Obama rejects demands to extend Bush-era tax cuts

Barack Obama dismissed a cacophony of voices calling for Bush-era tax cuts for the wealthy to be extended beyond the end of this year, setting up a showdown with the Republicans that could define the mid-term election campaign.

In an uncompromising speech about his economic plans, the US President stood by his years-old promise to fight for an extension of tax breaks for the majority of Americans, but not the top-earning 2 per cent of the population who disproportionately benefited from his predecessor George Bush's tax cuts in 2001 and 2003.

Those cuts are due to expire at the end of December, and the issue of their renewal has been sucked into the electoral battles over taxation, spending, economic stimulus and the government deficit. The investment community and small-business lobbyists have been most vocal in arguing for an extension of tax cuts for high earners, saying it would improve economic confidence, stimulate investment and ease the impression that the Obama administration is "anti-business".

"This isn't to punish folks who are better off, God bless them," the president said. "It's because we can't afford the $700bn price tag. And for those who claim that this is bad for growth and bad for small businesses, let me remind you that with those tax rates in place, under President Clinton, this country created 22 million jobs, and raised incomes, and had the largest surplus in history."

Republican leaders have formally proposed extending all the tax cuts for two years, a position endorsed earlier this week by Mr Obama's former budget director, Peter Orszag.

John Boehner, Republican leader in the House of Representatives, said the two-year freeze could be paid for by cutting federal spending back to 2008 levels. "What that will do is help small businesses who have no clue what the coming tax rates are going to be," he said.

Republicans are pitching their proposal as a "compromise" but Mr Obama rejected the idea. "Let me be clear to Boehner and everyone else: we should not hold middle class tax cuts hostage any longer."

Mr Obama also set out plans for new corporate tax breaks, including allowing businesses to write off all capital investment against tax for the next two years in the hope of stimulating business investment.