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Angry Democrats rebel against Obama's tax-cut deal with Republicans

President Barack Obama says a deal he has struck with congressional Republicans on renewing Bush era tax cuts keeps his 2008 promise to protect the American middle class from an increase in tax rates.

Democrats were cool by comparison. House Speaker Nancy Pelosi (Calif.) ignored the deal in a statement that lambasted Republicans, saying they have "held the middle class hostage for provisions that benefit only the wealthiest 3 percent." She concluded tersely, "We will continue discussions with the president and our caucus in the days ahead."

Senate Democrats also described the deal as a work in progress. "This is only a framework. It's up to the Congress to pass it," Majority Leader Harry M. Reid (Nev.) said after the Biden meeting. The Senate could take up the package next week. But, Reid said, "I think we're going to have to do some more work on it."

While liberals plotted rebellion, some Democratic moderates were open to the plan. Sen. Kent Conrad (N.D.), chairman of the Budget Committee, said he will support it despite the large increase in short-term deficits, conceding that compromise on the Bush tax cuts was inevitable.

The next step for Obama will be identifying key Democrats in both chambers who can help push the package forward. For instance, Senate Majority Whip Richard J. Durbin (D-Ill.), a traditional ally, signaled in recent days that a compromise would be necessary - but he declined to comment Tuesday.

A bigger boost

The mood was cheery at the White House as administration officials celebrated a package that, if approved by Congress, would provide a far bigger jolt to the economy than anyone had expected. While lamenting the need to compromise on the Bush tax cuts and particularly on a revived estate tax, administration officials said the package would inject an extra $300 billion into the economy next year alone.

Mark Zandi, chief economist for Moody's Analytics, predicted that the package would accelerate economic growth, adding more than 1.6 million jobs next year and driving unemployment down to 8.5 percent by the end of 2011.

Buyers of U.S. government debt were less pleased with the prospect of additional borrowing: The interest rate the government must pay to borrow money for 10 years rose 0.2 percentage points to 3.1 percent, a rate that, if it persists, could reduce the stimulative effects of the tax cuts.

But White House economic adviser Lawrence H. Summers said that "the first priority for addressing the budget deficit has to be getting the economy growing again at a rapid rate." The tax deal, he said, "offers the best prospect that was available for achieving the kind of escape velocity that we've been seeking for the past two years."

The deal developed over the past two weeks, after congressional leaders from both parties met with Obama at the White House. While Treasury Secretary Timothy F. Geithner and White House budget director Jacob Lew led talks with Democratic and Republican negotiators, Biden talked separately with McConnell and Sen. Jon Kyl (R-Ariz.) about the prospects for a Senate vote to ratify the New START nuclear arms treaty with Russia, a top White House priority.

Talk of the tax cuts inevitably crept into those conversations, administration officials said, and the outlines of a compromise became clear over the weekend. Obama would agree to extend all the tax cuts for two years in exchange for another year of long-term unemployment insurance and a payroll tax holiday, which would reduce the Social Security tax that workers pay on income up to $106,800 from 6.2 percent to 4.2 percent. Economists rank the two provisions as among the most powerful ways to inject cash into the economy.

Republicans were still pressing on the estate tax, demanding more generous terms that would exempt estates worth up to $10 million for couples and impose a rate above that amount of only 35 percent. On Monday, Biden made a counteroffer: The GOP could have a relaxed estate tax in exchange for a two-year extension of refundable tax credits created in the 2009 stimulus package that benefit college students and working-class families.

McConnell agreed, and a deal was struck late Monday that would give Democrats at least $100 billion more in middle-class benefits than the GOP would win for the wealthiest taxpayers, senior administration officials said.

"This gave us a chance to do what most people thought wasn't going to be possible in this environment," Summers said, "which is to provide a real forward lift to the economy relatively quickly."

Staff writer Felicia Sonmez contributed to this report.

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