The Obama administration and Congressional Democrats are struggling for a strategy to deal with the soon-to-expire Bush-era tax cuts, each side uncertain whether the other is up for a fight with Republicans in the wake of the Democrats’ election trouncing — or whether they could win, in any event.
That has both parties betting that the most likely outcomes could be either a truce that extends the tax cuts for all income levels for perhaps a year past their scheduled Dec. 31 expiration, or a stalemate that lets them expire temporarily, in either case delaying the battle until 2011.
President Obama devoted his weekly address on Saturday to reaffirming his support for extending only the tax rates that apply to incomes below $250,000, and not “for millionaires and billionaires,” even as he restated his post-election overture to compromise with the strengthened Congressional Republicans.
They insist on making the tax cuts for all incomes permanent. That would cost more than $4 trillion over the next decade and Mr. Obama’s partial extension about $3 trillion.
Mr. Obama’s assertiveness masked the doubts and indecision that plagued Democrats about the tax issue even before the midterm elections, and caused them to delay a vote until afterward. Now the divisions are intensified within their demoralized ranks.
Some Democrats want to take a stand, win or lose, for any option that could depict Republicans as patrons of the richest taxpayers, at the expense of blocking continued tax cuts for the middle class. Others have no appetite left for combat.
With Mr. Obama on a 10-day trip to Asia and lawmakers scattered to their states, Democrats say any resolution must wait until they regroup in the capital next week for a lame-duck Congressional session that will include those who lost their seats.
The tax issue is likely to dominate that session, and could also determine the outcomes for other pressing issues, including spending bills to keep the government running and myriad other expiring tax breaks.
Republicans are also unsure how to proceed, since Democrats could block a permanent extension of the Bush tax cuts for the highest incomes, either by their votes or Mr. Obama’s veto. But they favor any option that delays the issue until next year, when they will run the House and have a bigger Senate minority.
“Let’s start where we agree,” Mr. Obama said in his address. “All of us want certainty for middle-class Americans. None of us want them to wake up on Jan. 1st with a higher tax bill. That’s why I believe we should permanently extend the Bush tax cuts for all families making less than $250,000 a year. That’s 98 percent of the American people.”
He added: “But at a time when we are going to ask folks across the board to make such difficult sacrifices, I don’t see how we can afford to borrow an additional $700 billion from other countries to make all the Bush tax cuts permanent, even for the wealthiest 2 percent of Americans. We’d be digging ourselves into an even deeper fiscal hole and passing the burden on to our children.”
Mr. Obama’s emphasis on his opposition to a permanent extension left open the prospect that he could agree to a one- or two-year extension, an idea that has gained traction among Democrats since last Tuesday’s election losses.
But many Democrats say they should insist that the tax cuts for the middle class be extended longer than those on high income — “de-coupling” them, in effect, so that when the extensions expire for the richest 2 percent of taxpayers, Republicans would not have the political cover of packaging them with the tax cuts for everyone else.
Mr. Obama’s post-election stance comes after debate within the administration over how explicit he should be about what he would or would not accept as his bottom line. For example, should he specify how long an extension of rates he would accept for high incomes? And what might he demand in return? One possibility is extended aid to the long-term unemployed, which expires for two million jobless Americans after Nov. 30.
The president indicated in his address on Saturday that he has opted for now to stick with his pre-election mantra against permanently lower rates for high incomes.
Some Democrats suggest as a new bargaining position an income cut-off of $1 million instead of $250,000, arguing that would better define Republicans’ priorities rhetorically. As Mr. Obama said on Saturday, “I believe we can’t afford to borrow and spend another $700 billion on permanent tax cuts for millionaires and billionaires.”
If a stalemate causes all the tax cuts to expire, it is unclear how much of a headache will ensue for taxpayers. Treasury officials say the Internal Revenue Service has flexibility to leave the current tax withholding tables in place temporarily, on the assumption there will be some resolution in 2011.
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