Democrats, Obama divided over whether to lock in Bush’s middle-class tax cuts

Senate Democrats are peeling away from President Obama over permanent extension of the middle-class tax cuts, saying that locking in low rates for the vast majority of taxpayers is an unaffordable luxury.

Several senators, including Democratic Policy Committee Chairman Byron Dorgan (N.D.), are hesitant about giving up an estimated $1.5 trillion in revenue over the next decade, when the federal deficit is unsustainable and there are no obvious spending cuts to fix it.

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They say it would be smarter to pass a short-term extension of the expiring Bush tax cuts for families earning less than $250,000, then re-evaluate tax policy in a year or two when the economy is stronger.

“I think a far better approach is to extend the middle-income tax cuts for two years and then make a judgment,” said Dorgan. “There’s a lot of uncertainty about the economy and the indebtedness.”

“I don’t think we should get locked into any specifics. It locks us in to say this is going to be permanent,” added Sen. Tom Udall (N.M.). “The American people feel pretty strongly we need to do something about this deficit.”

But anything short of a permanent extension creates a conflict with Obama, who promised during the 2008 presidential campaign to work toward that end.

Senate Majority Leader Harry Reid (D-Nev.) has also called for a permanent extension of tax rates for individuals earning less than $200,000 and families earning less than $250,000.

A senior Senate Democratic aide said making the middle-class tax rates permanent would decouple the issue from tax rates for the wealthy and make it more difficult for Republicans to blur the issue.

“Republicans won’t be able to hold tax cuts for the middle class hostage to use as leverage to help the rich,” said the aide.

Allowing the Bush tax cuts to expire for wealthy families would raise an estimated $700 billion over the next decade.

But the problem is that’s not nearly enough new money to close the federal deficit, Democratic lawmakers acknowledge. Earlier this year the White House projected the 2010 federal deficit to be $1.47 trillion, or 10 percent of GDP.

Dorgan, who is retiring at the end of the year, is one of the few lawmakers willing to admit that keeping tax rates frozen for 98 percent of families may not be possible.

“I think it would be great if nobody had to pay any taxes ever, but that’s not reality,” he said.

Udall is also acknowledging the tough choice ahead.

 “I don’t think we should be making the middle-class tax cut permanent,” he said.

Udall said the tax rates for middle-class families should be extended temporarily and “then we have to look at the overall tax situation.”

Sen. Dianne Feinstein (Calif.), an influential member of the Senate Democratic Conference, said a temporary extension is “worth talking about.”

 She is reviewing data on what portion of federal tax revenues is paid by families at various income levels. She has yet to endorse Obama’s proposal for making permanent the tax cuts for all families earning below $250,000.

Sen. Sheldon Whitehouse (D-R.I.) said he would support a short-term extension of the middle-class cuts.

“I think that’s a good idea,” he said. “As long as we get them extended now, so we get past the early part of next year with the economy still in extremis in a lot of states like my own.

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“That would also give time to the deficit commission to report back,” he said.

The White House fiscal commission, which is tasked with coming up with a plan to rein in the nation’s debt, is due to report its recommendations to Congress by Dec. 1.

Obama told members of the commission in April that “everything has to be on the table” — unpopular spending cuts and tax increases alike.

A Senate Democratic aide, however, said Obama’s political advisers want to take any middle-class tax increases out of the debate in the run-up to the 2012 presidential election.

Lawmakers expect to debate a mix of tax increases and spending cuts in the 112th Congress to address the unsustainable budget deficit.

 Democratic and liberal policy experts say the budget cannot be balanced by spending cuts alone and argue that middle-class tax increases at a later date could solve the long-term fiscal conundrum.

 In a New York Times op-ed earlier this month, Peter Orszag, the former director of the Office of Management and Budget under Obama, also split with the administration in calling for an end to all the Bush-era tax cuts — including those for the middle class — after two years.

Orszag said policymakers need to reduce the deficit by $200 billion to $400 billion a year. He argued that reform to Social Security and Medicare would generate little savings, noting that Obama’s healthcare reform cut most of the fat out of Medicare and Medicaid.

Republican candidates running for the House and Senate have talked about fiscal responsibility, but few have offered substantive proposals for making meaningful dents in the annual deficit.

Other policy experts say middle-class tax increases are inevitable.

“The middle-class tax cuts are necessary for the short term,” said Chuck Marr, director of federal tax policy at the liberal-leaning Center on Budget and Policy Priorities. “You don’t want to lower the salaries of people who are going to spend the money they earn. Over the long term, middle-class people are going to have to pay higher taxes, ultimately.”

Robert Borosage, co-director of the Campaign for America’s Future, a liberal policy advocacy group, said tax revenue as a percentage of GDP is significantly lower in the U.S. compared to other industrialized countries.

He said revenue could be increased from progressive taxes such as a financial transactions tax and higher taxes on the super-rich but predicted the middle class will eventually have to pay more.

 “You can get a lot from progressive taxes, but eventually we ought to be raising taxes some across board,” he said. “You can’t run a modern industrialized mixed economy that offers people some modicum of retirement security and healthcare and civilized set of social institutions with tax revenue at 17 percent of GDP.”

Federal revenues were 17.5 percent of GDP in 2008, compared to 20.6 percent in 2000, according to historical tables compiled by the White House.