Why Obama might compromise on Bush tax cuts for the rich

President Obama and Congressional Republicans are close to a big economic compromise: Obama would agree to extend Bush-era tax cuts at all income levels, while GOP leaders would relent and allow passage of extended benefits for the long-term unemployed.

"They are making progress," said White House spokesman Bill Burton on negotiations surrounding the deal on Monday on negotiations surrounding the deal.

Such a deal would mark a profound turnabout for Obama, who campaigned hard on the idea that extending tax cuts for the wealthy would be wrong. What caused him to change his mind?

After all, Democrats still control both chambers of Congress. Republicans made big gains in midterm elections, but most of the GOP reinforcements won’t be seated until next session, after the Bush tax cuts are set to expire.

Many liberal Democrats want to take a stand on this issue. If Republicans persist in blocking efforts to extend the cuts only for those making less than $250,000 a year, let them, goes the liberals’ argument. Sure, everyone’s taxes would then rise – but it would be on the GOP’s head.

The White House won’t go along with this position for at least two key reasons. First, they know Republicans are willing to call the left’s bluff on this issue. They showed that on Saturday when Senate Republicans blocked Obama’s plan to end the tax cuts for top earners. And for the administration, the consequences of a standoff on this issue are unpalatable.

It’s true that polls show a plurality of Americans prefer not to extend tax cuts for the wealthy. But that’s an abstract issue for most – because most voters aren’t rich. Polls also show that voters don’t want their own taxes to go up. And that’s personal. If the White House allowed all the Bush cuts to expire rather than extend them for the wealthy, the screams of financial pain from around the nation would drown out any “attaboys” the administration might get.

Second, Obama may not be willing to risk the economic downside of letting all the tax cuts expire. The economic recovery is fragile and needs all the encouragement it can get. As Fed chairman Ben Bernanke noted Sunday in an interview on “60 Minutes,” “We don’t want to take actions this year that will affect this year’s spending and this year’s taxes in a way that will hurt the recovery.”

Plus, job figures have been dismal – the unemployment rate ticked up to 9.8 percent last week, according to the Bureau of Labor Statistics. The administration badly wants what the Republicans are offering – extension of long-term unemployment benefits. And the White House wants that to take effect as soon as humanly possible. About 2 million people will see their unemployment benefits expire this month, absent congressional action.

In political terms this situation has left many Democrats bitter about the way their party has handled this issue. Given the cost of the extending the tax cuts, some Democrats also are accusing the GOP of not being truly committed to reducing the nation’s red ink.

“Clearly the deficit is not an issue here any longer,” said Sen. Dick Durbin (D) of Illinois, number two in the party’s Senate leadership, on CBS Sunday. “If we can justify giving a tax break to the wealthiest people in America, adding $700 billion to our deficit over the next ten years, I wonder what I’ve been doing over the last ten months sitting on that deficit commission.”