Legislators Divided On How Far To Extend Tax Cuts

Obama is joined by Tim Geithner as he urges Congress to pass middle class tax cuts.

President Obama is joined by Treasury Secretary Timothy Geithner as he makes a statement urging Congress to pass a bill for middle class tax cuts last Wednesday.  Obama thanked Sen. George Voinovich (R-OH) and Sen. George LeMieux (R-FL) for voting with Democrats to move the bill closer to final passage. Chip Somodevilla/AP hide caption

itoggle caption Chip Somodevilla/AP

When Congress reconvened for its last session before the mid-term elections last week, one issue loomed large: To cut or not to cut? This time, taxes are on the chopping block.

Debate over extending the so-called "Bush-era tax cuts" has not been cleanly divided along party lines. Last Thursday, 31 moderate and Blue Dog Democrats in the House sent a letter to Speaker Nancy Pelosi imploring her to extend all of the cuts, including those for top earners.

Congressman Jim Matheson of Utah's second district helped draft the letter. He told NPR's Mike Pesca that small businesses would be in danger if tax cuts for the wealthy were allowed to expire.

"These rates also apply to a lot of small businesses across the country. So we've got to be careful when we say it's just wealthy individuals," he says.

The cuts were passed by President George W. Bush in 2001 and 2003. They were designed to be a temporary measure and are set to expire at the end of this year. But a struggling economy has both parties reconsidering that deadline.

The debate isn't over whether or not to extend the cuts — it's about who should get them. Legislators largely agree that the cuts for the middle class should stay, but they are divided on extending them for individuals who earn more than $200,000 and households that earn more than $250,000.

Matheson says a significant number of small businesses in the U.S. are taxed under those individual rates.

"I know $250,000 of income is a lot of money for an individual, but if you're a small business with 10 or 12 employees and your overall income is around 250,000 bucks, that's not a lot of money for that business and they want to put that money back into the business," Matheson says.

While Matheson says he — like most legislators — support a temporary extension of the cuts for the middle class, he doesn't deny that it will have an impact on the deficit if held for too long.

"I'm not one of these folks who thinks tax cuts pay for themselves or they simulate the economy so much like the supply-side theory says," he says. "I'm suggesting short-term, it makes sense to keep this economy stimulated to the extent it can be."

Short-term Or Long-term?

If the tax cuts were not extended for top-earners, their tax rate would increase from 35 percent to 39.6 percent on income above $200,000 or $250,000 for individuals or households respectively.

Adam Davidson of NPR's Planet Money says it just depends on who you talk to.

"I don't think there's any core, basic economic view that tells you 35 percent is good and 39.6 percent is bad or the other way around," he says. "I think most of the heat here is politics."

But are some earners "better" to tax than others? Davidson says it depends on whether you're thinking in the short- or long-term.

If your goal is short-term — to inject a stimulus — he says you should cut breaks for low-income earners.

"Now you don't want to do that necessarily because you think poor people deserve it or you think that's more just. It's simply a math problem — the poorer you are, the more likely you are to spend any additional dollar in revenue that you get, whereas the richer you are, the more likely you are to take that dollar and put it into savings," he says. "So if what you want to accomplish, which President Obama and many Democrats want to accomplish, is to get people spending money, then you want the tax cuts to go to poorer people."

But in the long-term, he says it may be better to hold off on high taxes for the wealthy because it doesn't encourage them to invest as readily.

"It does seem based on economic history that higher taxes on rich people [and] higher taxes on small business owners does tend to suppress entrepreneurial activity," he says. "It's sort of intuitive. The more the government is going to tax, the less incentive there is to create new businesses, to invest in new lines of business, whatever it might be."

However, a large national deficit — like the U.S. currently has — can complicate that plan.

"If we don't raise enough taxes to lower the deficit, then that can also start to stifle growth," he says.

And just like it would be hard to find a perfect tax rate, Davidson says it will also be hard in the future to look back at the current situation and determine the impact of each decision.

"It will be hard to piece out what was the impact of taxation, what was the impact of the debt that pushes interest rates up — this is simply not a big enough move that it's not clear."

Little Opposition Expected

Meanwhile, Congressman Matheson says he doesn't anticipate a lot of opposition to extending all of the tax cuts — even though President Obama and Speaker Pelosi have remained firm against the cuts for the wealthy, even after the letter.

"There are several other Democrats who have indicated they have the same interest. Some didn't sign the letter because they didn't think the letter was strong enough — they wanted to go farther than just a one-year extension, quite frankly," he says. "But I do think that there is a chunk of folks within the Democratic caucus who — on a short-term basis — are very concerned about where our economic circumstances are today and they're prepared to extend — at least for some period of time — the tax cuts."

So is Matheson quietly getting the thumbs up from eight or more House Democrats in the halls of Congress?

"Yes, absolutely," he says.

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