Current Tax Rates may be Extended at Least One Year to Help Democrats in the 2010 Election

Last night, the National Journal Congress Daily reported President Obama is considering extending all tax rates that expire at the end of this year for at least one year and maybe more. That would keep the top rate on individual income at 35% and the top rate on dividends and capital gains at 15%. This would give Democrats a tax cut to vote for going into the 2010 election for all Americans. There are plenty of House Democrats who would object to extending upper income tax cuts, but, if President Obama supported it, enactment would be likely.

Last May, President Obama proposed extending most Bush tax cuts, except for those with incomes over $250,000. He would have raised the top rate on individual income to 39.6% and the top rate on dividends and capital gains to 20%. The revenue impact is shown in Treasury’s 2009 Green Book on page 129. If Mr. Obama also refrains from reinstating the phaseout of itemized deductions and personal exemptions of those over $250,000, the whole package would raise the deficit by approximately $28 b. in FY11, $47 b. in FY12, $56 b. in FY13, and $65 b. in FY14. Those estimates were made a little over a year ago and would change somewhat with this year’s revised economic assumptions. In comparison to underlying deficits estimated by OMB last July at $1.5 tr. in FY10, $1.1 tr. in FY11, and approximately $0.8 tr. each fiscal year after that, it doesn’t seem like much. However, $196 b. of deficit reduction over the next four years and $615 b. over the next 10 is a lot larger than other deficit reduction measures that have any chance of passing Congress this year.

There’s also the issue of whether those earning over $250,000 benefited disproportionately from the financial excesses of the last nine years and bore relatively less of the costs than middle class America did. Whatever one’s view on that, it appears that it will be trumped by fearful Democrats bent on political survival.Last night, the National Journal Congress Daily reported President Obama is considering extending all tax rates that expire at the end of this year for at least one year and maybe more. That would keep the top rate on individual income at 35% and the top rate on dividends and capital gains at 15%. This would give Democrats a tax cut to vote for going into the 2010 election. There are plenty of House Democrats who would object to extending upper income tax cuts, but, if President Obama supported it, enactment would be likely.