Republicans Set Aside Middle-Income Tax Cuts to Focus on Rich May 8 (Bloomberg) -- Republican lawmakers, facing the prospect that their power to cut taxes may soon be curbed, plan to extend breaks that mostly benefit the wealthy and Wall Street at the expense of reductions for middle-income households. Six months before elections that may return a Democratic majority in at least one house of Congress, Senate Majority Leader Bill Frist of Tennessee and House Speaker Dennis Hastert of Illinois are focusing on extending the 15 percent rate on investments and repealing the estate tax. They won't push extensions of lower rates for all taxpayers and expanded breaks for married couples and families with children, which expire after 2010. ``In politics, timing is everything; you do what you can when you can, and this is what's queued up right now,'' says Arizona Senator Jon Kyl, the No. 4 Republican in the Senate. Given the federal budget deficit, it would ``be hard to generate public support overnight'' for making permanent the other tax cuts, he says. Democrats say the Republicans are favoring tax breaks that do little for middle-income Americans; 50 percent of all U.S. households earn between $26,859 and $120,100, according to the Tax Policy Center, a nonpartisan research institution in Washington. ``Even in an election year where they are losing popularity nationwide, they've chosen to pander to their base of rich donors and leave the middle class behind,'' says Representative Charles Rangel of New York, the senior Democrat on the tax-writing House Ways and Means Committee. Reaping the Benefits Internal Revenue Service data show taxpayers who earned at least $1 million reaped 43 percent of all savings from reduced rates on dividends and capital gains. The estate tax will affect only 12,600 families with more than $2 million in assets this year, a number that will decline to 7,200 by 2009, according to a study by the Tax Policy Center. In contrast, households earning less than $75,000 received about 70 percent of the benefits from increasing the child credit and 64.4 percent of the benefit from creating the 10 percent bracket on the first $14,000 of taxable income, the Tax Policy Center says. In addition, it says 55.2 percent of the benefit from ending the so-called marriage penalty was received by families earning less than $100,000. Political analysts say Democrats have their best chance in a decade to regain a majority in the House or the Senate from the Republicans, who are beset by flagging polls caused by ethics scandals, public outrage at the government's faltering response to Hurricane Katrina and discontent over the Iraq war. Holding a Lead Democrats have taken the lead over Republicans on most issues, including taxes, for the November congressional elections, according to a Bloomberg/Los Angeles Times poll conducted last month. The survey of 1,234 registered voters found that 49 percent of respondents favored Democratic candidates in their district, compared with 35 percent who said they would vote for a Republican. To gain control, Democrats would need to pick up six seats in the 100-member Senate, and 15 seats in the 435-member House. Democratic control of either chamber would make extension of many of the tax cuts difficult. Most Democrats opposed many of them when originally enacted, and some who supported them now say they are unaffordable. The administration has projected a record $423 billion budget deficit, for this year, although Treasury Undersecretary Tim Adams said last week that surging tax receipts will push the deficit ``well below'' the projection. Sustaining Growth Bush and his supporters say lower taxes on investments and multimillion-dollar estates will sustain economic growth. They point to reports last week showing the U.S. economy grew at a 4.8 percent annualized pace in the first quarter. ``The best way to reduce our deficit is to keep pro-growth economic policies in place so the economy expands, which will yield more tax revenues,'' Bush said last week in Washington. While the president has called for all of the $1.85 trillion in tax cuts passed in 2001 and 2003 to be made permanent, administration officials acknowledge that may not be possible. ``You can't do everything at once,'' says Sean Kevelighan, a Treasury Department spokesman who focuses on tax and economic issues. ``But what we are doing right now directly correlates to U.S. economic strength.'' House and Senate Republicans agreed last week to extend for two years the 15 percent rates on dividends and most capital gains, enacted in 2003 and slated to expire at the end of 2008. Extending the cuts would also be a boon to Wall Street, where the Russell 1000 Securities Brokerage & Services Industry Index is up 200 percent since the investment tax breaks took effect. Merrill's Ads New York-based Merrill Lynch & Co., the No. 2 securities firm by market value, has published full-page ads in Capitol Hill newspapers such as Roll Call in support of the cuts. The Securities Industry Association, a Washington trade group, is lobbying for the breaks because its members fear investors will flee the markets if they sense higher rates are on the horizon, says Richard Hunt, the group's vice president of federal policy. The estate tax currently has a top rate of 46 percent. The $2 million eligibility threshold is scheduled to gradually increase to $3.5 million before the tax is repealed in 2010 -- only to reappear in full the following year with an exemption amount of $1 million and rates as high as 55 percent. The Joint Committee on Taxation, a bipartisan congressional panel, estimates that renewing the investment tax breaks will cost the government $50 billion in revenue it otherwise would have received. Republican tax-cut advocates dispute this, saying that capital gains tax receipts have increased because investors have sold assets they would have kept when taxes were higher. Estate-Tax Repeal Repealing the estate tax would cost the government as much as $78.8 billion a year by 2016, according to the committee. Kevelighan also disputes arguments by Democrats that the tax cuts favor the wealthy. Treasury Department figures show the share of taxes paid by the top 1 percent of earners --defined by the IRS as households with adjusted gross incomes of more than $295,495 -- has grown faster than their share of income, currently 17.2 percent. David Keating, executive director of Club for Growth, a Washington-based organization that helped lobby for Bush's tax cuts, says Republicans believe that Democrats would extend the middle-income tax cuts if they win control of Congress. Republicans are focusing on the capital gains and estate tax measures this year because they don't want to give Democrats a middle-class tax cut to tout before the elections. ``The others are tougher and it's better to do the ones that are tougher first,'' he says, referring to the investment and estate tax reductions.