The clash between those two ideological positions will dominate the pre- and post-election debate for the rest of this year. There will be blood. But whether or not there will be a tax bill you can plan around is still an open question.
At issue are income tax rates lowered during the George W. Bush administration. Those rates are slated to rise to levels as high as 39.6 percent (from a current high of 35 percent) on January 1, 2011, unless there is some legislation to extend them. Obama's steadfast position has been that he wants to extend the tax cuts for all but the top 2 percent of American taxpayers - those earnings more than $200,000 as individuals or $250,000 as families.
But his opponents argue that those wealthiest Americans are the same small-business owners whom Obama is hoping will start a hiring spree. Without tax certainty and continued low tax rates, they won't take the risk, these critics say. Even President Obama's former budget director, Peter Orszag, says all of the cuts should be extended for two years to protect the fragile economic recovery.
It is a philosophical debate. What's better? Fiscal stimulus or debt reduction? Lower tax rates across the board or a more progressive tax system with targeted credits and deductions?
Those are interesting questions to ponder, but perhaps not as interesting as this question: What's going to happen to your taxes on January 1? Here are some thoughts.
- It's not just about income tax. Investors should keep their eyes on the tax rates on capital gains and dividends. This year they are capped at 15 percent. Next year, without legislation, the top rate on capital gains would go up to 20 percent - and dividends would go back to being treated as ordinary income, taxed at rates as high as 39.6 percent. Obama says he wants to make both of them 20 percent next year. But if lawmakers have to make all the income figures add up at the end of the day, they could fudge those numbers a point or two in either direction. If Congress fails to act, dividend investors would pay big. Anyone sitting on big gains might consider taking their lumps now, at 15 percent.
- Who's rich and who isn't? Some Democrats are pushing Obama to raise - to $1 million - the income threshold for taxpayers who would see an increase. A couple living in an expensive city with a kid in college isn't rich on $250,000, goes the argument. Maybe not, but they sound pretty rich to most voting Americans. Those numbers could move back and forth as the debate progresses. Half a million maybe? The Republican plan would raise the deficit by $36 billion a year; the more income Obama allows, the less deficit reduction he gets.
- There's a passel of other provisions, too. The estate tax, special breaks for teachers, a deduction for state and local sales taxes and other items either expired at the end of last year or will expire this year. Once Congress starts picking and choosing which breaks to extend, the discussion could blow wide open. Tax bills aren't called "Christmas trees" for nothing: Legislators all like to decorate them with their own favorite tax breaks. Watch that space.
- Don't be surprised if the argument continues for a good long while. There's no incentive for Senate Republicans, expected to pick up several seats (and possibly a majority) in November, to act fast. So expect them to try to block anything but legislation they love from now until the end of the year. Usually, when it comes to voting for difficult measures, lame-duck legislators are braver than those seeking re-election. But it's conceivable that nothing will get passed this year, and businesses and taxpayers will have to wait for a new Congress to come in in January and starting passing items retroactively. How's that for uncertainty?
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