By Richard Cowan
WASHINGTON (Reuters) - Democrats in the U.S. Congress warned on Monday they are prepared to let all Bush-era tax cuts expire on December 31 if Republicans continue to insist on extending lower rates for top earners.
Senator Patty Murray, a member of Democratic leadership, was scheduled to deliver a tough message later on Monday aimed at bolstering her party's election-year attack on tax cuts for those making more than $250,000 a year at a time of high budget deficits.
Murray's speech to the Brookings Institution comes as Senate Democrats prepare to bring to the full Senate this month a bill keeping tax rates low for families earning $250,000 a year or less, knowing that Republicans will block the measure.
The plan takes a softer line on dividend taxes than President Barack Obama proposed in his 2013 budget, amid a corporate lobbying push on Capitol Hill. The Senate plan would raise dividend taxes from the current 15 percent to 20 percent rate, but this would be half the rate proposed by the president, according to a summary.
The July vote is seen as an opening volley in a debate that will play out after the November 6 presidential and congressional elections on the fate of the 2001 and 2003 tax cuts - valued at nearly $4 trillion over 10 years - ushered in by then-President George W. Bush. They expire at year's end.
"If we can't get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013 rather than lock in a long-term deal this year that throws middle-class families under the bus," Murray said in excerpts of the speech released by her office.
Her remarks track closely with those made last month by Senator Roy Blunt, a member of Republican leadership, who told the 2012 Washington Reuters Summit: "My preference would not be to accept a lesser solution than you could get in February and March just to say that you got it done before the end of the year."
Both leaders' remarks hint at the possibility that Congress will fail to compromise on tax policy in an end-of-year session.
In the drive to lower budget deficits that have been breaching the $1 trillion mark since 2009, Democrats and Republicans have already agreed to a series of spending cuts that have mainly hit domestic programs.
But to accomplish additional deficit reductions, Washington is beginning to weigh seriously whether to increase tax revenues, cut into defense spending and possibly lower Social Security and Medicare benefits for the elderly.
Republicans maintain that raising taxes on the wealthiest would hurt owners of small businesses at a time when they are struggling to expand. Democrats counter that few small businesses would be hit by their tax increase and that the wealthy need to share some of the burden of deficit-reduction.
Public opinion polls show support for raising taxes on the wealthy, which could be emboldening Democrats to ratchet up the rhetoric on their initiative less than four months from election day.
But there also are risks if Congress remains deadlocked over how to extend the Bush tax cuts, as economists fear that a sudden across-the-board revenue increase could jolt the economy and possibly push it back into recession.
Besides the tax increases, Congress also is staring at the possibility of automatic spending cuts being triggered in January that could further hobble the economy.
Those spending cuts - totaling $97 billion in their first installment - are the result of last November's failure of a congressional "super committee" to come up with a long-term deficit-reduction plan. Murray co-chaired the doomed panel with Republican Representative Jeb Hensarling.
Republicans are calling for a one-year extension of all the Bush tax cuts to give Congress time to write sweeping tax reform legislation.
"There is absolutely no reason ... that we need to extend the tax cuts for the rich as a precondition for reforming the tax code," according to Murray, who also warns that a rewrite of the tax code will "have to raise revenue to help rein in the deficit and debt," a point that Republicans so far have refused to concede.
Some tax and budget specialists have speculated for months about the possibility of Congress letting all the Bush tax cuts expire as one way of helping Republicans step out of the "no new taxes" pledge that has complicated deficit-reduction efforts.
If they were to expire, both parties would be starting with a clean slate, able to propose new tax breaks, even if they do not cut as deeply overall as the Bush-era ones.
"If the Bush tax cuts expire, every proposal will be a tax-cut proposal and the pledge will no longer keep Republicans boxed in and unable to compromise," Murray said.
(Editing by Fred Barbash and David Brunnstrom)