By Jane Sasseen
Yahoo! News
A sharply divided
House of Representatives passed legislation Thursday afternoon to extend the George W. Bush tax cuts for individuals earning under $200,000 and couples earning less than $250,000.
The vote, at 234 to 188, ran largely along partisan lines. All but three GOP lawmakers voted against the bill, as they want the
tax cutsextended for the wealthy as well. They were joined by 20 Democrats.
Don't pay any attention. The vote was pure political theater. But a compromise is in the works for real action.
The Democratic proposal was never intended as a serious bid to resolve the debate over the
expiring Bush tax cuts. It also has no chance of moving ahead in the Senate, where GOP support would be needed to get 60 votes for passage. Instead, the vote was a move by House Speaker Nancy Pelosi (D-Calif.) and her Democratic allies to force Republicans to take a potentially embarrassing stance — one that undoubtedly will show up in many a Democratic campaign ads come 2012.
"No one thinks this proposal was serious; it's a complete waste of time," says Daniel Clifton, head of policy research for Strategas Research Partners, which advises institutional investors. "It was simply intended to send a message to the Democratic base: Democrats are for the middle class and Republicans are for millionaires."
House Minority Leader John Boehner (R-Ohio) was certainly quick to dismiss it — in language not often heard in a
Capitol Hill news conference.
"I am trying to catch my breath so I don't to refer to this ... as, uh, chicken crap, all right?" said Boehner, who will become House speaker in January. "We are 23 months from the next election, and the political games already have started trying to set up the next election."
If the vote may help rally the Democratic base, however, the real action is elsewhere.
After Tuesday's "Slurpee Summit" at the White House, in which President Obama called for a bipartisan solution to the issue, Treasury Secretary Timothy Geithner and Budget Director Jack Lew have begun negotiations with Senate and House leaders of both parties to come up with a compromise on extending the tax cuts before they expire Dec. 31.
In theory, the two parties remain far apart. The president, along with many Democrats, has argued that the tax cuts should be extended permanently only up to the $250,000 mark. Obama and the Democrats believe the $700 billion cost of extending the cuts for high-end taxpayers would add too much to the gargantuan deficit.
Republicans want the tax cuts extended permanently for everyone. They argue that many small businesses would be hurt by ending the high-end tax cuts, and that raising anyone's taxes now would further weaken the economy.
With both sides maneuvering intensely for advantage — and eager to show their respective bases that they will hang tough — the sparring is moving into high gear. Publicly, both sides are digging in. Even as Democrats scheduled their highly politicized vote, Senate Minority Leader Mitch McConnell (R-Ky.) warned that his party won't allow a vote on any other legislation until the tax cut issue is resolved.
Yet both McConnell and President Obama have indicated in recent days that they are open to a deal.
"I believe it will get resolved," Obama told a group of newly elected governors Thursday. "That doesn't mean there might not be some posturing over the next several days. But I'm confident in the end people are going to recognize that it's important for families who are still struggling to have some relief and it's important for our economy to make sure that money is still out there circulating."
Neither party is eager to take the fall for letting everyone's income taxes go up, which would happen immediately if Congress can't reach agreement by the end of the year. So the outlines of a potential deal have begun to emerge.
Congressional negotiators are discussing a temporary extension of the tax cuts for both middle-class and high-end taxpayers that could last anywhere from one to three years.
"Beneath the surface, amid the posturing, there's progress in the six-man panel appointed by President Obama to come up with a tax deal," says Greg Valliere, chief political strategist for the Potomac Research Group, which also advises institutional investors.
The debate now centers on how long a temporary extension would last, as well as what other measures to include in any compromise.
Valliere, like most analysts, believes that a deal is all but certain. "There are still skeptics," he says. "But we continue to believe the tax cuts will be extended for everyone for either two or three years."
That will make many Democrats unhappy — and in the House, many of them have threatened to hold up any final compromise vote until Christmas Eve. But the reality is that the president and his liberal allies in Congress have very little leverage to force an end to the tax cuts for upper-income taxpayers. They don't have the Senate votes to pass a bill that preserves the cuts only for the middle class: All 41 Republicans and at least a handful of Democrats would probably vote against such a package. And in the House, many conservative and moderate Democrats also back an across-the-board extension, at least temporarily.
Republican leaders have threatened to simply let the tax cuts expire if the Democrats don't cut a deal Republicans can agree with. Then the GOP would come back in January, when they control the House and are in a much stronger position in the Senate, and bring all of the tax cuts back retroactively. They're counting on the fact that Democrats won't want to risk taking the blame for allowing taxes to go up on tens of millions of middle-class taxpayers, even for just a month or two.
Of course, that's not a scenario the Republicans relish either, as voters would probably blame both sides for the lack of resolution and the ensuing confusion. All of which means that as the serious negotiations get underway, the two parties are engaged in a giant game of chicken in which the real question is whether the Democrats have enough leverage to get something they want in return for giving in to the temporary extension of the cuts for upper-end taxpayers. Their priority: an extension of
unemployment benefits for the long-term jobless. Without Republican support, the current benefits ended Dec. 1.
"Democrats in the House realize that Republicans will pass their own plan next year if there is no action now, and that this is the last chance for unemployment benefits to be extended," says Clifton.
Several other items are on the table. Negotiators also have to decide where to set tax rates on capital gains and dividends, which will rise next year if no action is taken. And they've got to come up with at least a temporary resolution on the estate tax. That tax expired at the end of last year and fell to zero when Congress couldn't forge an agreement. But it is scheduled to return to 2001's 55% rate come Jan. 1 if Congress doesn't act.
A fix that would prevent some 27 million middle-class taxpayers from being hit with the
Alternative MinimumTax is also being discussed.
And as if all that weren't complicated enough, Valliere points out that the administration is pushing for a Senate vote on the stalled START nuclear arms treaty as part of any grand bargain. Republicans unhappy with some aspects of the pact want to delay a vote on START until after new members take office in January. Allowing that vote to go ahead may be part of the price they pay to win the president's agreement to go along with the temporary extension of the high-end tax cuts.
If tax breaks for the wealthy expire, would small business suffer?
Republicans say an extension would encourage spending and job creation. Most Democrats say the majority of small firms wouldn't be affected anyway.
By Jim Puzzanghera, Los Angeles Times
Curtis Hamilton says he wants to hire more programmers and buy computer hardware for his Escondido human resources firm. But he's worried that his taxes will go up next year, and with the economy still struggling, he's holding off.
"It gives me pause because I don't know whether to hang on to the cash or whether to make the investments," said Hamilton, 67, who founded Tri-Ad 35 years ago and now has about 100 employees.
People like Hamilton are the prime reason, Republicans argue, that the Bush-era tax cuts for those making more than $250,000 should be extended beyond their Jan. 1 expiration.
The GOP contends that tax cuts for wealthier Americans would pay an important dividend: Many of these people are small-business owners, and they are more likely to hire or invest in their businesses if their taxes don't go up next year.
But President Obama and most Democrats contend that small-business owners would not be affected much because only about 3% of them earn more than $250,000 a year. Democratic leaders agree with Republicans that those earning less should get a permanent tax break.
Rick Poore helps make their case. The owner of a Lincoln, Neb., clothing firm that employs about 30 people, Poore supports letting the top-level tax rates go up. The reason is simple: He won't be affected. Poore, 56, and his wife clear about $140,000 a year from the business.
"The only people I can think of who can honestly call themselves small businesses that this would effect would be stockbrokers and lawyers," Poore said. "And I don't have a lot of sympathy for either of them."
As lawmakers prepare to meet Nov. 30 with Obama to work on a compromise, Hamilton and Poore highlight the difficulty in determining the effects of an increase in the top-level tax rate. The truth might lie somewhere in between.
"It matters if you raise these taxes," said Mark Zandi, chief economist at Moody's Analytics. "It does affect small-business people — and particularly successful small-business people who are going to be hiring — but it is a small number of businesses that will be impacted."
For privacy and other reasons, there's not much definitive tax data on small businesses. What's available includes a wide variety of businesses that report income on individual rather than corporate returns. They range from mom-and-pop operations to large law firms and hedge funds structured as partnerships.
Because of changes to the tax code, the number of companies reporting income on individual tax returns has increased dramatically in the last three decades.
Profits at typical corporations are taxed twice: once at the corporate level and again when distributed to owners and other shareholders as dividends or capital gains.
But companies can also file as S corporations or partnerships. The business income flows to the owners or partners and is reported on their individual returns, so profits are taxed only once.
Hamilton's company, an S corporation, will have about $12 million in revenue this year. He owns the firm with his son, Thad, and how much they pay in taxes affects how they run their business, Hamilton said.
"Whatever profit we make at the end of the year is taxed to us at personal income rates," said Hamilton. "Tax rates always have an impact on our ability to grow the firm."
Hamilton opposes any tax hike, a position shared by groups such as the National Federation of Independent Business and the U.S. Chamber of Commerce.
"When you're running a business, $250,000 is not that much money," particularly in Southern California, he said. "Maybe it's more money than the average working person, but any business person knows how much risk they take in trying to start a business and run it."
Hamilton wouldn't say exactly how much he earns, but it is more than $250,000. A tax increase would make it harder for him to accumulate the working capital to hire new people or invest in new equipment, he said.
Just as big companies have been hoarding cash and avoiding much hiring, small businesses are sitting on cash "because of the uncertainty of the economy," Hamilton said.
"The uncertainty of the tax rates all play incremental pieces in the decisions of any of us," he said.
Poore, whose DesignWear Inc. takes in about $2.25 million a year, disagrees. He supports the expiration of the top-level tax cuts, pointing out that the costs of employees and equipment, such as a new automatic garment press he is purchasing, reduce his taxable income.
"I went out and bought an $80,000 piece of equipment. I did it so I wouldn't have to pay taxes," Poore said, adding that he plans to hire a new employee to run it.
"That's how small business works. We reinvest in our businesses. We try to minimize the amount of taxable income we have," he said.
Some small-business groups, such as the Main Street Alliance, a national network of state-based small-business coalitions, also support letting the top-level tax cuts expire.
"Its disingenuous for people to say this is going to have such a horrible affect on small business if they let these expire," Poore said. "Either they're honestly ignorant of how this really works or they're being intellectually dishonest."
The nonpartisan Congressional Budget Office said in a report in February that extending the tax cuts would not do much to create jobs.
Although an extension would help a company's bottom line, "increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers," the CBO said. Demand is the principal driver of those decisions, it said.
Democrats and Republicans base their arguments on data from Congress' Joint Committee on Taxation.
This summer, the committee estimated that 3% of taxpayers who had net business income — about 750,000 filers — would be affected if the current top-level rates increase. And those filers account for half of the approximately $1 trillion in net business income reported on all individual returns.
Tax experts said there's no way to know whose income that is because the data can't be tied to specific companies.
"We don't know if this is the owner of a small tool-and-die plant or a McDonald's franchise or a partner in KPMG," said Scott Hodge, president of the nonpartisan Tax Foundation.
"The Republicans have been a little fast and loose in trying to define all of these taxpayers as small-business owners," he said. "The lack of data has created this political debate, which gives a lot of leeway on both sides to kind of stretch their arguments."
The Tax Foundation's own analysis found that if the top-level tax cuts expire, just 39% of the additional money raised by the government would come from business income.
Hodge also criticizes Democrats' argument that an increase in the top tax rates would cause little harm to small businesses because only about 3% of them would face the increase.
"Statistically speaking, only about a half a percent of all Americans will be diagnosed with cancer in any given year, and we take that pretty seriously," Hodge said. "So to try to minimize the economic impact by saying only 2 to 3% of taxpayers will be affected is, to some degree, economic malpractice."
