Tax cuts for rich questioned by key U.S. senator

* Most taxes will rise in 2011 without action

* Polls show voters worried about U.S. indebtedness

By Kim Dixon

WASHINGTON, July 14 (Reuters) - The head of the U.S. Senate's tax writing committee questioned on Wednesday whether the country could afford to extend tax cuts for the wealthy, further bolstering chances that high-income Americans will pay more next year.

"When we passed the 2001 tax cuts, the federal government was running a surplus," Senate Finance Chairman Max Baucus said at a hearing. "We face a different budget picture today."

The federal government has run deficits for several years, with the 2010 fiscal budget expected to be more than $1 trillion in the red. The issue has stalled several spending initiatives in Congress as polls show voters are worried about U.S. indebtedness.

Lawmakers are weighing renewal of a series of middle-class tax cuts enacted in 2001 under former President George W. Bush that expire at the end of this year.

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. Many Republicans, however, favor extending all the tax cuts, including for upper income groups.

Democrats charge that Bush's tax cuts for the wealthy have been a major factor behind the federal deficits.

With consumer spending losing steam and a stubbornly high unemployment rate, Democratic lawmakers say keeping rates low for the middle class could help boost the economy.

LIKELY TO SPEND

Many economists say middle and lower income people are more likely to spend the money they keep, though a conservative economist told the panel that hiking taxes on the rich will cut incentives for work and cut the efficiency of the economy.

Tax-writers in the House of Representatives are considering a one-year extension of the lower rates for the middle class, defined as individuals making less than $200,000 and families earning $250,000 a year.

Democratic leader Steny Hoyer said on Tuesday he expected Congress to address the tax cuts by year end and that cutting taxes for the wealthy is less urgent.

Without congressional action, current tax rates will rise for all income groups, to approximately 28 percent, 31 percent, 36 percent and 39.6 percent from 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

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

(Editing by Philip Barbara)