LAME DUCK TAX CUTS

The most important issue to be dealt with in the lame duck session of Congress is whether to extend the Bush tax cuts, which are due to expire in January.

If the Bush tax cuts expire, the current six income tax rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent would be replaced by five rates of 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent.

Letting all the tax rates cuts expire would strip at least a percentage point from an already anemic growth forecast for next year, predicts Goldman Sachs.

Aside from the immediate economic consequences, the debate over the Bush tax cuts will indicate how willing President Barack Hussein Obama is to compromise with Republicans, who will take over the House of Representatives in January.

Going into the election, the president said he favored extending the Bush tax cuts for all but those who earn more than $250,000 a year.

Republicans favor extending them for all taxpayers, chiefly because many small businesses pay taxes at income tax rates.  Higher tax rates would clobber them at a time when it is hard enough to keep their businesses afloat.

Republicans are joined by many Democrats who have no objection in principle to raising rates wealthier Americans pay, but who think now is a bad time to be raising taxes on anybody.

President Obama and his aides have been sending conflicting signals since the midterm elections.  But it appears he would be willing to extend the Bush tax cuts for the lower brackets permanently, and those for the highest brackets temporarily.

Republicans are wary of this ploy.  Polls indicate the public supports extending the tax cuts for everybody.  But if a temporary extension of the top tax rates were to expire in a year or so, the issue then would become whether or not to extend tax cuts only for the wealthy, and that is a loser for the GOP politically.  So the going-in negotiating position for the Republicans is to extend all the Bush tax cuts permanently.

A responsible option to do would be to extend all the tax cuts for three, preferably, four years.  This would provide businesses with enough stability to plan, and provide enough time for the economy to recover.

This would be a genuine compromise.  Many Democrats oppose raising taxes on the relatively wealthy now, but would be of different mind if, in 2013 or 2014, the economy were stronger.

And it’s about the only compromise than can be reached, since the president and Republicans have a conflict of visions.  Mr. Obama wants a larger, more expansive government, financed by taxes on "the rich.".  Republicans want a smaller, less intrusive government.  A three or four year extension of the Bush tax cuts would permit the American people to weigh in on the dispute in 2012.

Another reason for opposing a permanent extension of the Bush tax cuts is there is nothing sacrosanct about them.  The tax code is a mess.  It would become a bigger mess if the tax cuts expire, but we can do much better.

Two who think so are the chairs of the deficit commission President Obama appointed, Erskine Bowles, who was White House chief of staff during the Clinton administration, and former Sen. Alan Simpson, R-Wyo.  In a news conference Nov. 10, they proposed a series of spending cuts and tax law changes.

Among them was a proposal to replace the current income tax system with three lower rates — 8 percent, 14 percent and 23 percent — coupled with elimination of all income tax deductions and credits, including the home mortgage interest deduction.

This last is a not-bad idea offered at a very bad time.  The home mortgage deduction benefits chiefly the wealthy (who have larger mortgages and higher tax rates) and induces people to buy when they really ought to be renting.  But with the housing industry on life support, ending the mortgage deduction now could be the equivalent of pulling the plug.

The Bowles-Simpson recommendations are so controversial they are unlikely to obtain the 14 votes on the 18-member commission required to send them to Congress for a vote, and would be unlikely to be approved by Congress even if they were. 

I’m not crazy about the Bowles-Simpson income tax proposals.  (I’d prefer a two-tier flat tax.)  But their existence is an argument for extending all the Bush tax cuts temporarily.  Let tax reform be a central issue in the 2012 campaign, and let the American people cast the deciding votes.

Jack Kelly is a former Marine and Green Beret and a former deputy assistant secretary of the Air Force in the Reagan administration. He is national security writer for the Pittsburgh Post-Gazette.