Will Congress let the Bush tax cuts expire?

The battle will get ugly this fall as Congress debates whether to let the Bush tax cuts expire, and for whom.

If you think this year’s battles over health care, stimulus, climate change, and financial regulation have been nasty, just wait ‘til Washington tackles the Bush tax cuts.

Democratic leaders on Capitol Hill say they will consider the fate of those tax cuts--due to expire at year's end-- just before the congressional elections. That will set up a high-stakes brawl on a political and economic high-wire.

Washington often gets bogged down in symbolism. And there will be plenty of that in this donnybrook. But this argument is also about real money. Huge piles of it. At issue: $3.5 trillion in tax revenues over the next decade, $200 billion in 2011 alone.

There are two very different ways to think about all that cash. On one hand, nearly three-quarters of households will pay more in taxes in 2011 than they will this year if the Bush tax cuts expire and the Alternative Minimum Tax (AMT) is allowed to bite millions of middle-income households.

On the other, if the tax cuts are extended, the overall average tax rate would fall from 23.5 percent to 20.7 percent by 2012 (relative to current law).

Then there is the economic environment. With the economy still on uncertain footing, do we want to raise anyone’s taxes next year? And what would be the short-term impact if Congress does what President Obama wants and extends the tax cuts only for those making $250,000 or less? Would the economy suffer if high-earners had to pay pre-Bush rates? Few economists think so.

Finally, there is the politics. Nearly every congressional Republican will oppose allowing any of the tax cuts to expire, even for high-earners. “No new taxes” is a no-brainer for most Rs. By contrast, Democrats are torn. Lawmakers such as Senate Budget Committee Chairman Kent Conrad (D-ND), usually a fiscal hawk, are also against ending any of the tax breaks, given the fragile economy. But most Democrats prefer to restore the top rates of 36 percent and 39.6 percent. And polls suggest many voters agree with them.

Unlike most recent congressional debates, the Democrats may have the procedural upper hand this time. With health care, for instance, Republicans would have “won” by blocking congressional action. Gridlock would have preserved the status quo, an outcome favored by about half of voters--and overwhelmingly supported by the GOP base.

But this time, stalemate means the Bush tax cuts expire for everyone. For most households, that will feel like a tax increase—an outcome favored by a handful of budget wonks but very few real people. Democrats believe this will give them the leverage they need to force the GOP to deal. Republicans, by contrast, feel they’d be able to blame the ruling Democrats for failing to tackle the pending tax hike.

My best guess is that, in the end, Congress will extend the Bush tax cuts for all but the highest earners. And it will probably do so for a year or two. But after watching Congress fail to address the expiring estate tax last year, no outcome would shock me.

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