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."
Yeah, like after the 2010 election, when his party got a shellacking in Congress, the economy showed no signs of improvement, and he reluctantly agreed to a two-year extension of the Bush tax cuts.
No one can predict what will happen in November, but the likely parameters of the election are beginning to come into sharper focus.
Despite polls showing that Congress' approval rating has sunk to a record low of 10 percent, surveys also show a strong majority of voters approve of their own representative and senators. With the House firmly in the grip of the Republicans, by 242 to 192 with one vacancy, it appears highly unlikely the GOP will lose control in November.
The Democrats' Senate majority is much more tenuous. Republicans need three more seats to effectively take control if they win the White House, with the vice president breaking tie votes. But if Obama wins a second term, the GOP would need just four more seats, which top forecasters say is easily within their reach.
"With five Democratic seats at greatest risk -- Nebraska, North Dakota, Missouri, Montana and Virginia -- and another five -- New Mexico, Ohio, Florida, Wisconsin and Hawaii -- the 2012 Senate landscape is stacked in the Republicans' favor," says Stuart Rothenberg in his latest race-by-race analysis.
What this means is that Republicans will be in control of Congress, and if Obama were to win a second term -- which very much depends on who the GOP nominee is -- he can kiss any tax increases goodbye.
In that situation, with the Republicans ruling Capitol Hill, he will likely be sent legislation in January to make the tax cuts permanent, with additional tax reforms to boost growth and new job creation. The political pressure on him would be intense to sign the bill to get the economy going again.
But what if he loses the election and refuses to extend the Bush tax cuts in a bitter battle in the divided lame-duck Congress, allowing them to expire? That seems unlikely because he would be hurting the very segment of the electorate he says he most wants to protect: the middle class.
In that situation, even if he held his ground this time and let the tax cuts die, it would be a futile act of political retribution that would gain him nothing but public enmity.
The Republican majority would send legislation to the new president soon after the new Congress was sworn in and restore the tax cuts retroactively, with every assurance it would be immediately signed into law.
But for now, the political argument that Obama's failed policies have allowed this high unemployment and painfully slow recovery that has dragged on far longer than necessary is a powerful one.
Much of the investment doubts throughout the economy have been due to chronic uncertainty within the business community that feared making long-term expansion plans, not knowing whether the temporary tax rates would continue or be raised in any succeeding year. The absence of any certainty in tax policy has helped produce the anemic, high-unemployment economy we have now.
The Christian Science Monitor said the "standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the U.S. government began recording it five decades ago."
The Obama economy, now in its fourth year, has little to show except higher poverty, record bankruptcies, mounting foreclosures, and more than $5 trillion in additional debt on the backs of generations to come.
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