Obama Says He'll Negotiate With Republicans on Bush Tax Cuts

President Barack Obama said he is “absolutely” ready to negotiate this month with congressional Republicans, whose success in the Nov. 2 midterm elections has hardened their stance that Bush-era tax cuts set to expire next month should be extended for high-income taxpayers.

Obama, a Democrat, said yesterday that he hopes to avoid “brinkmanship” in the lame-duck session of Congress when he deals with Republicans on preventing the expiration of lower tax rates on wages, investments and multimillion-dollar estates enacted in 2001 and 2003. Unless Congress acts, those tax policies expire Dec. 31.

“My goal is to make sure that we don’t have a huge spike in taxes for middle-class families,” Obama said at a White House news conference when asked if he would seek a compromise with newly empowered Republicans on such matters as preserving the tax cuts on the first $1 million of income.

Obama has been adamant that the U.S. can’t afford to extend policies that benefit high-income Americans, whom he defines as individuals earning more than $200,000 annually and couples making over $250,000. Treasury Secretary Timothy F. Geithner has said that doing so would add $700 billion to the national debt. Obama’s proposal itself would add about $3 trillion to the debt.

“My hope is, is that given we all have an interest in growing the economy and encouraging job growth, that we’re not going to play brinkmanship but instead we’re going to act responsibly,” the president said.

While Democrats will still be in charge of both houses of Congress when lawmakers return for the lame-duck session that starts the week of Nov. 15, the tax-cut battle will test whether Obama and Republicans can find common ground on divisive issues.

Historic Party Loss

Republicans gained at least 60 seats in the House of Representatives -- 21 more than needed to win control in the next session, starting in January -- and won at least six new seats in the Senate, narrowing the Democrats’ majority. It was the Democrats’ biggest defeat since 1938, when the party lost 72 seats in the House.

“We continue to believe that extending all of the current tax rates for all Americans is the right policy for our economy at this time,” John Boehner of Ohio, the House Republican leader and the likely speaker in the next Congress, said yesterday.

Republicans have faulted Obama and Democrats for failing to act earlier to extend the tax cuts enacted during President George W. Bush’s administration. Among other things, the policies established lower marginal tax rates, eliminated the so-called marriage penalty, doubled a child tax credit to $1,000, lowered rates on most capital gains and dividends to 15 percent, and phased out the estate tax.

Tax Rate Increase

If Congress takes no action, individual income tax rates will increase to 15, 28, 31, 36, and 39.6 percent from 10, 15, 25, 33, and 36 percent now, respectively. Reinstated limits on certain deductions and exemptions would push rates even higher for taxpayers in the top two brackets.

Many married couples would pay more in income tax than if they were single. The child tax credit would be reduced to $500. Rates on capital gains would revert to 20 percent, and dividends would again be taxed at ordinary income rates. The estate tax, repealed for this year only, would affect estates exceeding $1 million and would have a top rate of 55 percent.

Obama campaigned on preserving the tax cuts only on the first $250,000 of a couple’s income. That would mean increasing the top two marginal rates and higher rates on capital gains and dividends; Obama has sought to cap the dividend tax rate at 20 percent. The president also wants to exempt the first $3.5 million of estates from taxes and levy any excess with a top 45 percent rate, reverting to the rules that existed in 2009.

Renew Them All

Republicans have long insisted that all of the Bush-era tax cuts should be renewed. Doing so would cost the government about $5 trillion in foregone revenue and interest costs on the debt over the next decade, according to an Oct. 27 report by the nonpartisan Congressional Research Service.

Michigan Representative Dave Camp, the Republican in line to become chairman of the tax-writing House Ways and Means Committee in January, said he also will insist on extending Bush’s tax policies for all income levels.

“I do think we can’t increase taxes on any American with the economy still over 9.5 percent unemployment,” he said in an interview yesterday.

Camp also said he would prefer to find a long-term solution. “I don’t think a short-term extension gets the kind of certainty that I’m hearing from employers and analysts that they need,” he said.

Reid ‘Laser’-Focused

Senate Majority Leader Harry Reid, who won a close bid for re-election in Nevada, told reporters yesterday that the Democrats are still “focused like a laser” on extending tax cuts to middle-income taxpayers. He said permanently extending all the Bush-era cuts would be “a road to a $4 trillion debt. That won’t happen.” Reid’s $4 trillion figure doesn’t include interest costs.

Obama also said he would push to renew dozens of expired breaks that primarily benefit businesses, including a tax credit that subsidized research and experimentation. Separately, Congress must act to roll back a $70 billion alternative minimum tax increase, already in force for 2010, that would affect more than 30 million households.

Pat Heck, a partner at the Washington law firm K&L Gates LLP, said the need to prevent the increase in the alternative minimum tax will be the biggest catalyst for Obama and lawmakers to strike a deal.

“That absolutely has to be done,” Heck said. “Without the AMT patch you’re going to have 25 million taxpayers get hit by a tax bill next year that they hadn’t planned on.”

A short-term compromise is most likely on the Bush-era tax cuts, he said. “I think there’s enough time for them to come together; it’s not rocket science.”

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

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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