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LINDA WERTHEIMER, host:

This is MORNING EDITION from NPR News. Good morning. I'm Linda Wertheimer in for Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep.

Let's be frank. Members of Congress will spend part of this fall at home in their districts campaigning. There's an election coming, of course. They will spend the rest of the time back here in Washington debating legislation and also campaigning. There's an election coming.

One of the most uncomfortable issues for some Democrats is the issue of tax cuts. The big tax cuts approved during the first term of President Bush's administration expire at the end of this year. Most Democrats, including President Obama, say they want the tax breaks permanently extended, except for the wealthiest two percent of taxpayers, and that is going to spark some debate.

NPR's David Welna continues our series this week on the expiring tax cuts.

DAVID WELNA: A full-blown congressional debate on the expiring Bush tax cuts is expected this fall, but some lawmakers have already weighed in on the most controversial issue: whether it makes sense, at a time of huge budget deficits, to extend those tax cuts for household income that exceeds a quarter million dollars.

(Soundbite of gavel)

Senator MAX BAUCUS (Democrat, Montana): (Unintelligible) come to order.

WELNA: Earlier this summer, Senate Finance Committee Chairman Max Baucus gaveled in the only congressional hearing held so far on the expiring Bush tax cuts. Baucus originally supported all those cuts, but the Montana Democrat told fellow panel members he thought it now made sense to extend only the tax breaks that benefit the middle class.

Sen. BAUCUS: With today's budget picture, it's no longer clear that we can afford large tax cuts for the most well-to-do.

WELNA: While Baucus argued in terms of fiscal responsibility, Michigan Democrat Debbie Stabenow said it's really a question of fairness.

Senator DEBBIE STABENOW (Democrat, Michigan): At a time when people are losing their jobs, working part-time jobs, seeing their wages go down, and the incomes of the wealthiest 400 people in the country have gone up about 400 percent in the last decade and a half and their tax rates have been cut in half, for the majority of Americans that doesn't compute, that is just not fair.

WELNA: Republicans don't argue it's fair to extend the tax cuts for the wealthiest. Instead, they say small businesses would be hurt should those top cuts expire.

Here's the finance panel's top Republican, Chuck Grassley of Iowa.

Senator CHUCK GRASSLEY (Republican, Iowa): On my side, we hear small-business people loud and clearly. They say they know their taxes are going up. They don't know how high the rates will go.

WELNA: To drive that point home, Senate Republicans showcased an actual small businessman at a Capitol Hill news conference.

Mr. CRAIG FRITSCHE (Owner, Tart Lumber Company): Good afternoon. My name is Craig Fritsche. I'm at Tart Lumber Company out near Dulles Airport. Just here to say a few words about our small business.

WELNA: Craig Fritsche has not laid off any of the 60 people who work for his lumber company. He also hasn't made enough money in the past couple of years to be taxed in the top income brackets. Still, in an interview, Fritsche says Democrats are wrong to let tax cuts expire for any small business that would make that much money.

Mr. FRITSCHE: And they don't realize we're not out buying boats. We're not out buying second homes. We're plowing that money back into the business and creating jobs.

WELNA: Some economists would agree. Former Congressional Budget Office director Douglas Holtz-Eakin told the Finance Committee it was a bad idea to let tax rates go up.

Mr. DOUGLAS HOLTZ-EAKIN (Former Director, Congressional Budget Office): My own research says that if you raise the top rate from 35 to effectively 42 percent, given all the phase-outs, you're going to lower the probability of a small business hiring by about 18 percent, and for those who already have people on the payroll, payrolls are going to grow five percent slower than they would otherwise.

WELNA: But Brookings Institution tax policy expert William Gale says the impact on small business of letting top tax rates rise has been greatly exaggerated.

Mr. WILLIAM GALE (Brookings Institution): First, 98 percent of all small business owners are not in the top two tax categories. Second, even among the people who are in the top two tax categories, most of them earn most of their income from other sources rather than small-business income.

WELNA: Democrats say far from hurting small business, they're trying to get specific tax breaks for such firms extended, and it's Senate Republicans who are standing in the way. President Obama is expected to provide his party further political cover later today by proposing additional business tax incentives. Still, some Democrats wish the president would stop insisting the top tax cuts have to expire.

Virginia Congressman Gerry Connolly, who represents the country's wealthiest district, notes that 47 of the country's 59 most well-off districts voted for Mr. Obama.

Representative GERRY CONNOLLY (Democrat, Virginia): They're our voters, and the more some of my colleagues who represent some of those districts fully appreciate who we're talking about, perhaps that will give them pause to consider I think a reasonable proposition, which is don't allow those tax cuts to expire at this time.

WELNA: Because letting tax rates rise, even for just the wealthy, might not only hurt a fragile economy - it could also take a toll on Democrats like Gerry Connolly at the polls in November.

David Welna, NPR News, the Capitol.

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