On Friday evening Politico reported a tax package intended to keep the Bush tax policies in place for individuals making less than $200,000 annually and couples making $250,000 annually — in addition to patching the Alternative Minimum Tax for one year — is making its way around Capitol Hill. From the article:
The 20-page draft Democratic proposal obtained by POLITICO includes these provisions: a 20 percent capital gains rate on those earning more than $200,000, couples over $250,000; a 20 percent dividend rate on those earning more than $200,000, couples over $250,000; estate taxes would apply to estates worth more than $3.5 million with a maximum rate up to 45 percent; extensions of the American Opportunity Tax Credit for college standouts, as well as an expanded child tax credit and Earned Income Tax Credit for poorer Americans; and a one-year patch for the alternative minimum tax.
None of this is unexpected, but the plan has run into four problems. First, at least two Senate Democrats are standing against the plan:
Sens. James Webb (D-Va.) and Joe Lieberman (I-Conn.) have already publicly stated that they will not support the Obama-Democratic leadership position.
Democratic sources say that two embattled Democratic incumbents, Jon Tester (Mont.) and Claire McCaskill (Mo.), will likely back the plan. Another concern for Reid will be Sens. Maria Cantwell (D-Wash.) and Mark Warner (D-Va.). With only 53 Democrats — and Reid calling for a straight majority vote for any tax proposal — Democratic leaders cannot afford to lose any support.
Back in June it was reported that as many as seven Senate Democrats were hesitant to support this kind of proposal as a stand-alone piece of legislation. I wrote that Republicans should take advantage of this hesitation to immediately call the bluff of Democrats who want to raise taxes on the wealthy. Even with only a few Democrats potentially not backing the plan, this gives Republicans a great deal of strength in coming negotiations.
Second, Democrats keep claiming raising taxes on upper-income earners is critical to help close the gargantuan deficits garnered since 2009. Eliminating the Bush tax policies for upper-income earners would raise just over $800 billion over ten years. Using Congressional Budget Office’s (CBO) expectations on spending over the next decade, that’s a maximum of 1.88% of what we’ll spend over that same time period. Yet, to use the CBO’s static method of tax analysis, the Democratic plan would “cost” $272 billion over one year, over three times what raising taxes on the wealthy would raise. Which, of course, explains why Democrats insist the plan not be considered under PAYGO rules:
The legislation also states “that the budgetary effects will not be entered on the PAYGO scorecard,” meaning its impact on the deficit will not derail the legislation. Tax experts said that Reid and other Democratic leaders fear that going for an even more costly bill could cost them support.
Third, barring a flinch by Speaker Boehner (R-OH), this plan has zero chance of making its way through the House of Representatives. Yet Politico says Reid may want a vote as soon as next week on the legislation — clearly showing the Democrats are gambling voters will support raising taxes on upper-income earners as we go into the August recess and the major push by campaigns before November. While this pseudo-campaigning is going on, however, Reid has ignored his chamber’s lawful duty to pass a budget for the federal government for the third year in a row.
Reid’s abdication of responsibility is the fourth difficulty facing the plan: the 2012 fiscal year runs out in two months and 14 days. The Bush tax policies run out in five months and 15 days. Which means outside of the law, simple math says getting a budget together and passed should be a priority. Which means Republicans have an easy rebuttal to any pressure from Democrats about this plan: let’s have Congress worry about actually doing its job and pass a budget before the end of September. Once that happens, and the military and other important functions of the federal government are funded through the 2013 fiscal year, we can get into the negotiations about taxes.