr Obama announced a "framework" agreement with Republicans that would renew tax cuts not just for the middle class - as he and fellow Democrats had sought - but also for wealthier Americans, as Republicans wanted.

The tentative plan is expected to draw resistance from some liberal Democrats, who have expressed disappointment that the president was bending to Republican demands while not gaining enough in return. Mr Obama might need Republican help to pass the package if enough of his fellow Democrats revolt.

The tentative tax-cut deal, which is expected to extend breaks on dividends and capital gains as well, also calls for a 2 per cent employee payroll tax cut and a 13-month extension of unemployment benefits, which could placate some Democrats.

But Mr Obama acceded to Republican demands on the federal estate tax, by agreeing to a maximum 35 per cent tax with a US$5 million individual exemption level, which he admitted was more generous than he felt was "wise or warranted."

"We cannot play politics at a time when the American people are looking for us to solve problems," Mr Obama told reporters. "I am confident ultimately that Congress is going to do the right thing."

Mr Obama said he had made some concessions because of the urgent need to reach a deal before Congress adjourns this month to avoid allowing the middle class to face higher taxes when all of the Bush-era cuts expire on December 31.

"I have no doubt that everyone will find something in this compromise that they don't like," Mr Obama said. " In fact, there are things in here that I don't like - namely the extension of the tax cuts for the wealthiest Americans and the wealthiest estates. But these tax cuts will expire in two years."

Extending all the tax cuts for two years would cost $501 billion, according to the congressional budget office, at a time when Mr Obama is under pressure to cut the $1.3 trillion budget deficit. The CBO said renewing the rates will boost the economy in the short term but be harmful in the long term.

Mr Obama's concessions reflected a new political reality. Republicans gained the upper hand in the tax fight after scoring big gains in the November 2 congressional elections, which were seen as a verdict on Mr Obama's handling of a stumbling economy and persistently high unemployment.

Mr Obama's tax proposal was still likely to meet some resistance from Democrats in Congress but analysts believe it faces a good chance of ultimately being approved before the end of the legislative session.

Most Democrats have made clear they prefer to extend the lower tax rates for individual income up to $200,000 only, while Republicans have pushed for also keeping tax cuts for people who earn far higher incomes.