Democrats can't agree over killing or saving the Bush-era tax cuts

Democrats are undercutting their campaign message by condemning Republican economic policies while calling for the extension of Bush-era tax cuts.

“It’s hard to say the Republican economic policies were bad, [and] then continue them,” Paul Begala, Democratic strategist and former adviser to President Clinton, told The Hill. “That is a bit of a mixed message.”

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President Obama and Democratic congressional leaders want to extend all of the tax cuts initiated by President Bush with the exception of rates on individuals making $200,000 and families with incomes above $250,000.

But there’s growing momentum within the party to extend cuts on those with higher incomes, too, given the stubborn recession. Moody’s Analytics economist Mark Zandi, who has advised Democrats on the economy, this week said congressional leaders should extend all of the tax cuts to reduce the risk of a double-dip recession.

Even extending only the tax cuts for the middle class undercuts the Democratic argument a bit, said Democratic strategist Douglas Schoen, by making it difficult for liberal leaders to say Bush’s tax policies had a toxic affect on the economy.

“If the whole campaign is based on blasting Bush, and Bush for giving away too much to the rich, it’s pretty hard to say that Bush was right [about the middle-class tax cuts],” Schoen said.

Several Democrats during the past six weeks have suggested it is possible all of the tax cuts will be extended. Zandi has proposed a compromise of extending the tax cuts on the top brackets through 2011 and then phasing in an increase in 2012 assuming the economy is strengthening at that time.

Such a strategy, however, could make Democratic leaders look as if they are caving to political pressure from Republicans, who have argued all of the tax cuts should be extended to bolster investments by small businesses and individuals in the economy.

It could also further turn off the Democratic base just before a mid-term election where Democrats are already worried they could lose control of the House and even the Senate.

“All of the energy in this election is on the right; the progressives are completely demoralized,” Begala said. “One of the reasons is that when you get up in the morning and you find out that Democrats are increasing troops in Afghanistan and cutting taxes for the rich, why the hell have a Democratic Party?”

Extending the Bush tax cuts could also send the signal to foreign investors that the U.S. is not taking its debt seriously, according to some economists.

The nonpartisan Congressional Budget Office predicts continuing all measures will add nearly $4 trillion to the debt in ten years. Tax breaks for the wealthy would account for less than a quarter of that figure, about $700 billion.

Lawmakers are talking about a one-year extension of all Bush tax cuts, which would add approximately $200 billion to the debt in 2011. Tax breaks for the wealthy would account for about $40 billion of that increase.

Begala believes a single-year extension of all the tax cuts is a bad move for Democrats.

“I don’t think it helps politically at all,” he said. “Because tax cuts for the rich expire in a year, then we have this whole fight all over again [next year] only in a Congress with more Republicans.”

A possible compromise between liberal and centrist Democrats is a tax increase on millionaires. The idea gained traction during the healthcare debate, as supporters argue it would essentially stop all small business owners from incurring a tax hike next year.

“It would cut out a fair number,” said Pete Sepp, executive vice president of the National Taxpayers Union. “The problem though is that business income is highly volatile on a year-by-year basis.”

That volatility could make revenue scoring difficult. A recent Tax Foundation study found only 6 percent of all millionaires consistently held that status every year between 1999 and 2007, the most recent IRS data available.

“That means 94 percent of entities that found themselves in the million dollar-plus range one year didn’t find themselves in it for another year over the better part of a decade,” Sepp said. “When you look at it that way, the picture is less static. And there could be many more people and businesses affected by the tax increase.”