A broad tax plan crafted by President Obama and congressional Republicans would temporarily lower tax rates for Americans at every income level, while also reducing the tax liabilities of small businesses and corporations alike.
The White House on Tuesday urged reluctant Democrats to embrace the proposal, which also calls for the renewal of emergency unemployment benefits through the end of 2011.
"The American people didn’t send us here to wage symbolic battles or win symbolic victories," Obama said Monday evening in announcing the plan. "They would much rather have the comfort of knowing that when they open their first paycheck on January of 2011, it won’t be smaller than it was before, all because Washington decided they preferred to have a fight and failed to act."
Although details of the Obama/GOP plan are still emerging—and will be subject to change in any negotiations with Democrats—here are some of the key elements right now:
Income tax cuts
The plan calls for a two-year extension of the Bush-era income tax cuts, which lowered tax rates for all income levels. For wealthy Americans, this means the highest tax bracket will remain at 35 percent. For middle-income Americans—for example, an individual earning around $80,000 a year—the rate would remain at 25 percent.
According to a fact sheet released by the White House, extending the tax cut will save the average American family $3,000 next year.
Capital gains and dividends
The proposal would also continue the 15 percent rate cap on capital gains profits and dividends. This is significant particularly for dividend income, which was set to return to being taxed as regular income in 2011.
Under the White House proposal, estates would be taxed at 35 percent in 2011, while estates up to $5 million in value would be exempt from any taxes at all. This is a significant compromise for the White House, which had previously proposed returning the estate tax rate — which was reduced to 0 percent in 2010 under the Bush tax program — to 45 percent with an exemption of $3.5 million.
Under the White House tax plan, Social Security taxes paid by workers would be lowered by two percentage points, from 6.2 percent to 4.2 percent. The White House estimates this measure will save American workers up to $120 billion next year.
Child Tax Credit
The $1,000 tax credit parents can claim on children living in their home was set to fall to $500 January 1—under the White House plan, the current child tax credit would be extended for the next two years.
Tuition Tax Credit
The 2009 stimulus bill created a tax credit of up to $2,500 for college students, allowing them to claim costly textbooks and other expenses for the first four years of college. The president's tax deal will extend this credit for the next two years.
Earned Income Tax Credit
The stimulus bill also expanded the earned income tax credit for some of the lowest-earning families in America. The White House estimates families with three or more children saved an average of $600 a year as a result of this tax break. The tax-cut plan would also extend this credit for the next two years.
Business Tax Cuts
In an apparent bid to boost economic activity, the plan would allow U.S. businesses to expense all business investments in 2011; this would be the largest temporary investment incentive in U.S. history, according to the White House.
Research from Goldman Sachs estimates that this policy would reduce corporate taxes by about $100 billion next year, though the firm cautions that low interest rates and "significant" spare capacity in the U.S. economy are likely to limit the anticipated impact of this corporate tax break.
Among other tax incentives for businesses proposed by the president is a two-year extension of the research and development tax credit.