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Among Democrats, economic pressures are changing tax-cut dynamics

By Lori Montgomery
Thursday, August 26, 2010; 7:34 PM

With the economy rapidly weakening, some senior Democrats are having second thoughts about raising taxes on the nation's wealthiest families and are pressing party leaders to consider extending the full array of Bush administration tax cuts, at least through next year.

This rethinking comes barely a month after Democrats trumpeted plans to stage a high-stakes battle over taxes in the final weeks before the November congressional elections.

The Bush tax cuts are set to expire in December. Republicans are pushing to extend them all, while President Obama has forcefully argued that the country cannot afford to keep tax breaks on income over $250,000 a year for families and $200,000 a year for individuals.

But a growing cadre of Democrats - alarmed by evidence that the recovery is losing steam and fearful of wounding conservative Democrats in a tough election year - are advocating a plan that would permanently extend tax cuts benefiting the middle class while renewing breaks for the wealthy through 2011, senior Democratic aides said.

That idea has long appealed to some conservative Democrats in both chambers, who argue that Congress should not raise anyone's taxes until the economy is more stable. But Democrats said it has gained momentum since economist Mark Zandi, a key adviser to House Speaker Nancy Pelosi (D-Calif.), adopted that view during a presentation at a Democratic issues conference in California in mid-August.

Zandi, an adviser to the presidential campaign of Sen. John McCain (R-Ariz.), later played an important role in designing Obama's economic stimulus package, enacted by Congress last year.

In an interview, Zandi said he supports a one-year extension of tax cuts for the wealthy - with the cuts phased out starting in 2012 - in part because election-year anxiety about budget deficits is preventing Congress from approving additional stimulus in any other form. He acknowledged that tax cuts for the rich tend not to be an effective way to pump money into the economy because they tend to save it rather than spend it.

"Normally, I would firmly agree that raising taxes on people who make over $250,000 a year would not make a meaningful difference in the way they spend money. But I worry that these aren't normal times and that even this income group may be sensitive," Zandi said, noting that the top 3 percent of households account for a quarter of all personal spending.

"With 9.5 percent unemployment - which is clearly going to move higher - raising taxes is a gamble that is unnecessary," he said.

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Some progressives are pushing back. In an op-ed this week in the Financial Times, John Podesta of the Center for American Progress and Robert Greenstein of the Center on Budget and Policy Priorities, argued that extending the high-income tax breaks even temporarily would send a bad signal to investors worried about rising U.S. debt. And it would leave the task of ending the cuts to the next Congress, which will probably be even more conservative because of anticipated Republican gains in the midterm elections.

Extending all the tax cuts would add $3.9 trillion to the national debt over the next decade, according to the latest estimate from the nonpartisan Congressional Budget Office. The upper-income cuts account for less than a fifth of that figure, or $700 billion.

Obama administration officials and the Democratic leaders of the House and Senate, meanwhile, say they are determined to stay the course and still hoping to spend September and October on a debate that forces Republicans to defend expensive tax breaks for a tiny, wealthy minority.

"The speaker and the president have been clear they want to extend the middle-class tax cuts because they have the greatest economic benefit," Pelosi spokesman Brendan Daly said.

montgomeryl@washpost.com

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