On the tax deal the president cut with the Republicans, I think at first, until I took my time to really read on and understand what is in it, I was a little too harsh on the White House. Being the pragmatist that I am, when I look at all the variables in the political and economic calculi, I can sense the rationale behind such deal.

In reality, it is not too bad of a compromise. The political dynamics in the House of Representatives and the Senate basically dictated the nature of the deal. It is not a perfect deal, but the provisions in it will help boost the economy in the short run.

What did the president and the Republicans want initially? Initially, the president wanted to give tax cuts to those Americans making less than $250,000. The Republicans, on the other hand, wanted to extend the Bush tax cuts for the wealthy. So the question was how to bring the two extremes to meet right in the center? To do that, both sides had to compromise. And that is exactly what they did. The republicans got the Bush tax cuts for the top 2% Americans extended only for two years; the president came out with a major economic stimulus package. What did the president get out of the deal? He got a package loaded with economic goodies. He got:

  1. Unemployment insurance extension –There is no way he could have gotten the extension to pass if he did not compromise; the republicans were not going to budge. Right now, millions of Americans are out of work. They lost their jobs to no fault of their own. The unemployment benefit is their only source of income. So he had unemployment insurance extended for 13 months for these people, which would have not happened otherwise.
  2. Earned Income Tax Credit (EITC) –This is a tax provision given to the low income working Americans having dependents and struggling to make ends meet.  
  3. American Opportunity Tax Credit (AOTC) –This tax provision gives up to $2500 to those Americans having a child in college. It may not sound a lot, but this is money that can be used in many ways for someone’s education.
  4. Child Tax Credit –This is a tax credit given to families depending on the number of dependents they have. This provision comes with a significant cut in the payroll tax that all workers pay, which will save them over a thousand dollars a year.
  5. Investment incentives –This provision gives tax break to companies that are willing to create jobs here in America by building companies and investing in equipment.

This is real money given back to real people to spend in the economy. And when money is being spent in the economy, it tends to get the economic growth rate up.

President Obama had to extend the Bush tax cut for 2 years (not permanently as the Republicans initially wanted) for the top 2% wealthy Americans to get these aforementioned provisions to pass the gridlock in Congress. If he did not make that compromise, come January the 1st, taxes would have gone up to thousands of dollars on the middle class, which would have been disastrous for the already struggling economy. So he had to do something. This is a situation where you are not looking for the infant to look like his/her dad; you just want a safe delivery. And that is exactly what he did.

The White House, as always, has a communication problem. The fact that they are not communicating effectively what is in the bill for the middle class, the people now turn to the political pundits and talk show hosts to have the bill explained to them. And quite often, these people do not seem to be telling the whole truth.  

So the president extended the Bush tax cuts for only two years to get most of what he wanted. Come election time in 2012, he will then have to fight to let them expired. I only hope at that time he will have the political leverage to do so.