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Extending Tax Cuts, but With a Catch

Posted by Predovich & Company

By John McKinnon, Wall Street Journal, November 10, 2010

Two top Senate Democrats floated the idea Tuesday of extending the Bush-era income-tax rates for a limited time only, and tying that move to an overhaul of the U.S. tax code or passage of policies to address the budget deficit.

The idea injects a new element into the ongoing political discussion about the tax breaks, which expire December 31 unless they are extended, at a time of growing concerns about government deficits. The new proposals could lay the groundwork for a multi-year debate many experts say would be needed to overhaul the bulky tax code.

Republican aides on Capitol Hill expressed cautious interest in the Democrats’ idea. But they said they would be on guard against any measure, such as a fast-track procedure for passing a tax overhaul, that might put the GOP at a disadvantage in blocking future tax increases.  White House officials didn’t immediately respond to requests for comment.

The Democrats’ proposal likely would require extensive compromise by lawmakers at a time when the two parties have been preparing for battle. Most Democrats, including President Barack Obama, have supported extending the current levels for the middle class, defined as families earning less than $250,000, while allowing them to expire for higher earners.

Republicans and some Democrats want all the Bush-era breaks extended, including those for higher earners, at least for some period.  Since the Republican victories in last week’s midterm elections, Mr. Obama has signaled he is also willing to consider some extension for higher earners, but the two sides remain divided on the details.

The two parties also remain far apart on what a tax-system overhaul would look like. Republicans tend to focus on streamlining and simplifying the tax code, and making it more competitive for U.S. companies overseas. Many Democrats do too, but many also view tax-code changes as an important element of deficit reduction.

At a news conference, Sen. Kent Conrad (D., N.D.), the current chairman of the Senate Budget Committee, said he would prefer to extend the current breaks only until a complete tax overhaul can be accomplished. “If I were able to make the decision, I would go for changing the tax system fundamentally,” Mr. Conrad said. “And I’d have an extension [of the Bush-era tax cuts] until that was accomplished.”

Sen. Evan Bayh (D., Ind.) suggested a similar approach. He proposed a two-year extension of all the current tax levels, to be followed by the implementation of policies to reduce government deficits.  “For the next couple of years we need to err on the side of growth, not adding to the burdens of people who make the hiring and investing decisions,” he said. “But after that we need to quickly pivot and begin reducing this debt.”  He pointed to the example of the U.K., where recently-elected Conservatives have pushed a debt-reduction program that emphasizes spending cuts and some tax increases.

The two senators spoke at an event organized by the Peter G. Peterson Foundation, a group that advocates for deficit reduction. It’s launching a $6 million advertising campaign to draw public attention to the grim U.S. fiscal picture and to build political momentum for action.

Several senior GOP Senate aides said they were open to the Democrats’ proposal notion of combining a tax-rate extension with a tax overhaul, but added that the lack of detail so far makes it difficult to respond.

A spokesman for Rep. Dave Camp (R., Mich.), who is in line to become Ways and Means Committee chairman next year, said Mr. Camp preferred making the current rates permanent but has expressed a willingness to support a two-year extension “and then use that time to work on fundamental tax reform.”

Sen. Orrin Hatch (R., Utah), who is expecting to become the top Republican on the Finance Committee, “believes that America’s tax code is overly burdensome and complicated, needing reform,” a spokeswoman said. “How that reform will take shape – too early to say.”

Supporters of combining tax cuts and tax reform likely will soon have more ammunition. A panel appointed by President Barack Obama to come up with deficit-reduction recommendations is scheduled to issue a report on December 1 just as Congress addresses the Bush-era breaks.  The panel isn’t expected to make any direct recommendations on the Bush breaks; its budget baseline assumes that the breaks for the middle class are extended, and the breaks for higher earners end. One likely focus: tightening up some income-tax deductions such as those for mortgage interest and state and local taxes.  Another, unofficial panel is releasing recommendations next week, and it is likely to include a simplified tax code with fewer breaks.

Alice Rivlin, a former director of the Congressional Budget Office who is a member of both panels, said she thought the tax cuts ought to be phased out. “My personal view is the tax cuts, except for the ones at the very, top should be extended but not permanently,” she said in an interview.

In a rare display of bipartisanship on Tuesday, the Democratic and Republican leaders of the congressional tax-writing committees pledged to “do everything possible” to pass another annual extension of middle-class relief from the alternative minimum tax for 2010.  That relief has lapsed for this year, potentially exposing about 21 million mostly middle-class taxpayers to the AMT, which originally was intended to affect only the very wealthy.

Source:  WSJ Online, 11/10/10


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