Dems, GOP clash over taxes as 'fiscal cliff' warnings increase

Published: Wednesday, July 18 2012 10:44 a.m. MDT

In this April 16, 2012 file photo, a 2011 1040 tax form along with other income tax forms are seen at the entrance of the Illinois Department of Revenue.

Seth Perlman, Associated Press

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Warnings about the January 1, 2013, "fiscal cliff" are starting to pile up as Republicans seek to extend all the Bush-era tax cuts and Democrats push to extend the cuts for everyone except wealthier Americans.

Without Congressional action, all marginal individual tax rates increase, the capital gains tax rate increases, the dividend tax rate will increase, the death tax returns to its 2000 levels, the ATM patch ends, the marriage penalty relief expires, the child tax credit is halved and annual business "extenders" end, according to the U.S. Chamber of Commerce.

While both parties agree that the tax cuts ought to be extended, the two parties differ over letting the cuts expire for wealthier Americans.

On July 9, President Barack Obama called for Congress to extend the tax cuts for individuals with incomes below $250,000 per year. Also on July 9, White House press secretary Jay Carney said Obama would veto any bill that extended all the tax cuts, and in a recent speech at the Brookings Institute, Sen. Patty Murray, D-Wash., said Democrats would let all the tax cuts expire rather than renewing them for higher-income families.

"If we can't get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013 rather than lock in a long-term deal this year that throws middle class families under the bus," Murray said. "And I think my party and the American people will support that. I hope it doesn't come to that."

"Today, I told reporters that Rs are holding tax cuts for middle class hostage in order to give tax breaks to wealthiest 2%," House Whip Steny Hoyer tweeted Tuesday.

Raising taxes under Obama's plan would hit about 2.5 percent of businesses, but that the 2.5 percent encompasses 894,000 small businesses, reports suggest.

"Most Americans understand that if we raise taxes on job creators, we're going to have fewer jobs," House Speaker John Boehner, R-Ohio, said. "Our economy is still struggling under President Obama's policies, and his massive tax hike will only make things tougher. It's one of the worst possible ideas at one of the worst possible times for families and small business."

"Democrats in Congress are now saying that they would rather see taxes go up on every American at the end of the year than let about a million business keep what they earn now," Sen. Mitch McConnell, R-Ken., said. "This isn't an economic agenda. It's an ideological crusade."

Federal Reserve Chairman Ben Bernanke warned Congress Tuesday that allowing the "fiscal cliff" in the form of tax increases and spending cuts would have "major negative effects on the recovery."

A new Ernst & Young analysis looked at the impact of coming tax increases on the top tax tier, including the rise accompanying the expiration of the Bush-era tax rates, the reinstatement of the limitation on itemized deduction, the taxation of dividends as ordinary income, an increase in the top tax rate applied to capital gains and additional tax increases tied to the health care overhaul.

The combination of these tax changes would put the top tax rate on ordinary income at 40.9 percent, up from 35 percent. The top tax rate on dividends will rise from 15 percent to 44.7 percent and the top tax rate on capital gains will rise from 15 percent to 24.7 percent. The report states that these higher rates will "result in a smaller economy, fewer jobs, les investment and lower wages."

The report goes on to say that output in the long-run would fall by about $200 billion in today's economy, and the economy would have 710,000 fewer jobs. The estimate for Utah shows an output of -1.7 billion and -6,500 jobs. The report also suggests that employers would be forced to trim wages by 1.8 percent. In total, the fiscal changes would reduce the federal budget deficit by $774 billion in 2013.

The Business Roundtable said policymakers should make a deal to extend the Bush-era tax cuts while the Tax Relief Coalition encouraged Congress to extend the expiring tax provisions and make reforms to the U.S. tax and entitlement systems a priority, echoing a June 5 letter from the Chamber of Commerce.

"Mrs. Murray may think she's putting Republicans on the political spot, but her real hostage is the already weak economy," a Wall Street Journal editorial said. "Growth in the first quarter was a mere 1.9 percent, and economists have steadily downgraded their expectations for the second. As the tax cliff approaches, the policy uncertainty is already causing businesses to hold off on hiring and investment. Even the Keynesians at the Congressional Budget Office say that if all of the Bush tax rates expire, growth will fall close to recession territory."

An Investor's Business Daily editorial also slammed the rhetoric, saying Obama and his Democratic allies are pointing a gun at the economy and threatening to pull the trigger unless they get a tax hike that will hurt economic growth.

"If President Obama really wants the wealthy to pay more in taxes, he should champion the kind of tax reform that his long-discarded Simpson-Bowles Commission encouraged," Liz Peek wrote at The Fiscal Times. "With every sign that the economy is slowing, our Campaigner in Chief is creating even more anxiety by taking an unwavering stand — he will not, he affirms proudly, extend current tax rates on all Americans. Instead, he demands the wealthy pay more. That's it. That's his grand plan for getting the country moving again."

A Pew poll shows that 44 percent of the public believes that raising taxes on incomes above $250,000 would help rather than hurt the economy. A recent McClatchy-Marist poll shows that 52 percent of registered voters want all the tax cuts extended, including those for incomes above $250,000.

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