Domestic Taxes

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.”

{mosads}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.”

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