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WASHINGTON: US lawmakers returning from summer recess face a conundrum on tax cuts set to expire at the end of this year, with the economy seemingly sputtering ahead of looming congressional elections.
A fierce battle over taxes is likely with President Barack Obama's administration pressing for a limited extension of tax breaks for the middle class and Republicans hoping to extend the full range of cuts enacted under former president George W. Bush.
The Bush-era cuts chopped trillions of dollars in taxes over the past decade, but under budget rules they will expire at the end of 2010, resulting in a hike in many kinds of taxes if Congress takes no action.
The Congressional Budget Office estimates extending all the original Bush-era tax cuts would cost 2.56 trillion dollars over the coming decade, which administration officials say would be calamitous for the deficit.
The White House wants to keep the lower income tax rates for all but the top two percent of Americans, to add revenues of some 700 billion dollars over 10 years.
But it remains to be seen whether the two parties will find a compromise and offer a tax break ahead of the November election, or allow rates to rise and blame each other.
President Barack Obama is expected to tout new economic reforms in a heavy slate of events next week, including travel to the hard-hit Midwest and in a major press conference next Friday.
But one top Republican, Arizona Senator John McCain, on Sunday dismissed the effort as too little too late and simply a desperate ploy calculated to soften the impact of the struggling economy on the mid-terms.
"My reaction is that we always like to see deathbed conversions, but the fact is if we'd had done this kind of thing nearly a couple years ago we'd be in a lot better shape," he told "Fox News Sunday".
"Look, they're just flailing around. Every place I go in my state where people are hurting very badly, one of the major things that small business and large business people tell me is they want some kind of certainty," he said.
"The first thing we need to do is extend the tax cuts that are in existence so people have that certainty," the 2008 Republican candidate told Fox News.
Treasury Secretary Timothy Geithner has said however that a full extension of cuts it would be a "700-billion-dollar fiscal mistake."
"It's not the prescription the economy needs right now, and the country can't afford it," he said in an August speech.
Lawmakers must decide whether to allow the expiration of breaks, effectively raising the top tax brackets, now 33 percent and 35 percent, back to 36 percent and 39.6 percent, which were in effect in the 1990s. Also at stake are reductions in capital gains taxes.
Obama says he wants to "keep on pushing" the economy to keep a fragile recovery on track but also pay more attention to getting debt and deficits under control.
"We're going to be have to do two things at once. We've got to keep on pushing to grow the economy. But we've also on the medium term and the long term have to get control of our deficit," Obama told NBC television.
Many economists say the latest sluggish data highlight the need for some further fiscal relief but views vary widely. US growth slowed to a weak 1.6 percent pace in the second quarter.
"It seems increasingly likely that Congress will extend most, if not all, of the Bush tax cuts for at least a year or two," said Howard Gleckman, research associate at the Tax Policy Centre of the Urban Institute and Brookings Institution.
"As the economy shows growing signs of softening, lawmakers are less and less likely to take steps that will be seen as 'raising taxes,'" he added.
Sal Guatieri, senior economist at BMO Capital Markets, said the economic recovery is too fragile to allow taxes to rise, and that failure to extend the relief could undermine already weak consumer confidence.
"Given the fragile state of consumer confidence and how worried all Americans appear to be in their financial security, tax increases at any income level are probably unwelcome," Guatieri said.
Other analysts say that keeping the full rage of tax policies would provide a windfall to the wealthiest Americans with little economic benefit.
"It's hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren't likely to spend a windfall," said Nobel economics laureate Paul Krugman of Princeton University.
- AFP/de
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