Should Obama Extend Bush Tax Cuts?

Just about everyone agrees the Bush tax cuts for middle class and lower income Americans should not be allowed to expire at the end of this year and in all likelihood they will be extended, reports CBS News' chief White House correspondent Chip Reid.

But a major battle is brewing over whether to extend the so-called tax cuts for the rich.

Like most small businesses, the Tart Lumber Company in Sterling, Va. has been hit hard by the recession. Craig Fritsche, president of Tart Lumber Company, tells Reid that the last thing small business owners need now is a tax increase.

"The thing is I won't go out and hire more people if these tax rates go through because I won't have the money to invest in the business as much," says Fritche.

But President Obama wants to allow the Bush tax cuts to expire for individuals making more than $200,000 a year, and for couples making more than $250,000. That includes thousands of small businesses - 75 percent of which file their business income on their personal taxes, reports the National Federation of Independent Business.

If the tax cuts do expire, the top rate for business owners will increase from 35 percent to 39.6 percent. For a business that brings in about $400,000 a year, that's about $12,000 more in taxes and for a business with income of $2.5 million, taxes would go up about $108,000.

And the NFIB reports while only about three percent of small businesses earn over 250,000 dollars, small business advocates say that three percent employs about 25 percent of the U.S. workforce.

Overall only about two percent of Americans qualify as rich under the president's plan and would see their tax rates rise -- but they pack an enormous economic punch.

"There's an astonishing fraction of the national business funding that comes from these high-income groups," says conservative economist Alan Viard.

"40 percent of non-corporate business income goes to people in the top brackets, along with 60 percent of dividend income and 80 percent of capital gains," reports Viard.

While the rich do tend to save more as a portion of their income, they also love to spend -- so much so that economist Mark Zandi says they drove the economy out of recession.

"High-income households are particularly sensitive to their finances so if we raise their taxes now I think they will pull back on their spending," says Zandi.

That will slow the recovery. Zandi, who has counseled politicians from John McCain to President Obama, says the high-end tax cuts should be extended at least another year, until the economy is on its feet.

President Obama, though, is unconvinced. He wants the tax cuts for the rich to expire. It's partly about fairness, but the administration says it's also about being fiscally responsible.

"Permanently extending the tax cuts for the top two percent would require us to borrow $700 billion more over the next decade, adding significantly to an already unsustainable level of debt," argues U.S. Treasury Secretary Timothy Geithner.

This epic battle over raising taxes on high-income Americans will begin after congress comes back from its August recess.

  • Chip Reid

    Chip Reid is CBS News' national correspondent.