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Politics

Why Obama May Back Down On Tax Hikes for the Rich

Congress may do what it does best -- postpone a tough decision until next year.

What a difference a year makes. Twelve months ago, the conventional wisdom was that President Obama and the Democratic controlled Congress would have their way with tax policy, ramming through tax increases on upper income folks and businesses. Now, with Democrats having lost their supermajority in the Senate, tax hikes seem to be squarely on the back burner. Instead, Job No. 1 is boosting the economy. That means tax cuts, and lots of them.

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Democratic leaders are so worried about the outcome of the midterm elections that they’re determined to quickly pass a new package of economic stimulus measures, the centerpiece of which is likely to be a credit for hiring the unemployed -- a break that just a few months ago was nixed because of doubts that it would work as intended and fears that it could too easily be abused. And that’s not all: Among other things, small businesses can expect Congress to revive two popular breaks for one more year: 50% bonus first-year depreciation and the higher $250,000 limit on so-called Sec. 179 expensing of assets.

Originally, the main tax issue of 2010 was supposed to be what Congress would do about the Bush tax cuts -- the 35% top marginal tax rate, the special 15% top rate on long-term capital gains and dividends, marriage penalty relief, etc. -- which expire at the end of this year. Back in the old days, when the Democrats had 60 votes in the Senate, it was presumed Congress would make quick work of Obama’s proposal to let the Bush tax cuts expire for singles with about $196,000 in taxable income or higher and around $231,000 for married couples. Now, even members of his own party -- particularly those in tough reelection fights -- are begging Obama to back down. For the moment, he’s hanging tough, having revived the proposal as part of his fiscal 2011 budget plan.

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From a political perspective, it’s not hard to see why Obama would want to stick with his idea for the Bush tax cuts, because the flip side is that they would be made permanent for the middle class. Republicans have pledged to block Obama’s plan because they argue that it would raise taxes on a lot of small business owners who aren’t among the wealthy taxpayers Obama says he is targeting. But if Republicans dare to stymie the proposal, they could be accused of killing tax cuts for middle income folks.

Given the Democrats’ fears about November, that kind of brinksmanship probably isn’t in the cards. Because Congress is so good at punting on the really tough issues, the most likely outcome for this year is a short-term extension of the Bush tax cuts for everyone, rich and poor, so both sides can live to fight another day. That day will have to come before too long, though, if Congress and the White House are serious about making a dent in the federal deficit

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