Tax Cuts for Wealthy May Get Reprieve if Democrats Blink

Wealthier Americans stand to gain from an election-year fight over extending trillions of dollars in tax cuts enacted under former President George W. Bush.

While Democrats and Republicans alike want to keep the 2001 and 2003 tax reductions for families earning up to $250,000, President Barack Obama and congressional Democrats want to end the break for those who earn more. Republicans, contending a recovery from recession is no time to raise taxes, insist on continuing the Bush-era cuts for high-income people as well.

As Congress returns this week, the looming fight over one of the biggest battles of the session will play out in a midterm election season that will determine who controls Congress and ultimately who makes long-term decisions over taxes.

For the Democrats, reluctant to break Obama’s promises, the pressure may be strongest to blink in this standoff and let the tax cuts stand another year. All of the cuts will expire Dec. 31 if Congress fails to act, an outcome neither party can afford.

“Anybody who wants to obstruct right now is in paradise,” Senator Ron Wyden, an Oregon Democrat, said in an interview yesterday.

Ohio Republican Senator George Voinovich said he is willing to let all the tax cuts expire.

“If we have to create a crisis to get people to come to the table and look at this tax code and start doing something about it, then I am for the crisis,” said Voinovich, who is retiring after this year. He said he would oppose any extension of the Bush tax cuts that didn’t include offsetting revenue.

The cost of continuing the tax cuts for the most prosperous Americans would be about $55 billion for one year. By contrast, Democrats and Republicans have battled for months over extending aid to the long-term unemployed, with a $34 billion price tag.

One-Year Extension

The easiest option may be a one-year extension of the entire tax-cut package, said Roberton Williams, a senior fellow at the Tax Policy Center. The Washington research group is run by the Urban Institute and Brookings Institution.

“The simplest solution this year would be to say ‘we have a struggling economy; we don’t want to raise taxes at all,’” said Williams. “It’s a compromise that would get things past the end of this year.”

Wyden said a short-term extension arising out of brinkmanship was possible, though he said it would be a hard sell to Democrats who “don’t want to ratify another round of Bush tax cuts” they have opposed.

Congress, back in Washington after a weeklong Fourth of July recess, is working to resolve the dispute over extending the jobless aid. The Senate fell one vote short June 30 and may able to pass the measure after a successor is appointed for the late West Virginia Democrat Robert Byrd.

Wall Street Rules

Senate Democrats are seeking to pass an overhaul of Wall Street rules. Also on the agenda are funds for the wars in Iraq and Afghanistan and confirmation of U.S. Supreme Court nominee Elena Kagan.

Congress will consider the tax issue “pretty soon,” House Speaker Nancy Pelosi of California told reporters July 1. Like Obama, she supports keeping the middle-class tax cuts while ending those for upper-income people.

House Democratic Leader Steny Hoyer of Maryland, though, said June 22 that even the reductions for middle-income Americans may no longer be affordable as the U.S. tries to cut its growing debt.

Republicans say the economic harm of ending any of the Bush tax cuts would outweigh deficit concerns.

“With unemployment near 10 percent, the last thing struggling American families and small businesses need right now is a massive tax increase, but that’s exactly what Washington Democrats have planned for them,” House Republican leader John Boehner of Ohio said through spokesman Michael Steel last week.

Middle Income

The Bush tax cuts gave middle-income earners a 10 percent rate on couples’ first $14,000 in income; subsidies for college expenses, a higher child-care credit and relief from the marriage penalty. Keeping those and other reductions for the 130 million households earning less than $250,000 would cost about $300 billion a year, according to the congressional Joint Committee on Taxation.

In addition to those benefits, high-income households got reduced top marginal rates, elimination of phase-outs for some deductions and personal exemptions, and benefited the most from lower rates on dividends and capital gains.

The average tax rate for the 400 richest U.S. households fell to 16.6 percent in 2007 from 29.4 percent in 1993. There are about 5 million households earning more than $250,000 a year. By contrast, the Tax Policy Center found in April that 47 percent of Americans pay no income tax, largely the result of tax credits enacted under Bush and Obama. Those Americans do pay Social Security and Medicare payroll taxes.

In the Senate, the Democrats control 59 votes and the Republicans have 41 votes. Either side would need 60 votes to push its proposal through the chamber.

‘The Difficulty’

“Don’t underestimate the difficulty of the politics” for the Republicans, said Stan Collender, a former House and Senate budget analyst who is managing director of Qorvis Communications, a Washington communications firm.

Congress also must act this year to prevent the alternative minimum tax from wiping out tax savings for more than 30 million households and must decide what to do about the federal estate tax. The 45 percent tax on estates of more than $3.5 million per person expired Dec. 31, 2009, and is scheduled to return Jan. 1, 2011, with a top rate of 55 percent on estates valued at more than $1 million.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

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