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Baucus Examines US Tax Cut Options, by Mike Godfrey, Tax-News.com, Washington

Max Baucus, the Democratic head of the US Senate tax committee, has said that temporary tax cuts for middle class Americans should be extended as soon as possible, but with Congressional elections on the horizon, action to extend a series of temporary tax breaks for both individuals and businesses may be delayed until late in the year, causing further uncertainty for taxpayers as they plan their future tax and business affairs.

Following a hearing convened by Baucus to examine the issue of expiring tax cuts, the Senate Finance Committee chairman said that Congress should “do all we can to put more money back in the hands of workers, middle-class families and small businesses so our economy can grow,” given that many Americans are struggling to make ends meet.

“I support extending the middle-class tax cuts permanently, as soon as possible, so working families can keep more of their hard-earned money,” Baucus stated.

However, Baucus also says that there is one giant “elephant in the room” in the form of the federal deficit, which is expected to reach USD1 trillion this year, and with that in mind, tough choices may have to be made. This means that some taxpayers will lose out if Congress allows certain tax breaks which are deemed unaffordable or unfair to expire at the end of the year.

“With today’s budget picture, it’s no longer clear that we can afford large tax cuts for the most well-to-do,” Baucus noted in his hearing statement.

The two major pieces of tax legislation set to expire at the end of 2010 are the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. These laws, passed under the administration of President George W. Bush, have been criticized for cutting the tax burden on the wealthiest segment of American society, for example by lowering the long-term capital gains tax rate and cutting the dividend tax rate, which have tended to benefit those receiving substantial investment income.

While President Obama supports ‘tax extenders’ legislation, his administration has made it clear from early on that it will not support tax cuts which benefit families with annual incomes of USD250,000 or more, suggesting that the investment tax cuts will be allowed to lapse. Obama has also proposed that the top rate of personal income tax will be raised to 39.6% from 35% presently. The flip side to this coin however, is that many small business will be hurt since they are structured in a way that profits ‘flow through’ to their owners who pay tax at marginal income tax rates. Indeed, the threat of higher taxes was identified as a major concern in a survey of small business owners by the US Chamber of Commerce recently, along with chronically high budget deficits and bigger government. According to the Chamber’s survey, one-quarter of small business owners said that higher taxes would be the biggest threat to job creation over the next few years.

But many lawmakers are uncomfortable with the idea of raising taxes with the US economy still in recovery mode, and with Congressmen having to face the voters in November’s mid-term elections, it will be no surprise if this taxing decision is postponed until the last minute.

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