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Can U.S. economy tolerate a tax increase in 2013?

Is the American economy strong enough to withstand an income tax increase starting on New Year’s Day?

The rhetorical skirmish over this question is the prelude for bargaining that’s likely to culminate after Election Day as President Barack Obama tries to persuade Congress to raise income tax rates on people with incomes over $200,000 and Republicans try to keep the current tax rates in place at least for 2013.

If the two sides don’t come to terms, income tax rates for all earners go up on New Year’s Day.

For a middle-income married couple with three children under age 17, this would mean at least a $1,500 tax increase since the child tax credit is set to shrink at year end from $1,000 per child to $500 per child.

The tax policy clash played out on NBC’s Meet the Press Sunday as Meet the Press host David Gregory played a clip of Obama saying in 2010 that “the economy remains somewhat fragile” and asked Senate Democratic Whip Dick Durbin, “If it was a bad idea to raise taxes in a down economy then, why is it a good idea to raise taxes in a down economy now?”

Durbin argued that Obama “has drawn the line in the proper way. He believes, and I agree, that the top 2 percent of wage earners in America should pay their fair share.”

He said, “Asking the top 2 percent of wage earners in America to pay their fair share of taxes is not going to kill the economy. Instead, it's going to make sure we move toward reduction of our (budget) deficit.”

The Congressional Budget Office reported last week that at this point, three-quarters of the way into the fiscal year, the budget deficit, $905 billion, is $66 billion less than the deficit incurred for the same period in the prior year. Spending is about 1 percent higher and revenues are about 5 percent higher than they were at the same point last year, the CBO said.

Making the case for the Republicans, GOP Senate Whip Sen. Jon Kyl of Arizona told Gregory, “We're not talking about giving tax cuts to anyone. All we're asking is don't raise taxes on all Americans, and especially don't raise taxes on the people who create the business. When you say that the high income earners, the top 20 percent, pay 90 percent of the taxes, what should they pay, 99 percent? These are the people who have enough money to invest in businesses and to create jobs.” The tax increase that Obama is proposing “falls directly on those job creators,” Kyl said.

The Arizona Republican predicted that his party will gain control of the Senate on Election Day.

The GOP needs a net gain of four seats to do so – a goal that seems within reach since the nonpartisan Cook Political Report says eight seats now held by Democrats are in the toss-up or likely Republican category. Three GOP-held seats are in Cook's toss-up category.

“That means that both the House and the Senate will reject these kinds of job-killing tax increases that the president is proposing,” Kyl said. “I think that will make it more difficult for the president to propose what he is doing now and go back to where he was a year and a half ago when he said it would be a blow to the economy to increase taxes on anyone. He was right then. And then we had a 3 percent GDP growth, now we're fewer than 2 percent.”

A major tax increase on upper-income people is already set to begin on New Year’s Day: the Affordable Care Act’s new Medicare tax on people with incomes over $200,000. The new tax will collect $20 billion in revenues next year, increasing to nearly $40 billion a year by 2019.

Some Democrats, such as House Ways and Means Committee member Rep. Xavier Becerra of California, see the expiring tax rates as powerful leverage for their side. Becerra has made the case for allowing the current income tax rates to expire on Dec. 31, which would mean they’d revert to the higher levels of 2000.

Becerra said in May that cumulative deficits could be reduced by $7 trillion over ten years if pre-2001 tax rates took effect in 2013.  He said Congress could “tweak” those tax increases in 2013 (when Becerra and other Democrats hope they’ll be in the congressional majority) – presumably so that they would not affect lower-income people.

The original version of this story said that the child tax credit was $1,500 per child; in fact, it is $1,000 per child.