By Alexander Bolton - 07/22/10 10:00 AM EDT
Democrats are considering a plan to delay tax hikes on the wealthy for two years because the economic recovery is slow and they fear getting crushed in November’s election.
It could mean a big reprieve for families earning $250,000 and above annually.
Some Democrats are now arguing forcefully that a delay is a win-win plan that would help the federal budget without hurting the economy.
Wealthy families would not have an incentive to cut back on spending and budget writers could assume an inflow of tax funds in future years, making five- and 10-year budget projections look less scary.
Rep. John Yarmuth (D-Ky.), a member of the Ways and Means Committee, which has jurisdiction over taxes, said some of his Democratic colleagues have discussed the idea out of fear of impeding the nation’s economic recovery.
“I’ve heard some sentiment about raising the rate but not making it effective until 2012,” he said.
During the 2008 presidential campaign, President Obama said he would not extend the Bush-era tax cuts for families earning more than $250,000.
Obama promised that families earning less than $250,000 would not see their taxes increase.
But vulnerable Democrats in Congress are worried about talk of raising taxes, even on the wealthiest families, when the national economic recovery has slowed.
“I think the recovery is sufficiently fragile that we ought to leave tax rates where they are,” said Rep. Gerry Connolly, a freshman Democrat from Virginia.
Connolly said Democrats should not allow the 2001 Bush tax cuts to expire for anybody.
“People in the upper tax brackets have a huge impact, a disproportionate impact on consumer spending,” he said.
Sen. Kent Conrad (N.D.), a senior Democrat on the Senate Finance Committee, said he could support a short-term extension of the Bush tax cuts for the highest income earners.
He noted that experts predict continued economic weakness over the next 18 to 24 months.
“My reaction would be don’t cut spending, don’t raise taxes and that would mean on anyone,” he said.
Rep. Bobby Bright, a Democrat facing a tough reelection race in Alabama, said tax increases, even if limited to the wealthiest families, could imperil the recovery.
“I don’t care if it’s the wealthiest of the wealthy, you don’t raise their taxes,” he said. “In a recession, you don’t tax, burden and restrict. The economy is like a ship, and if you sink the ship, all the good you might do goes down with it.”
Families who make up the 5 percent of highest earners account for about 30 percent of consumer spending.
Mark Zandi, chief economist for Moody’s Analytics, recently declared that a drop in spending by the rich has slowed the economic recovery.
“One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious,” he told The New York Times.
Liberals who favor the tax hikes note that these families also take in almost 30 percent of the nation’s income, according to Congressional Budget Office data from 2007. The top 1 percent of earners collect 17 percent of the nation’s income, according to CBO.
Yarmuth said Connolly and Bright, who don’t want to touch the tax rate on the wealthiest, represent a minority opinion in the Democratic Caucus.
But he added concern over the economic impact of raising any taxes has spurred the idea of postponing when higher taxes go into effect.
Discussions are in the earliest stages and it’s not yet clear whether the tax impact would be postponed until after November of 2012, when Obama faces reelection.
Even liberal lawmakers from the Northeast have begun pushing to shield some of the nation’s highest income-earning families from tax increases.
Rep. Jerrold Nadler, a Democrat from Manhattan, has proposed legislation that would provide adjustments in income tax rates to reflect regional costs of living.
The legislation is sponsored by five Democrats representing New York City, its suburbs and Long Island where living standards and incomes are high.
They are Reps. Tim Bishop, Steve Israel, Nita Lowey, Carolyn Maloney and Carolyn McCarthy.
Rep. Jared Polis, a freshman Democrat from Colorado, said lawmakers are torn between concerns over the economic effect of raising taxes and the budget impact of keeping rates low for earners in the top brackets.
Allowing income tax rates to reset to pre-Bush levels for individuals earning more than $200,000 and families earning more than $250,000 could generate close to $700 billion over the next 10 years.
Families earning more than $374,000 a year in taxable income would see their rate jump from 35 percent to 39.6. Families earning above $250,000 in gross income would see their rate jump from 33 percent to 36.
The debate promises to get more contentious as Democrats near the end of the year.
Speaker Nancy Pelosi (D-Calif.) has reiterated her support for raising taxes on individuals and families who earn the most.
“My position is also that the Bush tax cuts for the wealthiest people in America did nothing to grow the economy during the Bush administration, did not create jobs, did not reduce the deficit,” she said at a recent press conference.
In the Senate, some liberal Democrats such as Sen. Tom Harkin (Iowa) would like to see the Bush tax cuts expire for families earning $200,000 a year, or even less.
Sen. Byron Dorgan (D-N.D.) disputed the argument that raising taxes on the wealthy could hurt the economy.
“One of the most robust periods of economic growth was prior to the Bush tax cuts,” he said.
He said large federal deficits, which would be addressed by tax increases, have caused people to lose confidence in the economy.
Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a left-leaning think tank, said the economic impact of raising taxes on the wealthy is overstated.
He said the spending of high-income people is less affected by moderate shifts in income than is that of middle-income people, who often live “paycheck to paycheck.”
“If lawmakers are concerned about the impact on the economy, they would be better off taking money raised from taxing the wealthy and channeling it in policies that deliver more bang for the buck,” he said.
Some Democratic policy experts cite unemployment aid and infrastructure spending as policies with greater economic impact than keeping taxes low for the wealthy.