Both Nancy Pelosi and Barack Obama insist that they will not move to extend the current tax rates on upper-income Americans, creating by default a tax hike on those with capital and means to invest — and not just the wealthy, either.  While both Democrats attempt to paint Republicans objecting to massive tax hikes as bad policy in a stagnating economy as extremists, they are finding themselves increasingly marginalized in their own party.  Forty-seven Democrats have publicly demanded that Pelosi acquiesce to an across-the-board extension of existing tax rates on capital gains and dividends:

The debate over what to do about the expiring Bush-era tax cuts has focused mainly on income tax rates and the fight between Democrats and Republicans over maintaining the tax breaks for the wealthiest Americans.

But in a letter to the House speaker, Nancy Pelosi, 47 rank-and-file Democrats urged Congressional leaders to maintain lower tax rates on dividends and capital gains that are also due to expire on Dec. 31.

“Our fiscal policy should be one that maximizes economic growth and private sector job creation,” the lawmakers, led by Representative John Adler, Democrat of New Jersey, wrote.

“By keeping dividends and capital gains tax rates linked and low for everyone, we can help the private sector create jobs and allow seniors and middle class households to save and invest more,” the Democrats added in the letter.

Note the phrase for everyone.  A hike in capital gains tax rates will discourage both initial investments and turnover in capital, both of which are necessary to expand the economy.  In order for that to be effective in expanding the economy, it has to apply to those with the most capital on hand.  It doesn’t do a lot of good to penalize those with the most potential to expand the economy through new ventures and significant expansion of existing projects and companies.

That, by the way, also applies to income tax rates as well, especially since many small business owners file as individuals.  Taking more money from this class of entrepreneur means less capital for hiring and keeping employees, capital investment, and so on.  The exact same arguments apply to income tax rates, perhaps even more so since the very wealthy can usually structure their cash flow as income, dividends, or capital gains depending on which method provides the least amount of loss.

Generally speaking, of course, it’s considered economic suicide to raise tax rates in a recessionary environment, and even more to introduce massive uncertainty about tax policy.  Democrats have managed to threaten both, especially the latter, by delaying action for months on these issues and running away from it before the break.  Businesses normally have to budget for the next year before the end of the third quarter, and they are unable to do so because no one can project costs in the massively uncertain climate that Democrats have created.

Update: The House adjourned until after the elections on a vote that required a rare participation by the Speaker in order to break the tie.  As Nancy Pelosi sent the House home, John Boehner claimed he had the votes to settle the tax issue — and Pelosi blocked it:

House Democrats on Wednesday barely won a 210-209 vote to adjourn the House without extending the Bush tax cuts.

Thirty-nine House Democrats voted against adjournment after Minority Leader John Boehner (R-Ohio) urged opposition to the motion in a floor speech that said it would be irresponsible for Congress to leave without providing certainty on the tax issue. Dozens of Democrats in tough races voted against adjourning.

“Vote no on this adjournment resolution. Give Congress a chance to vote on extending tax rates,” Boehner said.

Boehner’s floor speech turned the vote on adjournment into a referendum on the tax cuts, which has divided Democrats for months.

There was probably a lot of vote-whipping by Democrats at the end in order to allow some of the most endangered Democrats to argue that they voted to stay on the job.  However, voters will not get fooled into buying that, not with Democratic leadership pushing to get out of Washington before Boehner really could beat Pelosi on the tax issue.