Q+A: Republican election wins may tilt tax policy

WASHINGTON (BestGrowthStock) – Big Republican gains in the congressional elections on Tuesday will influence a host of tax policies expiring at the end of 2010, most notably Bush-era tax cuts for individuals and investment taxes.

Below is a summary of what is at stake.


Former President George W. Bush enacted tax cuts for all income groups in 2001 and for capital gains and dividends in 2003. The lower rates will expire January 1 if Congress fails to take action.

President Barack Obama and Democrats tried before the election to pass legislation extending low rates for taxpayers on family income of $250,000 or less and individual income of $200,000 or less.

They were stymied when a small but vocal minority in their own party backed a rival proposal from Republicans to extend all the tax cuts — notably those for families with income above $250,000. Agreement still has not been reached on whether to extend the cuts.

Taxes are levied marginally, so an individual making $250,000 only pays a higher rate on $50,000, the part of income above the $200,000 threshold.

Extending all the tax cuts will benefit all income levels, but those in the upper income tiers benefit more.


Democrats will still be in power in November and December when key decisions need to be made to prevent taxes from rising at the start of 2011.

Many believe the two most likely options are a one- or two-year extension of all current rates — passed with the help of some conservative Democrats, or gridlock with all the rates expiring on at least a temporary basis.

The first option could happen if Democrats cannot muster enough votes to pass their “middle class only” tax plan and decide to compromise with Republicans to prevent all taxes from rising.

Inaction could occur if Republicans decide to wait until they consolidate their power and have all their new members seated in January. Because many Democrats never backed the Bush-era tax cuts to begin with, they may be in no mood for compromise.

Chances are slimmest for Obama’s preference to continue lower rates only for the first $200,000 of an individual’s income.


JP Morgan has estimated expiration of all the cuts could take about 1 percent to 1.25 percent off GDP growth over the course of a year, as personal income falls.

Still, if Congress allows the low tax rates to expire, it likely would be just temporary. Republicans and many Democrats would push to reestablish the tax cuts in some form in 2011.


Any deal on extending individual rates is likely to include the estate tax.

The tax on estates passed onto heirs by the wealthy expired this year, but will spring back at a higher rate in 2011 if lawmakers cannot come to agreement.

Under current law, the tax will increase from the 2009 rate of 45 percent to 55 percent in 2011, and the exemption amount will drop from $7 million for couples in 2009 to $2 million for couples in 2011.

Many Republicans want to scrap the tax altogether, though they are unlikely to gain enough backing for that idea.

Republicans have in recent years backed a compromise of sorts that would tax estates above $10 million for couples at a rate of 35 percent. Most Democrats back extending 2009 rates.

Big Republican wins could increase the odds of an estate tax closer to their preferred proposal.

(Reporting by Kim Dixon; Editing by Tim Dobbyn)

Q+A: Republican election wins may tilt tax policy