WASHINGTON (Reuters) - U.S. Democratic and Republican lawmakers have one month left to reach a compromise on renewal of Bush-era tax cuts that will expire at the end of the year.
With no deal, all taxpayers face higher income taxes come January 1.
President Barack Obama said he is open to talks with Republicans after arguing for months that the country could not afford to keep rates low for individuals with income above $200,000 a year.
Republicans, energized by winning control of the House of Representatives and gaining seats in the Senate, want to keep permanent the low rates for the wealthiest Americans.
Most Bush-era individual income tax rates, including those on investments, are to expire at the end of the year.
A one- to three-year extension of all current rates may be the most likely outcome, given that Republicans and Democrats are at loggerheads over an extension of lower rates for the wealthy.
While cautioning that any deal could fall apart, many analysts predict 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.
Capital Alpha investment analyst Jim Lucier puts 70-30 odds on a deal, but warns “failure remains an option.”
Democrats have an incentive to compromise now, given that their power will be diluted come January when Republicans take control of the House of Representatives and add six seats in the Senate.
Republicans also do not want to be tied to a tax hike, however briefly.
Senate Majority leader Harry Reid, a Democrat, last week opened the door to a potential compromise with a multi-year, across-the-board extension.
Reid cannot now muster the 60-votes needed to prevent Republicans from blocking a Democratic plan to extend cuts only to those with income considered middle class or lower.
Chances of passage in the House are not certain given that about 45 Democrats have sided with Republicans that the wealthy be included in any extension of lower tax rates.
Gridlock — and consequently, higher taxes for everyone — is still a possibility and ranks a close second likely outcome.
Many Democrats are worried they will be blamed if this happens, given that they control the presidency and both houses of Congress, at least until January.
Republicans believe they have the upper hand in this game of who-blinks-first as they will be in the majority in the House once the new Congress is seated in January.
Even with inaction this year, any delay may just be a month or so.
Still, corporate America and other traditional Republican backers say waiting until January will be disruptive and cut into consumer spending.
Democrats want to consider taxes on middle-income Americans separate from taxes on the wealthiest. 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 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.
The tax debate takes place in the context of a $1.3 trillion budget deficit.
Extending all of the tax cuts will cost the federal treasury $2.9 trillion over the next decade. Extending the lower rates for wealthy earners, about 2 percent of the population, adds about $700 billion on top of that.
A presidential commission is set to issue recommendations to reduce the deficit on December 1, though it is doubtful they will reach a consensus.
Still, the ideas proposed are likely to include a broad overhaul of the tax code, and a temporary extension would allow for broader reform a few years down the road.
In addition, some see some benefit in letting all the lower tax rates expire, with the added tax payments helping to lower the deficit.
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, but 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 than last year in 2011.
Reporting by Kim Dixon; Editing by Jackie Frank