Key Democrat backs keeping tax cuts for rich

WASHINGTON (Reuters) - A fiscally conservative Democrat who chairs the U.S. Senate's budget committee on Wednesday said he supports extending all of the tax cuts that expire this year, including for the wealthy.

"The general rule of thumb would be you'd not want to do tax changes, tax increases ... until the recovery is on more solid ground," Senator Kent Conrad said in an interview with reporters outside the Senate chambers, adding he did not believe the recovery has come yet.

Conrad's comments are sympathetic with Republican arguments against raising taxes amid a fledgling economic recovery. They frame a debate gaining steam over whether stimulus to bolster the economy's recovery, or deficit reduction, should be the top policy priority.

Other Democrats are still sensitive to budget worries.

Senate Finance Committee Chairman Max Baucus, another fiscally conservative Democrat, earlier this month questioned whether the country could afford to extend the tax cuts for the wealthier groups, citing the yawning budget deficit.

Lawmakers are mulling the renewal of tax cuts enacted in 2001 and 2003 under former president George W. Bush that expire at the end of this year. President Barack Obama and his Democratic allies in Congress want to extend the lower rates for individuals earning less than $200,000 or couples making less than $250,000.

About two to three percent of Americans fit into the upper income categories.

The federal government has run deficits for several years, with the 2010 budget expected to come in more than $1 trillion in the red. The issue has stalled several spending bills in Congress, including extension of unemployment insurance now being debated in the Senate.

Conrad said that it will be tough to extend the top tax cuts, given worries about the deficit and because under budget rules, lawmakers must find offsetting revenue to pay for the lower rates for wealthier Americans.

But the North Dakota Democrat who also is on the Senate Finance Committee, said he thinks waiving so-called pay-go rules to extend the upper income rates should be considered.

"Pay-go is not just a line in the sand," he said. "There is a reason that you have a pay-go waiver, which requires 60 votes."

Democratic Senator Evan Bayh also recently questioned whether taxes should be raised on the wealthy, citing the economy.

Without action, tax rates will rise for all income groups, to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent, from the current categories of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

By letting the Bush tax cuts for those in the upper income categories expire and boosting their capital gains and dividend tax rates back to 20 percent, the Obama administration expects to generate about $678 billion over 10 years.

MOST LIKELY TO SPEND

Conrad later said the first priority should be extending the middle class rates, acknowledging that the wealthier are less likely to spend the extra cash.

Most economists agree with that proposition.

Former Treasury Secretary Robert Rubin, who served under President Bill Clinton, also weighed in on the issue on Wednesday.

"I would do what President Obama has proposed to do, which is increase the rates on top two brackets to where they were under President Clinton and I don't think that would pose a threat to the economy." he said.

Extending the tax cuts for wealthier Americans would also include keeping the dividend tax rate from rising to 40 percent, the level it reverts to under current law with no action.

Dividend-paying companies such as AT&T are lobbying to prevent the jump to 40 percent.

"We're continuing to do spadework to educate members about the potential for the tax rate going up," said Jim McCrery, a former Republican member of the tax-writing Ways and Means Committee in the U.S. House of Representatives and now a lobbyist for a group of such companies.

Baucus has voiced support for keeping the dividend rate from going back to 40 percent but has not been specific.

(Additional reporting by Joseph Giannone in New York)

(Reporting by Kim Dixon. Editing by Robert MacMillan and Carol Bishopric)