Tax Cut Heartburn

While the White House keeps talking about plans to partially extend the Bush tax cuts, more Democrats in Congress broke with Democratic leaders on the issue Tuesday.

The latest schism was sparked by a group of 47 House Democrats, who signed a letter to Speaker Nancy Pelosi, arguing against plans to allow tax rates to go up on investment income, through capital gains and dividends.

“Our fiscal policy should be one that maximizes economic growth and private sector job creation,” wrote the group led by Rep. John Adler (D-NJ).

“That is why we strongly believe that Congress should extend the current tax rates for dividend and long-term capital gains taxes.”

While most people have heard the debate about extending the Bush income tax cuts, I would bet many people had no idea there were other items involved as well, like capital gains and dividend taxes.

“Raising taxes on capital gains and dividends could discourage individuals and businesses from saving and investing,” the Democrats wrote.

The names on this letter are very familiar to reporters, as it’s basically the same group of Democrats who also noted their opposition to White House plans to extend just some of the Bush tax cuts earlier this month.

With almost four dozen Democrats now on the record about this part of the Bush tax cuts, it seems almost impossible to imagine a way that a partial extension of the cuts could get through the Congress before the elections.

And it again raises questions about what Congress can get done on the tax cuts after the elections.

My simple thought is this – if it wasn’t easy to do now, why is it going to be any easier after a whole bunch of lawmakers get defeated?

Meanwhile, there was one other interesting development on the tax cut front yesterday, courtesy of Congressional Budget Office Director Doug Elmendorf.

Elmendorf told a Senate committee that their full evaluation of extending the tax cuts – whether for all taxpayers, or all but the top income brackets – showed that while the move would boost in the economy in the short term, it would dampen economic activity in the long term.

Why?  Because Elmendorf says tax cuts will mean higher budget deficits, which will require more borrowing by the feds in later years, crowding out private sector loans and investment.

Elmendorf said a two year extension might be the best, but then after that, the Congress needs to figure out how to solve the budget gap, using spending cuts and/or tax increases.

There are no easy solutions.