Obama Aims at Middle Class with Tax Cut Extension
Business + Economy

Obama Aims at Middle Class with Tax Cut Extension

REUTERS/Kevin Lamarque

President Obama’s announcement on Monday calling for a one-year extension of the Bush era tax cuts for families and small businesses earning less than $250,000 a year stressed his reelection campaign themes of “tax fairness” and the importance of targeting  government fiscal policy on helping the struggling  middle class.

“I’ve often said that our biggest challenge right now isn’t just to reclaim all the jobs that we lost to the recession, it’s to reclaim the security that so many middle- class Americans have lost over the past decade,” Obama said in a brief speech in the East Room of the White House. “Many members of the other party believe that prosperity comes from the top down, so that if we spend trillions more on tax cuts for the wealthiest Americans that will somehow unleash jobs and economic growth. I disagree, I think they’re wrong.”

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But a strong subtext to the president’s speech declaring he will  fight efforts by congressional Republican leaders and even some prominent Democrats to extend the tax cuts to the wealthiest Americans as well was concern about the mounting federal debt – and the prospects of adding trillions more in the coming years if the tax cuts are extended for everyone.

“I might feel differently . . . if we were still in [budget] surplus,” Obama told a gathering of middle-income supporters. “The money we’re spending on these tax cuts for the wealthy is a major driver of our deficit, a major contributor to our deficit, costing us a trillion dollars over the next decade.” The combination of the 2001 and 2003 tax cuts enacted under former Republican President George W. Bush, combined with the cost of two wars, added trillions to a national debt following four consecutive years of budget surpluses during the Democratic Clinton administration. Those two income and corporate  tax cuts were set to expire at the end of 2010, but were extended through the end of this year as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 negotiated by Obama and Congress.

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The Congressional Budget Office has estimated that extending the tax cuts between 2011 and 2020 would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs. The current outstanding public debt totals nearly $16 trillion.

With the fear that the fragile economic recovery could be torpedoed early next year by a combination of massive tax increases and scheduled government spending cuts, the president and congressional Democratic and Republican leaders are looking for a compromise that would ease voter concerns about a looming “fiscal cliff.” Both sides believe the tax cuts should be extended in some manner, but the GOP is insisting they should be extended across the board while Obama wants to limit the future benefit to middle income taxpayers.

House Republicans reportedly plan to press for a measure that would extend the tax cuts to all Americans, including millionaires and billionaires, but with the promise that they would seek comprehensive tax reform legislation next year that would do away with many tax breaks and loopholes. They warn that denying wealthier Americans continued tax relief would discourage investment and business expansion just when it is needed most.

Senate Republican Leader Mitch McConnell of Kentucky told CNN’s State of the Union program on Sunday that allowing the tax rates to rise on anybody beginning Jan. 1 would bring the economy's tepid recovery to a complete halt. The wiser course, McConnell argued, would be to extend all of the tax cuts for one more year to allow negotiators from both parties to reach a lasting deal.

Andrea Saul, a spokesperson for presumptive Republican presidential nominee Mitt Romney said on Monday, “The president’s latest bad idea is to raise taxes on families, job creators and small businesses. Unlike President Obama, [former Massachusetts] Gov. Romney understands that the last thing we need to do in this economy is raise taxes on anyone.”

Obama dismissed the GOP argument that his approach would discourage job creation, noting that 97 percent of small businesses – which are widely viewed as the primary generator of new jobs – make under $250,000 a year.  “So this isn’t about taxing job creators, this is about helping job creators,” he said.

Yet even Democrats are divided over the president’s proposal, with some arguing that the threshold for continuing to receive the benefit of the tax cuts should be much higher. House Minority Leader Nancy Pelosi, D-Calif., and Sen. Chuck Schumer of New York, a Senate Democratic leader, both favor extending the tax cuts to families earning up to $1 million, while Senate Majority Leader Harry Reid of Nevada said he was siding with Obama’s approach.

“Republicans have claimed they want to reduce our deficit,” Reid said. “In the weeks ahead, they will have a chance to do so by joining Democrats to vote to extend tax cuts for all middle class American families on the first $250,000 of their income."

This dispute has huge implications for long term deficit reduction. If Obama were to prevail in limiting the tax cut to families making less than $250,000 a year, the Treasury would rake in an additional $829 billion of revenues over the coming decade, according to estimates from the Congressional Joint Committee on Taxation. By contrast, the Treasury would reap only $463 billion of new revenues if the tax threshold were set at $1 million a year, as Pelosi and Schumer favor.

That would mean that policymakers ultimately would need to find $366 billion more in deficit savings to offset the cost of the extended tax cuts.  That would make key programs ranging from Medicare to Medicaid and other low-income programs to education, basic research, food safety, defense, and homeland security significantly more vulnerable to deep cuts, according to a recent analysis by the left-leaning Center on Budget and Policy Priorities.

“If you actually extend the whole thing, like Republicans and Mitt Romney want to do,  you are sacrificing about $850 billion of deficit savings over the next ten years,” Jared Bernstein, a former economics adviser to Vice President Joseph Biden, said today on MSNBC. “That’s real money.”

J.D. Foster, a federal tax authority with the conservative Heritage Foundation, insisted that the best approach for the economy was to permanently extend the Bush tax cuts, and to cut wasteful spending in the budget to offset the cost. But if that can’t be done, then he would favor the House Republicans’ proposal to extend the tax cuts across the board for another year while Congress attempts to overhaul the tax code.

Given mounting concern among business leaders, policy experts and average Americans about the possibility of massive tax increases early next year unless something is done soon, Foster sees the possibility of the White House and Congress striking a tax deal before the election.

The House was already going to vote on at least avoiding the tax hikes from the 2001 and 2003 legislation,” he told the Fiscal Times. “if they move quickly enough, combined with the President’s call today, there’s a fair shot . . .  that the Congress may find itself dealing with this in July, before the August recess. If not, certainly in September, because I don’t think there are many – Democrats in particular -- who really want to go into this election with this huge tax hike hanging over their heads.”