Elections Spark Congressional Showdown on Taxes
Policy + Politics

Elections Spark Congressional Showdown on Taxes

With a potentially major shift in political power at stake in the upcoming midterm elections, Republicans and Democrats in Congress are moving rapidly toward a showdown on extending tax cuts for high income earners. The confrontation, postponed for years by political stalemate, has suddenly arrived in force as both parties play a combative game of chicken aimed at emphasizing ideological differences and allowing for little or no compromise.

Senate Democrats are aiming to unveil a bill today that encapsulates President Obama’s plan to extend the Bush tax cuts for families earning less than $250,000 a year, but would end them for people earning more. House Republicans will fire back with their own “Pledge to America” – a manifesto that includes promises to  make all the Bush tax cuts permanent, freeze nonsecurity government spending, abort Obama’s stimulus program and repeal the new health care law. 

To highlight their support for ordinary people and small business, Republicans plan to stage their event at the Tart Lumber, a family-owned lumber and hardware supplier in the rural town of Sterling, Va. The home-spun, Main Street setting dovetails with a key Republican theme in recent weeks: that Obama’s plan to let tax rates rise for families with incomes above $250,000 would hurt small businesses.

The risks are high on both sides. Democrats will be under fire for raising taxes – always unpopular – at a time when unemployment is near 10 percent and growth is sputtering. Republicans are being accused by Democrats of holding middle-class tax cuts “hostage’’ in order to win relief for “millionaires and billionaires.”

Role Reversal
Amid the grandstanding, both parties are engaged in a peculiar role reversal.

President Obama and the Democrats, who have locked horns with Wall Street bankers and other corporate interests, are now positioning themselves as the new friends of big business. Republicans, who have generally supported Wall Street and tax cuts for the very rich, are positioning themselves as champions of Joe Small Business.

Earlier this week, Senate Democratic leaders proposed a bill that would offer multinational corporations a two-year holiday on payroll taxes for every job they moved to the United States from overseas. That proposal came on top of President Obama’s newest tax proposals, both of which would benefit large corporations. The first would allow corporations to deduct 100 percent of their investment in new plant and equipment in the first year, rather than over many years. The second proposal would permanently extend the tax credit for research and development. 

On Thursday, Senator Max Baucus, Democrat from Montana and chairman of the Senate Finance Committee, is expected to unveil a bill that would embody the essence of Obama’s tax plan. For the top 2 percent of income earners, who earn more than $250,000, the top tax rate on personal income revert from 35 to 39.6 percent. The top rate on capital gains could revert from 15 to 20 percent, though details of the bill were still unclear on Wednesday. Baucus is also expected to support a limited return of the estate tax on inherited wealth, which disappeared in 2010 but is scheduled to bounce back next year to pre-2001 levels. 

Democrats' Concerns
Many Democrats are nervous. Some are worried about raising taxes on anybody while the economy is still weak and unemployment is above 9 percent. Others say Democrats should be pushing ahead with their own ideas for tax breaks to spur job growth or a broad tax overhaul. Senate Budget Committee Chairman Kent Conrad, D-N.D., in an interview on Wednesday with The Fiscal Times, said that he favors giving employers who hire additional workers a larger cut in payroll taxes.

“In the internal deliberations, that was at the top of my list,’’ Conrad said. “Not only do I think it, but the [nonpartisan Congessional Budget Office] has told us they put that at the top of their list of bang-for-the-buck. After an extension of unemployment benefits, the biggest bang for the buck they give proposals is that one.”

Earlier this year, Congress enacted the HIRE Act, which provides a $1,000 tax credit and payroll tax exemption to employers for hiring unemployed workers. It expires at the end of the year, and Conrad said it wasn't generous enough. But in a striking shift from their stance two years ago, neither President Obama nor Democrats in Congress are pushing for an extension of cuts in the employee share of payroll taxes.

One reason, analysts say, is that cuts on the employer’s share of payroll taxes provide a more direct incentive to hire workers. Alan Blinder, a professor of economics at Princeton University and a frequent advisor to Democrats, told the Senate Budget Committee on Wednesday that an expanded temporary tax credit to employers would cost $30,000 to $40,000 per job, not the $100,000 per job that the current stimulus programs are costing.

“We need to do this stuff cheaper, given the state of the budget," Blinder told lawmakers.

Mark Zandi, chief economist at Moody’s Analytics and an advisor to both parties, proposed offering businesses a $7,500 credit for each new hire. To give companies an extra nudge, Zandi suggested that Congress offer up to $50 billion in credits on a first-come, first-served basis. 

“The HIRE Act was insufficient, it was too small, too restrictive, it was not working,’’ Zandi said. “It could be quite effective if implemented in a better way." Other economists would go even further. Nouriel Roubini, a professor of economics at New York University, recently proposed that Congress reduce the payroll tax on all workers for two years, and offset the cost by letting the Bush tax cuts on high-earners expire.

But much like many Democrats in Congress, Roubini proposed that most of the cuts be on the employer share of payroll taxes.

“To maximize the incentives for private sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees,’’ Roubini wrote in an op-ed column for The Washington Post. “This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses.”

It is far from clear that Congress will do anything at all about taxes before the midterm elections in November, given the determination by both political parties to highlight their ideological differences. Though it is possible Democrats will push for a vote on extending only the so-called middle-class tax cuts, the earliest real action probably won’t come until a lame-duck session after the elections, and may not come until early next year.