Much has been said about the impending so-called “Fiscal Cliff,” the confluence of economic events that will take place at the end of 2012. These include the expiration of the Bush tax cuts, the need to extend the national debt limit, the expiration of the reduction in the capital gains rate, the triggering of the $1.2 trillion dollars in cuts to government spending with half in domestic and half in military (the so-called “Sequestration”) and the expiration of numerous tax credits such as the production tax credit for the wind energy industry. Democrats see this as an opportunity to emphasize two tax provisions that they have championed for some time - a continuation of tax cuts for the middle class and a tax increase on high income earners. Last week a senior member of the Senate Democratic Leadership indicated that Democrats would allow the country to fall off the Fiscal Cliff if Republicans refused to increase taxes on Americans earning over $200,000 individually, or $250,000 for a couple. Republicans immediately attacked the plan as holding the American economy hostage to the Democrats’ tax strategy. Democrats in their reply pointed to the irony of such a position, stating that it was Republicans who last summer during the debt limit debate threatened to throw the country into economic turmoil if they did not achieve one of their long term economic goals of reducing government spending.
Later this week, Senate Democrats will attempt to force a vote on extending the middle class tax cuts for one year for Americans earning under $250,000. Interestingly, however, in an associated provision, Democrats would extend for another year the current reduced rate of taxation on dividends. If Congress does nothing before the end of this year, dividends will be taxed as ordinary income, beginning in 2013. Thus, in this bill the Democrats tax income at a higher level, but retain the lower rate on dividends. Regardless of the outcome of this week’s vote in the Senate, this particular bill will never become law. It is nonetheless another opportunity for Democrats to make a political statement in this election season.