Obama has tenuous grip on Democrats over taxes

Democrats in Congress are distancing themselves from President Barack Obama's push to let taxes rise for the wealthiest Americans, fearing it will further harm them in November's mid-term elections.

Obama stood firm on his stance in a fiery speech this week addressing the looming increase of all individual taxes. He repeated his pledge to let tax rates on high-end income groups rise -- individuals making more than $200,000 a year or couples earning over $250,000.

But congressional Democrats are worried as they face potentially big losses in November. Democrats in the most vulnerable districts are teetering, especially the party's conservative Blue Dogs who need to appeal to constituencies that sometimes look more like Republicans.

Without support from his own party, Obama's effort to let tax rates rise on the rich is in peril. The most public displays of support have come from the Democratic leadership in the U.S. House of Representatives.

"Democrats are peeling off," said Clint Stretch, a three-decade veteran of tax policy, now a principal at Deloitte in Washington. "My guess is in a lame-duck Congress (after the election) you'll get a one or two-year extension."

There are two potentially divisive issues at play -- whether to extend tax cuts for everyone or just the middle class, and whether to make those cuts permanent or temporary.

Uneasy Democrats are backing away from Obama's plan to only extend lower tax rates on the so-called middle class. A group of Democratic freshmen that backs extending all the lower rates are drafting a letter to their party's leaders expressing that position.

"It is time for Congress to be decisive about the tax rates facing small business owners next year," freshman Michigan Democrat Gary Peters said on Wednesday in a statement. "Extending the 2001 and 2003 tax cuts for all earners is the right thing to do as anything less jeopardizes economic recovery."

In the Senate, at least three Democrats and independent Joe Lieberman have said they would prefer an extension of all the rates, citing the economic malaise.

Treasury Secretary Timothy Geithner avoided talk of a compromise on Wednesday, appealing to fears about the widening budget deficit to defend Obama's plan.

"There are some Republicans in Congress who believe that we should go borrow $700 billion from our children, and investors around the world, so that we can afford to extend these tax cuts for the most fortunate two percent of Americans," he said on Fox Business Network. "We just don't think that is responsible economic policy."

Still, Obama has avoided threatening to veto any legislation containing an extension of the tax cuts.

ORSZAG ADDS TO HEADACHE

Former White House budget director Peter Orszag added to Obama's problem when he caught the White House by surprise with a New York Times editorial this week calling for a two-year freeze on current tax rates. After that period, he backed an automatic return to rates before former President George W. Bush lowered taxes nearly a decade ago.

Given the gridlock in Congress, Orszag said the cuts might have to be kept in place for all.

Orszag's comments reflect the gap between Obama and some congressional Democrats as well.

"I wonder if Obama can hold his own party on this," said Greg Valliere, a political analyst for investors at Potomac Research Group. "The jury is out on that."

Republicans pounced on Orszag's comments as evidence that economists, even those associated with liberals, are worried that tax increases on any income group could derail the recovery.

Orszag also disagreed with Obama's bid to make the lower tax rates for the lower and middle income groups permanent - keeping the president's campaign pledge to not raise taxes on the middle class.

The top Republican in the House, John Boehner, who would likely become House speaker if his party takes control, called for a two-year tax freeze of current rates a day after Orszag's comments.

"I have the sense it may be this is where the politics are headed," said Brookings Institution senior fellow Isabel Sawhill, who in an ideal world said she backs letting the high-end rates expire. "I think that could be a good compromise."

But a two-year extension would be awful timing for Obama.

"It could potentially imply them fighting this debate in the run up to the presidential election," said Sean West, an analyst with Eurasia Group, which advises investors.

Extending the tax cuts for the wealthiest Americans would cost an estimated $700 billion over a decade. Obama argues that the United States, which already faces a $1.3 trillion deficit this year, cannot afford that bill.

FORCING PELOSI'S HAND

Virtually no one predicts any real movement on the tax issue before the elections. The Senate, which will take the lead on the issue, comes back from a break next week, only to adjourn about a month later.

"I don't think (House Speaker Nancy) Pelosi would swallow the extension unless the White House forced it on them," which is extremely unlikely before the election, West said.

It is unclear who Democrats need to appeal to more in the election -- liberals or moderates -- but the economy may supersede such distinctions, said Jennifer Duffy of the Cook Political Report.

"At this point Democrats just need Democrats to show up regardless of their stripes," Duffy said, though she said there could be a danger to making it an argument about income class.

But the Democrats are a big party, and many believe that some moderates think calling Republicans out on fighting for lower taxes for the wealthy is a winning argument.

"I still think moderates feel that it's most important to keep tax rates lower on the middle class and let the rich pay a bit more - in the interest of not ballooning the budget deficit even more," Anne Mathias, analyst for investors at Concept Capital said.