Iowa’s two U.S. senators were on opposite sides yesterday in near party-line votes on tax policy.  

All the Bush-era tax cuts are set to expire at the end of 2012 without action by Congress. President Barack Obama supports extending tax rates on up to $250,000 in income for one more year. (Note: even the wealthiest taxpayers would benefit from these lower tax rates on the first $250,000 of their family income.) Senate Democrats have been angling for weeks to put the president’s plan up for a floor vote.

Senate Republicans want to extend current tax rates for all income levels and for unearned income (capital gains, dividends, inherited wealth).

More often than not, contentious legislation is derailed by a Senate filibuster before it reaches a floor vote, where bills can pass with a simple majority. In this case, Republican leaders agreed to let the tax plans come up on the floor. Bernie Becker and Ramsey Cox explain for The Hill:

The votes came following a topsy-turvy morning of legislative maneuvering in which Minority Leader Mitch McConnell (R-Ky.) consented to allowing straight up-or-down votes on the two tax plans. The Senate had been scheduled to hold a procedural vote on just the Democratic plan, which would have needed 60 votes to advance.

McConnell, speaking on the Senate floor, suggested his move was meant to smoke out vulnerable Democrats, and make them put their cards on the table. “The American people should know where we stand,” McConnell said. “Today they will.”

The Republican plan came up first and went down by a 45 to 54 vote (roll call). Only two Republicans voted against that plan (Scott Brown of Massachusetts and Susan Collins of Maine). The rest of the GOP caucus, including Chuck Grassley, voted yes. Every Democrat present except for one (Mark Pryor of Arkansas) voted no, including Tom Harkin.

The president’s plan was up next. 53-47 majority leaves Democrats little margin for error. Vice President Joe Biden was ready to break a tie if necessary, but Democrats didn’t need him, as their one-year tax rate extension bill passed by 51 votes to 48 (roll call). Iowa’s senators split along the expected party lines. The only defectors in the Democratic caucus were independent Joe Lieberman and Jim Webb.

Lieberman said on the Senate floor that both the Republican and the Democratic plan amount to a punt at a time of trillion-dollar annual deficits. Webb, meanwhile, said that he would not support increasing taxes on ordinary income, but believed that rates for capital gains could go higher.

The U.S. House will soon take up a bill much like the Senate Republicans’ proposal on extending all current tax rates. This issue won’t be resolved before the November election, but at least all the members of Congress will be on record. I expect to see total Democratic capitulation during the lame-duck session of the outgoing Congress in December, as happened in 2010.

Senator Grassley’s office released this comment on yesterday’s votes.

TO:      Reporters and Editors

RE:      Preventing a Tax Increase

DA:     Wednesday, July 25, 2012

Sen. Chuck Grassley made the comment below about Senate votes this afternoon to extend expiring tax relief.  Sen. Grassley served as Chairman of the tax-writing Finance Committee in 2001 and 2003 and co-authored the tax relief, which passed with bipartisan support.  The first vote today was on S. 3412, the Senate Democratic Majority Leader’s bill to increase the estate tax and the top two tax rates.  The second vote was on S. 3413, the Senate Republicans’ bill to extend all of current tax policy for one year, including the estate tax, and top rate for dividend income.  It also extends small business expensing and provides an alternative minimum tax (AMT) patch for two years.

Grassley comment:

“It’s time for these tax issues to be addressed.  Uncertainty about taxes and federal regulations is a major damper on the economy.  I hear about it directly from Iowans at my town meetings.  If the 2001 tax relief, the bipartisan legislation I got through a 50-50 Senate, is allowed to expire at the end of the year, it would be one of the biggest tax increases in history.  Employers at the grass roots – the job-creating small businesses of America – need and deserve certainty.

“When this tax relief was extended in 2010, 40 Democratic senators voted for it.  President Obama supported it, too, and said that raising taxes ‘would have been a blow to our economy.’  He also said at the beginning of his presidency that ‘you don’t raise taxes in a recession.’  Today, the economy continues to struggle, and experts say raising taxes on small businesses – which both President Obama’s and Senator Reid’s bills do – would hurt workers and job creation.

“The answer to America’s fiscal challenge isn’t higher taxes.  In fact, the President’s budget proposal this year increased taxes on job creators to spend more on government programs rather than to reduce deficits and debt.  His plan would have increased the national debt $10 trillion over the next ten years.  The Senate Democratic majority hasn’t offered or passed a budget for more than three years.

“Those in charge of running the Senate have failed to lead on these important issues.  At least there is some accountability today, with the outcome of these votes determined by a simple majority, so no senator could mask his or her position in a procedural vote.”

Note that Grassley is talking about the dire consequences of not extending any of the 2001 tax cuts. Democrats are trying to extend almost all of those tax cuts. Economic research does not support the idea that raising tax rates for the wealthiest Americans would hurt the economy.

As three leading tax economists recently concluded in a comprehensive review of the empirical evidence, “there is no compelling evidence to date of real responses of upper income taxpayers to changes in tax rates.”[1]   The literature suggests that if the alternative to raising taxes is larger deficits, then modest tax increases on high-income households would likely be more beneficial for the economy over the long run. […]

The evidence shows that changes in tax rates that fall within the ranges that policymakers are debating have little impact on high-income individuals’ decisions regarding how much to work.   […]

[A]s Professor Joel Slemrod has written, “there is no evidence that links aggregate economic performance to capital gains tax rates.”[3]   Similarly, the Congressional Research Service (CRS) has reported that most economists find that reducing capital gains tax rates would have only a small – and possibly negative – impact on saving and investment.[4] […]

The evidence does not support the claim that raising top marginal income tax rates has a heavy impact on small business owners: a recent Treasury analysis finds that only 2.5 percent of small business owners fall into the top two income tax brackets and that these owners receive less than one-third of small business income.  Moreover, even those small business owners who would be affected by tax increases on high-income households are unlikely to respond by reducing hiring or new investment.  

At this writing, Harkin has not commented publicly on yesterday’s votes, but I will update this post if I see a statement from his office.