Fight brewing over expiring tax cuts

By Dow Jones Newswires
Posted July 23, 2010 at 6:13 a.m.

The Obama administration will allow tax cuts for the wealthiest Americans to expire on schedule, Treasury Secretary Timothy Geithner said Thursday, setting up a clash with Republicans and a small but vocal group of Democrats who want to delay the looming tax increases.

Geithner said the White House would allow taxes on top earners to increase in 2011 as part of an effort to bring down the U.S. budget deficit. He said the White House plans to extend expiring tax cuts for middle- and lower-income Americans, and expects to undertake a broader revision of the tax code next year.

“We believe it is appropriate to let those tax cuts that go to the most fortunate expire,” Geithner said at a breakfast with reporters.

His comments came as a number of Democrats, including North Dakota Sen. Kent Conrad and Nebraska Sen. Ben Nelson, have begun echoing calls from Republicans and some economists to extend Bush-era tax cuts for all earners, including couples earning above $250,000 and individuals earning above $200,000.

Many economists believe the recovery is too fragile to risk raising taxes and that doing so could delay, if not stall, economic growth.

Geithner said there’s “still some uncertainty about how strong the recovery is going to be,” which may be affecting spending decisions by businesses and individuals. He discounted that as a reason to extend the tax cuts for top earners, saying most private forecasts show moderate economic growth and increasing public confidence in the recovery.

Pressure is growing on the administration from a small number of Democratic lawmakers to extend all the Bush cuts, which include taxes on investment income and capital gains.

“I think given the fragility of the recovery, the timing is wrong for any kind of tax increase of this nature,” Rep. Gerry Connolly (D., Va.) said. “I know that puts me out of step with many in my own caucus, but it’s important for members to remember the top 5 percent 1 8 of earners 3 8 generates 30 percent of consumer spending.”

Connolly said there were “lots of conversations going on sotto voce” among House Democrats over whether to extend current tax levels for all earners, not just the middle class.

Federal Reserve Chairman Ben Bernanke told lawmakers Thursday the U.S. “should maintain our stimulus in the short term.” Extending the Bush tax cuts “is one way” of doing that, he said. “There are other ways as well.”

Many economists say raising rates on top earners could prompt consumers to rein in spending. A Goldman Sachs research report projects the expiration of the tax cuts could shave just under 0.5 percentage points off growth in 2011.

All the Bush-era tax cuts are set to expire at the end of this year, meaning Congress must act if it wants to avoid raising taxes across the board. Political strategists said that could give Republicans an edge, since they could essentially hold the entire package hostage unless Democrats agree to extend the cuts for high-income earners.

“The question is, do Republicans think they can get this to the end game, where Democrats face a choice of seeing an income tax increase on everybody,” said Tom Gallagher, a Washington-based analyst with ISI Group, a Wall Street research firm. He speculated that a compromise could include a short extension for higher earners.

A Senate Democratic leadership aide said as of now, neither a partial extension of the Bush tax cuts nor a full extension could win the 60 votes needed to break an expected Senate filibuster. Liberals would try to block a full extension. Republicans would try to block an extension of just the middle-class tax cuts.

House Majority Leader Steny Hoyer of Maryland planned to lay out Democrats’ agenda on the economy in a speech Friday. He is expected to criticize Republicans by lumping their support for tax cuts with their opposition to government regulation of Wall Street and the oil industry.

Even if Republicans and centrist Democrats succeed in winning an extension of current tax levels for the next year or two, taxes could be going up after that. A top Republican on President Obama’s blue-ribbon fiscal commission, Sen. Judd Gregg of New Hampshire, said tax increases are on the table in the bipartisan panel’s negotiations, along with spending cuts.

The administration estimates that allowing tax cuts to expire for upper-income earners would increase U.S. revenue by more than $800 billion over the next 10 years.

House Speaker Nancy Pelosi of California appeared to back Geithner in ruling out a compromise. “Our position has been that we support middle-income tax cuts,” she said. “The tax cuts at the high end have increased the deficit enormously and . . . have not created jobs in the eight years of the Bush administration.

Read more about the topics in this post: , ,


  1. rj chicago July 23, 2010 at 9:36 a.m.

    Read it and weep – the liberals will continue to filch away!!! Go to cash if you can. – Investor’s Business Daily
    The Tax Tsunami On The Horizon
    Posted 07/21/2010 06:41 PM ET
    Fiscal Policy: Many voters are looking forward to 2011, hoping a new Congress will put the country back on the right track. But unless something’s done soon, the new year will also come with a raft of tax hikes — including a return of the death tax — that will be real killers.
    Through the end of this year, the federal estate tax rate is zero — thanks to the package of broad-based tax cuts that President Bush pushed through to get the economy going earlier in the decade.
    But as of midnight Dec. 31, the death tax returns — at a rate of 55% on estates of $1 million or more. The effect this will have on hospital life-support systems is already a matter of conjecture.
    Resurrection of the death tax, however, isn’t the only tax problem that will be ushered in Jan. 1. Many other cuts from the Bush administration are set to disappear and a new set of taxes will materialize. And it’s not just the rich who will pay.
    The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.
    But the damage doesn’t stop there.
    The marriage penalty also makes a comeback, and the capital gains tax will jump 33% — to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.
    Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. Other tax hikes include: halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.
    Letting the Bush cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020.
    But even more tax headaches lie ahead. This “second wave” of hikes, as Americans for Tax Reform puts it, are designed to pay for ObamaCare and include:
    The Medicine Cabinet Tax. Americans, says ATR, “will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin).”
    The HSA Withdrawal Tax Hike. “This provision of ObamaCare,” according to ATR, “increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%.”
    Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.
    Economic Substance Doctrine. ATR reports that “The IRS is now empowered to disallow perfectly legal tax deductions and maneuvers merely because it judges that the deduction or action lacks ‘economic substance.’”
    A third and final (for now) wave, says ATR, consists of the alternative minimum tax’s widening net, tax hikes on employers and the loss of deductions for tuition:
    • The Tax Policy Center, no right-wing group, says that the failure to index the AMT will subject 28.5 million families to the tax when they file next year, up from 4 million this year.
    • “Small businesses can normally expense (rather than slowly deduct, or ‘depreciate’) equipment purchases up to $250,000,” says ATR. “This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be ‘depreciated.’”
    • According to ATR, there are “literally scores of tax hikes on business that will take place,” plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss, “but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.”
    • The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers won’t be able to deduct their classroom expenses and employer-provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.
    Then there’s the tax on Americans who decline to buy health care insurance (the tax the administration initially said wasn’t a tax but now argues in court that it is) plus a 3.8% Medicare tax beginning in 2013 on profits made in real estate transactions by wealthier Americans.
    Not all Americans may fully realize what’s in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).
    Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn’t. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.
    The cuts also proved popular among all income groups — despite the Democrats’ oft-heard assertion that Bush merely provided “tax breaks for the wealthy.” Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.
    Maybe, just maybe, Americans remember that — and will not forget come Nov. 2

  2. Lisa Barrett July 23, 2010 at 10:04 a.m.

    First, if you look at the FACTS, admittedly hard to do amongst all the nonsense fear-mongering i.e marriage penalty, death tax, death panels, weapons of mass destruction, mushroom cloud, etc, etc, the expiring tax cuts (not to be confused with the term “tax increase”)will affect only the top tier, the wealthiest of wealthy Americans. So unless you earn more than app. 1.8 MILLION a year, don’t worry. Second, the Bush tax cuts, combined with Bush’s wars, are THE reasons the deficit has grown at an astronomical rate. If we end the tax cuts, the deficit will drop considerably within 5 years. Check for if you need additional, unbiased information.

  3. Susan July 23, 2010 at 10:36 a.m.

    Lisa Barrett is absolutely incorrect. This WILL affect everyone, not just those earning 1.8 million a year. My husband and I got caught in the Alternative Minimum Tax last year and we earn less than $80,000.00 combined. So I disagree heartily. The tax cuts need to be made permanent!

  4. terry July 23, 2010 at 10:48 a.m.

    “If we end the tax cut, the deficit will drop considerably within 5 years.”

    That assumes one thing – that the government will use the increase in revenue intelligently.

    Based on what we have seen so far from the present administration, how many out there actually believe that will happen?

  5. athena July 23, 2010 at 10:52 a.m.

    Congressional Budget Office data shows the Bush tax cuts created almost 50% of the current deficit. The democrats in Congress are talking about keeping the middle class rates as they are, but allowing the rate for the top tier to return to the 90s levels.

    The AMT is another issue altogether.

  6. terry July 23, 2010 at 10:54 a.m.

    “Tax increase” means that your taxes go UP.

    E.G. – In fiscal year A your taxes are nil. In fiscal year B your taxes are 20%.

    From nothing to 20%. Just because some pencil pusher finds a different way of doing it and a different name for it doesn’t mean that it’s not a TAX INCREASE.

  7. terry July 23, 2010 at 10:55 a.m.

    The people at the highe dn with the

  8. terry July 23, 2010 at 10:59 a.m.

    The people at the high end and the (BOOOO!) corporations with the big money – THEY are the ones who make it happen, and they are – understandably – hedging their bets right now, because they are afraid of what asinine move Obama and his (soon to be ex) cohorts have planned next.

  9. otp July 23, 2010 at 11:14 a.m.

    These evil top 5% – who bring home a greedy $174,000 year. In a 2-income home, that’s a money grubbing $87,000 each. Let’s see, a 10year teacher at CPS, w/ a masters and some credit hours makes nearly 80K, a CPD officer starts at 44,000, but w/ 10 years on the job and a promotion or two would be pulling down 71K.

    That’s right – 35 year olds, with pretty average jobs can be just $23K from being the evil rich. Hope you don’t have any overtime, or coach any afterschool programs. And these are the folks (along w/ everyone above them on the payscale) who account for 30% of the spending. If you yank their spending money, you cripple the economy.

  10. ChrisN July 23, 2010 at 1:43 pm

    Geez with all the mis-inforamtion out there to support the liberal agenda, its no wonder people demonize the rich…. We have all heard about how the rich get all the tax cuts on the backs of the working class…

    News flash…. about 47% of all tax payers pay no federal income tax.
    “About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That’s according to projections by the Tax Policy Center, a Washington research organization”

    Somehow even though the bottom 47% of Americans pay NOTHING in federal income tax, they can still ***** about how only the rich get the tax breaks…

  11. Liberalquaker July 28, 2010 at 3:27 a.m.


    You’ve conveniently left out payroll taxes. Did you know that 75% of Americans pay more in payroll taxes than income taxes?


    Doesn’t that piss you off though, that these “pretty average jobs” put you near the top 5% of earners? If these were “pretty average jobs” then shouldn’t they be, oh say, the top 50% of earners? Even granting a level of permanent unemployment that number should be at least below 90%. Its a good example of what has happened to the American middle class since the 50’s.