Earlier today, President Obama fired what promises to be the opening salvo in a six-month battle to determine the fate of the Bush tax cuts. As a reminder of what’s at stake, the 2001 and 2003 reductions of the individual income tax rates are set to expire at year-end, and in the absence of further legislation, the current tax brackets of 10/15/25/28/33 and 35% percent would be replaced by rates of 15/28/31/36 and 39.6%.
In his address to Congress, President Obama remained true to prior promises, urging an extension of the Bush tax cuts for those taxpayers with adjusted gross income of less than $250,000. For those earning in excess of the threshold, the top rates of 33% and 35% would return to the 36% and 39.6% rates seen prior to 2001.
While Obama’s push to extend reduced rates only for lower and middle class taxpayers should come as no surprise, the President did acquiesce on one portion of his previous stance: he is now arguing for only a one year extension of the Bush tax cuts; previously, the President promised to make the cuts permanent for those earning below the $250,000 threshold.
In his remarks, the President correctly pointed out retaining the current rates for the lower and middle classes is one of the rare pieces of tax policy to find bipartisan agreement. As a result, there is no need to continue to hold up an extension of those rates for qualifying taxpayers while the parties continue to hash out what to do with those earning more than $250,000. That debate, Obama reasoned, can take place after the lower and middle-class extension is signed into law.
It’s a cheeky bit of strategy by the President. By backing off his requirement that any lower and middle class extensions be permanent, Obama is attempting to show the voting public that he’s willing to work with his Republican adversaries to come to an agreement. Should the Republican party not be willing to make its own concessions — either real or largely illusory, as the President’s may well be — in order to reach an agreement to extend the cuts, they risk alienating the very lower and middle class voters who may well decide the upcoming election.
Further exacerbating the Republican’s potential public perception problem, if the party’s leaders fail to heed the President’s plea to extend the middle-class cuts now and debate the fate of the nation’s wealthy later, Republicans will appear willing to let the entire nation suffer to ensure they protect the wealthiest two percent.
Republican lawmakers, of course, have other ideas for any extension. They would like to see the Bush tax cuts continued for all taxpayers, and are unwilling, at least at this point, to give up what leverage they have by agreeing to a scaled-back extension of the cuts. To that end, House Republicans are expected to unveil their own bill proposing a one-year extension of the current rates for all taxpayers later this month.
It should be interesting to see the response to today’s remarks engender from Mitt Romney as well as current members of the House. This much we know, we’re in for a heated half-year on Capitol Hill.