Question of the Week: The Battle Over Bush Tax Cuts is Destined for Deadlock

[Editor's Note: Last week we asked readers what they saw happening in the Bush tax cuts battle. Some of our readers' responses are listed below - along with next week's question, "Is the Fed Right to Keep Interest Rates Low?"]

Democrats and Republicans have staked out their territory in the battle over the Bush tax cuts in the run up to November's midterm elections. However, readers remain unconvinced that the two parties will reach common ground on the issue anytime soon.

Question of the Week
Most Republicans want to see all expiring tax cuts extended. Senate leader Mitch McConnell, R-KY, last week proposed legislation to continue the tax cuts indefinitely, wanting to show party unity after House Minority Leader John A. Boehner, R-OH, hinted that he'd be willing to compromise and vote for U.S. President Barack Obama's plan of continuing only middle-class tax cuts.

"If the only option I have is to vote for some of those tax reductions, I'll vote for them," Boehner told CBS's "Face the Nation" Sept. 12. Boehner had previously proposed extending the Bush tax cuts for two years.

Former U.S. Rep. Vin Weber, R-MN, praised Boehner's political position because it made the middleclass tax cut extension a priority.

"Republicans need to quickly get their one voice together on this issue," Weber told NPR. "Boehner understands the politics of this pretty well, and I wouldn't march away from him if I were the Republicans."

But Republicans such as McConnell have said that the idea of raising taxes for anyone during such an uncertain time is absurd.

"Only in Washington could someone propose a tax hike as an antidote to a recession," McConnell said.

McConnell also accused Democrats of using tax revenue to pay for their generous government spending.

"Democrats spent the last two years putting government in charge of healthcare, the financial sector, car companies, insurance companies, student loans - you name it," said McConnell. "Now they want the tax hike to pay for it all."

Democrats were quick to attack McConnell's plan for not offering any options to compensate for the $700 billion lost by extending the highest-income-level tax cuts.

Worried that November elections will shift House and Senate control to Republicans, Democrats are using the tax cut battle to appeal to the voting middle class and to paint a picture of Republicans as supporters of policies enforced by unpopular former U.S. President George W. Bush.

"We're going to take the next 50-some days to convince the public that's exactly what the Republicans would do - back to the Bush policies," White House press secretary Robert Gibbs told NBC's "Today" show.

Sen. John Kyl, R-AZ, has accused Democrats of "pitting Americans against each other."

"We don't want to punish anyone for being successful - that class warfare went out of style when the Cold War ended," said Kyl. "I don't think it has a part in our debates."

Republicans control 41 Senate seats, just enough for a filibuster - but that is if all Republicans vote together and if they retain their seats after the midterm elections, should the battle continue that long.

What remains is a lot of uncertainty about where tax policy is headed, with just over three months until the tax cuts expire.

This prompted last week's installment of Money Morning "Question of the Week": How do you think the battle over the Bush tax cuts will turn out? Which party do you think will manage to get their way? Do you think the government should allow tax cuts to expire for the richest taxpayers? Or do you favor a tax increase for everyone as a way of slashing an out-of-control deficit? Are you preparing for a change in U.S. tax policy next year?

The following reader responses express some readers' discontent with an uneven distribution of wealth, and others' hope that a clash of policies in Washington will lead to a strong economic solution.

Washington Battles Can Breed Good Change

If we weren't coming up to the midterm elections, I would give the Democrats the edge in the fight over whether or how to extend tax breaks. But in addition to the Republicans needing to keep all 41 senators in order to maintain a filibuster, the Democrats also have to be worried that some of the Democratic senators facing tough re-election campaigns might decide to bolt and support a Republican filibuster. And regardless of what schemes and arm-twisting the congressional leaders may employ, they are all subject to the risk that other crises may divert attention from the subject at hand.

As far as that goes, I wouldn't mind seeing a bruising fight over the details of how tax breaks may be extended, such that they are unable to take up any other issues between now and election day, including such things as cap-and-trade, another round of stimulus, etc. Assuming no compromise on the extension of tax breaks, I would guess that no bill will be passed before election day. Then, depending on what happens on election day, we may or may not be at risk of a lame-duck Congress passing a bunch of its agenda before the new Congress is seated. For the most part, however, I would guess that if they could not pass a tax extension bill before election day, they will not be able to pass one during a lame-duck session. Then when the new Congress is seated, probably with a Republican majority in the House, and either party able to sustain a filibuster in the Senate, a compromise will be agreed on that extends the breaks for everyone, and President Obama will sign it, protesting loudly that it was not what he wanted, but that he cannot allow taxes to rise for everyone.

Actually, I would not be at all surprised to see all of this be overcome by events, with one or more crises driving attention elsewhere. What with the financial condition of the states, municipal bonds, the housing market, the European banks and PIIGS, circumstances in the Middle East, China, Japan, and Mexico, the possibility of another flash crash in the stock market, and who knows what else, it would almost be a miracle if we didn't have any major crises erupt during this time. Or we could even have a natural disaster, like that other volcano in Iceland that everyone was so worried about last spring, the one that is a hundred times larger than the one that shut down air traffic over Europe.

When I really think about it, the scariest possibility is that circumstances might arise that would motivate Congress to rubber-stamp whatever President Obama asked for, just as they did for Bush after 9/11. We need a lot of friction and disagreement in Washington to keep bad ideas from moving too rapidly through the system, so I am not too upset with how things are working right now.

- Gordon F.

Giving Rich a Break Misses the Boat

The economic growth case for extending the cuts lacks solid substance:

  • It is widely asserted that small business drives the economy and banks are generally not lending to small businesses.
  • Tax avoidance dollars the wealthy keep have no discernible path to small business investments.
  • Those in the top income brackets spend a lower percentage of their money than low earners do.
  • The wealthy have CPAs, tax attorneys and financial planners to find tax shelters, charities and foundations to beneficially divert money to.
  • Small businesses won't be hurt by letting the cuts expire because few of the wealthy run small businesses nor do they provide significant revenue sources in terms of goods purchased.

In the late 1990s, my brother and his wife retired to an area and joined a private club where nearly one-third of the members were quite wealthy- much more so than they were. At that time, the wealthy members were paying higher tax rates stemming from the tax increase of the Clinton years. The fact that they were paying more in taxes had no perceptible impact on their lifestyle. They still vacationed in the Greek isles, skied in Colorado, drove top-of-the-line Mercedes and BMWs, maintained several properties and dressed to the "nines" as my brother observed. He recalls never having heard one of them say that the additional taxes they were paying kept them from living their lifestyle.

His observations were confirmed in a 2008 analysis of spending habits of the wealthy conducted by Hannah Shaw Grove and Russ Alan Prince. Here is some of what they found. The wealthy spend per year:

  • Wine and spirits- $30,000
  • Resorts and hotels- $224,000
  • Spas around the world- $107,00
  • Jewelry- $248,000
  • Clothes- $117,000
  • Cars- $226,000
  • Boats- $404,000
  • Home Improvements- $524,000

Question of the Week
What percentage of these expenditures go directly into the U.S. economy and have the effect of maintaining job levels, increasing net profits and contributing to tax revenues would be interesting to know. One could assume that much of the money spent is off-shore- hotels, resorts, spas, jewelry and clothes most likely.

And, according to BusinessWeek: "Remember, a person in the highest tax bracket, which is now 35%, doesn't pay 35% on his or her entire income in taxes. Most of the income is taxed at lower rates. Only the last bit earned suffers the biggest haircut."

Here is the dead end in the argument to keep the tax cuts in place to stimulate the economy and let the wealthy keep their $700 billion over the next ten years- there is no direct way to get the dollars to the growth segment of the economy. It has been the mantra for decades that small business is the growth engine of the economy, creates the most new jobs and does the hiring which produces new tax revenues. However, the big banks aren't lending and the community banks cannot secure financing. So, to fill the void, how many wealthy people do you envision going to a community bank or the U.S. Small Business Administration and offering it the non-tax dollars saved by extending the Bush tax cuts? The legislation stalled in the Senate to partially treat this problem adds to the deficit.

- Robert H.

Powerful Rich Will Block Tax Reform

Like the blocking of efficient universal health care to protect their cash cow, the rich will do everything they can to block the loss of their immense tax cuts. The wealth of the rich comes from all of us and they take far more than they are worth - $13 trillion in the last 10 years - while Americans look the other way and paid politicians pour the resources into the pockets of the rich.

There have never been such rich people in the history of man or such a rapid decline in the resources of the rest. They are sending our jobs overseas to starving Asians getting paid almost nothing- for profit. They are cutting jobs, pay, hours, pensions, insurance, quality of products, the dollar, constantly taking from the rest of us. They have become so successful that the consumer is dying, thus the economic problems here, in Europe and elsewhere. The bubbles have burst, and jobs, homes, health are all disappearing, and the government says - with a straight face - we are in a recovery.

We are headed for serious decline and after November elections that will become clearer as the lies start running into reality. All societies go through this cycle, fall and begin again.

- Peter M.

And the Rich Become Richer...

The tax cut will happen, but due to political and personal reasons, not because there is concern over the economy. I am always for tax cuts and certainly don't see the harm of taxing the wealthy. That won't happen though, because then what would happen to the net gains the majority of the Senate made whilst the common man struggled to keep his head above water in 2009?

So I can't see the rich being taxed, they will simply get richer and there will be plenty of lobbying.

- Gordon

[Editor's Note: Thanks to all who responded to last week's "Question of the Week" feature regarding the Bush tax cuts. Be sure to answer next week's question: Should the Fed be looking to raise interest rates a lot sooner than is currently planned? Has this long stretch of near-zero interest rates already sown the seeds of another speculative problem down the road? Or is the central bank on the right path, understanding that a boost in rates now will thwart an already tepid and uneven recovery?

Send your answers to [email protected]!

Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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