Congress to extend middle-class tax cuts: Dems

WASHINGTON (Reuters) - The Congress will likely act to extend tax cuts for the middle class to avoid choking off the fragile economic recovery, key congressional Democrats said on Tuesday.

House Democratic Leader Steny Hoyer said he expected the House of Representatives to push to extend middle class tax cuts before they expire at year end, but suggested cutting taxes for the wealthy is less urgent.

"What you want to do is stimulate at this point in time, so you certainly do not want to increase taxes on the middle class, middle-income working Americans," Hoyer told reporters.

President Barack Obama and his Democratic allies in Congress have vowed not to raise taxes on individuals earning less than $200,000 or couples making less than $250,000.

Hoyer said discussion is underway between House Ways and Means Committee Chairman Sander Levin and Senate Finance Committee Chairman Max Baucus on the shape and timing of legislation. Those two tax writing committees will take the lead in developing the legislation.

"The goal is to get it done before they expire," Hoyer said.

Baucus told reporters that lawmakers were still weighing the details of the legislation, including the tax rate for dividends and wealthier families.

"Clearly we will want to extend the middle income tax cuts at the very least," Baucus said.

Without congressional action, the tax cuts enacted under President George W. Bush will expire at the end of the year. Current tax rates would rise for most income groups to about 28 percent, 31 percent, 36 percent and 39.6 percent from 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

Investors are watching because under current law, tax rates on the wealthy for dividends would be treated as ordinary income in 2011, meaning they would be taxed as high as 40 percent.

Obama has proposed extending the tax rates for individuals earning less than $200,000 and for families earning less than $250,000 but letting the rates rise back to 36 and 39.6 percent for wealthier income groups.

Obama also proposed raising tax rates on capital gains for the upper-income brackets to 20 percent from the current 15 percent.

Senate Democratic leaders met this morning with Obama to discuss the legislative agenda for the rest of the year. Democrats are facing a tough election cycle with unemployment stuck near 10 percent and Republicans poised to pick up a number of Democratic seats.

Tax-writers in the House are considering a one-year extension of the lower rates for the middle class and a two year extension on a fix to prevent millions of Americans being hit with the alternative minimum tax, originally intended to ensure the rich pay some taxes. That plan would cost $270 billion over 10 years.

DRAG ON DIVIDEND STOCKS

One dilemma for lawmakers and the Obama administration, though, is offsetting the budget impact of keeping dividend tax rates from spiking to 40 percent in January.

Congressional budget rules will allow lawmakers to extend middle income tax cuts without spending cuts or revenue increases to offset their cost. But that is not the case for any extended tax breaks for the wealthy.

Making all the middle class tax rates permanent and extending other popular programs such as child tax credits and relief from the marriage penalty alone would cost $1.3 trillion over 10 years, according to the congressional Joint Committee on Taxation

Several investment analysts predict resolution of the Bush tax cuts will drag into late November and December, after the November mid-term elections.

"It will likely be so expensive for Congress to deal with the expiring 2001 and 2003 tax cuts that there will be no way to pay for it all," Concept Capital analyst Anne Mathias told investors this month.

"This uncertainty could be challenging for portfolios heavily concentrated in dividend-paying stocks as confusion could lead to unpredictable behavior in advance of year-end," she added.

(Reporting by Kim Dixon and Donna Smith; Additional reporting by Thomas Ferraro; editing by Andrew Hay)