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Scenarios: U.S. tax battle to go down to the wire
November 30, 2010 / 5:20 PM / 7 years ago

Scenarios: U.S. tax battle to go down to the wire

WASHINGTON (Reuters) - President Barack Obama and U.S. lawmakers have one month left to clinch a deal to renew tax cuts begun under former President George W. Bush that on December 31 are set to expire for virtually all taxpayers.

Obama and most fellow Democrats want lower tax rates to expire for individual income above $200,000, or $250,000 for couples. Republicans want to renew additional lower rates for income above those amounts.

Obama met with congressional leaders on Tuesday, though a deal, if one is possible, could still be weeks away.

While the president has opened the door to a possible compromise, plenty of disagreements persist between Republicans and Democrats -- as well as among Democrats. Republicans went into the White House meeting indicating they would settle for nothing short of an extension of all tax breaks.

Most Bush-era individual income tax rates, including those on investments, are to expire at the end of the year.

Here are several scenarios regarding the tax cuts.

ACROSS-THE-BOARD EXTENSION

A one- to three-year extension of all the Bush tax cuts may be the most likely outcome, given that Republicans and Democrats are at loggerheads over an extension of the tax cuts for the wealthy.

While cautioning that any deal could fall apart, some predict that lawmakers’ fear of being blamed for raising taxes on nearly every taxpayer will lead them to compromise on a temporary extension, and likely one that will benefit all income groups.

Democrats have an incentive to compromise now, given that their power will be diluted come January when Republicans take control from them of the House of Representatives and add six seats in the Democratic-controlled Senate.

Republicans may not want to be tied to a tax increase, though they have taken a harder line and rejected potential compromises by Democrats.

Senate Majority Leader Harry Reid, a Democrat, will hold a vote on the Democrats’ preferred plan, but it is not expected to clear a 60-vote threshold to overcome Republican opposition.

That vote could happen by next week, according to Senate Democratic Finance Committee Chairman Max Baucus.

“I do very much think there should be an early vote on (making) the middle-income tax cuts permanent,” Baucus said.

Democratic Representative Gerry Connolly, one of dozens of Democrats who asked Pelosi to back the Republican option, said he would vote for the middle class-only plan even though he prefers a straight extension of all lower rates.

“Of course I’ll vote for that, otherwise it would be inconsistent with my position,” said Connolly, a conservative Democrat from Virginia who narrowly won re-election.

Connolly is among the roughly 45 Democrats who have sided with Republicans on the issue.

COULD GRIDLOCK PREVENT ACTION ON THE TAX ISSUE?

A stalemate -- and consequently, higher taxes for everyone -- is still a possibility and ranks a close second likely outcome. If no action is taken, the tax cuts simply disappear.

Many Democrats are worried that they will be blamed if this happens, given that they control both chambers of Congress until January and the White House through at least 2012.

Republicans believe they have the upper hand in this game of who-blinks-first since they will control the House when the new Congress is seated in January.

Even with inaction this year, any delay may be just a month or so. The Internal Revenue Service may delay issuing withholding tables to employers, which would put off any tax hikes.

Another view among some Democrats, most of whom did not vote for the lower Bush-era rates to begin with, argue for more targeted tax breaks for business.

“I, for one, am not for the top 2 percent (upper income) tax cuts,” Democratic Representative Jane Harman said.

“I never was, and I‘m also wondering whether the $3 trillion cost of extending some of them is worth it.”

Extending all the lower and middle income tax rates would cost about $2.9 trillion over a decade, according to the White House. The additional upper-income cuts would add about $700 billion.

Taxes are levied marginally, so a person with $225,000 in income is taxed at the higher rate only for the additional $25,000 above the $200,000 threshold.

WHAT IS THE BIGGEST STUMBLING BLOCK NOW?

Democrats want to consider taxes on middle-income Americans separately from taxes on the wealthiest taxpayers. That way, the next time tax rates on the wealthy expire, it will be harder for Republicans to defend keeping them low.

Most Democrats argue that lower rates for the wealthiest should remain temporary, especially given the bloated budget deficit, which hit 8.9 percent of GDP in the fiscal year that ended September 30. Republicans reject this “decoupling” approach.

WHAT ABOUT DIVIDENDS, CAPITAL GAINS AND THE ESTATE TAX?

A compromise on extending all of the Bush-era tax cuts would also include extension of lower rates on dividends and capital gains, now taxed at 15 percent.

Obama proposes to raise those taxes for high earners to 20 percent in 2011. If Congress fails to act before December 31, the rates for dividends for high earners jumps to 40 percent, a prospect worrying some companies and investors.

Any deal on extension is also likely to include the estate tax, which disappeared this year but will come back at higher levels in 2011 than last year.

Editing by Will Dunham

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