The clock is ticking on one of the Bush administration's biggest and most controversial legacies. On Jan. 1, 2011, the two big tax cut packages that Republicans pushed through Congress in 2001 and 2003 will expire. The Democrats who control Congress once denounced the Bush tax cuts as a big mistake — a mistake, said former House Majority Leader Richard Gephardt, "that we will pay for for years to come."
Now, as Democrats are facing tough midterm elections, they are divided over whether to extend all the Bush tax cuts or just some of them.
A little background: When George W. Bush was sworn into office as president in January 2001, he inherited a record budget surplus. Five weeks later, he addressed a joint session of Congress, urging lawmakers to act swiftly on his signature campaign promise: $1.6 trillion in tax cuts.
Democrats were deeply skeptical of a tax cut based on projections of a $5.6 trillion surplus over 10 years that, in fact, never came about.
Nonetheless, Republicans pushed two big tax packages through Congress in 2001 and 2003. The measures cut marginal rates on personal income taxes. They gradually reduced the estate tax so it disappeared altogether this year. In 2003, they slashed taxes on dividends and capital gains. But to comply with budget and procedural rules, Republicans had to let all those cuts expire, most of them after 10 years. And that is why the clock is now ticking down.
What to do about the Bush tax cuts is likely to be the big debate in Congress this fall. In a series of reports, NPR lays out the parameters of that debate and looks beyond it to how tax policy affects individuals, corporations and states. Among the highlights:
The president's stake. President Obama needs Congress to extend some of the tax cuts to honor his campaign promise not to raise taxes on families making less than $250,000 a year. But he has also promised to bring the deficit down. "I don't think he can keep both of those promises," said Diane Lim Rogers of the Concord Coalition, a deficit watchdog.
What's a fair tax policy? For Obama to keep his campaign promise, the tax cuts would be extended for all but the wealthy. Cuts made in 2001 for the top two tax brackets would be allowed to expire on schedule. Democrats say it's only fair, because the wealthy pay a lot less now proportionately than they used to, and they have reaped the greatest benefits from the Bush cuts. Republicans say that's bad economics: It will hurt small businesses and kill jobs. Economists are divided.
Corporate taxes. The top marginal tax rate for U.S. corporations is nearly 40 percent, among the highest in the developed world. Critics say the best way to create jobs would be to lower it. But others say the picture is not quite what it seems. They say that with exemptions, credits and deferrals, many companies pay much less than the rate suggests, and some pay none at all.
State fiscal woes. The states are broke, too, many of them struggling with billion-dollar budget gaps. And unlike the feds, they can't print money. So they have closed swimming pools and turned off streetlights. They have slashed payrolls and raised taxes. And many have gone deeply into debt.