Tax Hikes on the Rich: Will Dems Blink?

For more than two years, President Obama and the vast majority of Democrats have argued for extending and enlarging Bush’s middle class tax cuts while allowing rates to rise for those making more than $250,000 a year. Ask today, and that’s still the answer you get from every Democrat in a position of power. But as the Dec. 31 deadline approaches, don’t be surprised if Democrats cave and allow at least a one-year extension on all the Bush cuts.

This is one case where the parliamentary rules should give Democrats an advantage because if the Senate deadlocks and does nothing, all the tax rates would automatically rise for 2011 -- an outcome no one wants. That means Democrats could put a bill on the floor extending the lower rates just for middle incomers and dare the Republicans to block it. If Republicans do -- insisting they won’t vote for a bill that is a de facto rate hike on the rich -- Democrats would be able to go to the voters and blame the Republicans for a massive tax hike on the middle class.

The problem is that politically it probably won’t work. While Republicans have done everything they can to block every piece of Obama legislation over the past 18 months, independent voters still blame Democrats for the gridlock because Democrats are theoretically running the show. It may not be fair, but that’s the way it is, and Democrats aren’t likely to want to take a risk on the all important issue of taxes. Plus -- with the economy still shaky -- some Democrats worry about raising taxes even on the rich and prefer a delay.

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The irony gets even greater when you consider how much extending tax breaks on high incomes adds to the deficit -- about $55 billion in 2011. Republicans who have blocked all kinds of legislation (including $34 billion to extend aid to the unemployed) because it would add to the deficit think the offset rule shouldn’t apply to tax cuts. In fact, in an interview with Fox News, Sen. Jon Kyl (R-AZ) claimed that tax cuts should never have to be paid for. Not every Republican agrees with that, and one wild card in the extension debate is Ohio Republican Sen. George Voinovich, who says he’ll try to block an extension of the Bush tax cuts if they’re not paid for. Voinovich can afford to stand on principle because he’s retiring rather than running for re-election.

Debates on taxes always bring out a number of anomalies. Everytime we discuss them, all sorts of misinformation surfaces in e-mails and comments, with most people thinking their taxes are even higher than they are. The biggest mistake -- people in the 25% marginal tax bracket think they pay 25% of their income to the IRS. In fact, most of their income is taxed at a far lower rate.

The Congressional Budget Office provided some clarity in a recent report analyzing what people actually paid in 2007, the last year for which data are available. The CBO combined income taxes, payroll taxes, unemployment and even corporate taxes, using a formula that assumes businesses pass those taxes on to individuals in higher prices and lower dividends. They didn’t include state taxes on income, sales and property, which tend to be less progressive.

The results:

• The lowest 20% of earners (those who made less than $20,500 in 2007) paid just 4% of their income in federal taxes.

• Those making $20,500-$34,299 paid 10.6%; those making $34,300-$49,999 paid 14.3% and those making $50,000-$74,699 paid 17.4%.

• The top 20% -- those making $74,700 or more in 2007 -- paid 25.1% of their income in federal taxes.

Income tax, by the way, is a relatively small portion of the total, especially at the low ends but even at the high ones. Federal income tax for the top 400 household incomes in 2007 averaged 16.6%.