'Game of chicken' coming in Congress over Bush tax cuts

McClatchy NewspapersAugust 11, 2010 

WASHINGTON — Congressional incumbents, already nervous about increasingly unpredictable November elections, are facing a potentially make-or-break political decision: Whether to vote on extending expiring Bush era tax cuts before the election.

The White House and many congressional leaders want to extend the 2001 and 2003 tax cuts for everyone but the wealthy; they'd let tax rates on the rich rise back to 1990s levels. Republicans, and moderate Democrats, want to extend the tax cuts for the wealthy, and may balk at anything short of that.

Top Democrats want to debate that when Congress returns from its summer recess in mid-September.

"If they (Republicans) want to block a tax cut for 98 percent of the American people in order to preserve a $700 billion tax cut for the wealthiest 2 percent, I'd say 'Let's have that fight.' I can't believe at the end of the day that they would do that," said White House senior adviser David Axelrod in an interview with McClatchy.

They would, said Senate Republican leader Mitch McConnell of Kentucky.

"We look forward to the debate over the appropriateness of raising taxes in the middle of a recession, between now and the election," he said.

Obama and most Democrats cite data indicating that the wealthy don't spend their tax cuts, and therefore don't boost the economy, while middle and lower income people do spend them, and will pull back their spending if their tax rates increase.

Republicans counter that increasing the higher tax rates will stymie smaller businesses and manufacturers as well as discourage badly needed investment.

So what is the politically safe vote? No one knows, and the answer is likely to reverberate all over the campaign trail in the crucial weeks before the Nov. 2 election.

Currently, individuals with adjusted gross incomes of more than $200,000 and families earning more than $250,000 pay top rates of 33 percent and 35 percent. Obama wants to take those rates back to pre-Bush levels of 36 percent and 39.6 percent and leave the current rates of 10 percent to 28 percent intact for those who earn less.

Treasury Secretary Timothy Geithner estimates that retaining the middle class cuts would be worth about $2,000 per middle class family per year.

Even if the top Bush rates expire, according to Congress' Joint Committee on Taxation, people earning more than $200,000 would still pay roughly $6,300 to $6,700 less than under pre-Bush rates, since the lower rates would remain intact on their first $200,000 in earnings.

However, their breaks would be much higher if the top Bush rates were extended — worth as much as $103,834 a year for those earning more than $1 million.

The nonpartisan Congressional Budget Office said earlier this year that extending all of the original Bush-era tax cuts would increase budget deficits by $2.56 trillion during this decade. As it stands, deficits under Obama's budget plan are expected to total $9.75 trillion in the next 10 years.

Raising rates only on the top income brackets would rake in an estimated $700 billion over 10 years.

While the House of Representatives, where Democrats control 255 of the 435 seats, is expected to go along with repealing the higher brackets, the initiative faces trouble in the Senate.

At least three Senate Democrats are sympathetic to extending all the cuts, meaning it will be difficult for Democrats, who control 59 of the Senate's 100 seats, to get the 60 votes needed to cut off debate and force a vote.

American Enterprise Institute political analyst Norman Ornstein said Democrats are on stronger ground by pushing for a middle class cut only, because "It's just very hard to justify giving a big tax break to multimillionaires and billionaires."

However, Republicans may be willing to fight anyhow, because they may have "much bigger numbers after November."

As a result, he said, the next few weeks will be "a game of chicken."

Len Burman, a public finance expert at Syracuse University, said it makes sense to extend middle class tax cuts temporarily, but not continue the breaks for the wealthy.

However, it comes down to either all tax cuts expire or all get extended, "Given the choice, I guess I'd extend everything on a temporary basis. I wouldn't do it on a permanent basis, though. That would be more dangerous than letting the tax cuts expire," because it would worsen already deep federal budget deficits.

The reluctance of centrist Democrats to act only on the middle class cuts poses another political dilemma. Democrats could ease the political tension and postpone the issue until a post-election, lame duck session, scheduled to begin Nov. 15. However, that would open the party to the charge that it's ducking tough issues before an election and depriving newly elected lawmakers a chance to vote on those issues.

A lot of Democrats, including House Speaker Nancy Pelosi, D-Calif., want a vote before the election. Not only could Democrats say they took strong steps to reduce the deficit, but "it would give us a good opportunity to get George Bush into the debate," said Rep. Raul Grijalva, D-Ariz.

ON THE WEB

Congressional Budget Office analysis of tax provisions

Rep. Tom Price on lame duck session

How marginal tax rates work

2010 tax brackets

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McClatchy Newspapers 2010

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