Donald Lambro

WASHINGTON -- An election-minded Congress defused the Social Security payroll tax cut issue last week, but a much more politically lethal time bomb is set to go off at the end of the year.

Income tax rates will go up, including the 10 percent tax rate on the first $8,700 of income, which will climb to 15 percent, hurting the poorest Americans and the middle class hardest of all. The $1,000 child tax credit will drop back to $500 per child, increasing the cost of raising a family.

The pro-growth 15 percent investment tax on dividends and capital gains from equities that millions of older people depend upon in their retirement years will rise to at least 20 percent. That will squeeze investment in the economy and weaken tax revenue flow, which in turn will worsen the deficit.

The top income tax rates will rise, too, with the highest tax rate shooting up from 35 percent to nearly 39 percent, punishing small businesses that file as individual taxpayers.

The marriage penalty for joint-filing couples will also go up, penalizing married working couples with higher taxes than they would pay if they were single.

Throw in the Jan. 1 restoration of the 6.2 percent payroll tax, up from from 4.2 percent, and you've got the perfect meltdown scenario that will flatten incomes, cut jobs and slow down the Obama economy's growth to less than 1 percent.

Republicans want to avoid this by making the Bush tax cuts permanent. The economy, after all, has been showing some signs of growth, lackluster though they are -- growth that's occurred under Bush's tax cuts, despite President Obama's belief that they have hurt the economy.

Obama wants to keep the former president's middle class tax cuts, but significantly raise taxes on investors, corporations and higher-income working couples earning more than $250,000. However, that's not going to happen as long as Republicans control the House, where all tax revenue bills must originate.

This raises fears of a post-election stalemate in a lame-duck Congress that would let the tax cuts expire in 2013 when the unemployment rate is expected to still be above 8 percent.

There are those who continue to believe a deal will be made in the 11th hour before this Congress ends. "I see the framework of a big agreement in the lame-duck (session) to finally put this divisiveness behind us," Rep. Richard E. Neal, D-Mass., a senior member of the tax-writing Ways and Means Committee, told The Washington Post last week. "Obama's going to have great leverage to get something done."

Donald Lambro

Donald Lambro is chief political correspondent for The Washington Times.