On Wednesday, July 26, the Senate held a vote regarding the extension of the Bush-era income tax rates.  The current tax cuts, set under President Bush, are set to expire on January 1 of 2013, demanding a new tax deal to be secured by Republicans and Democrats in Congress by that date.  Both parties have been working on their own tax bills—Republicans offering an extension of all current Bush-era tax cuts, and Democrats allowing tax rates on income, capital gains, and dividends to rise for earnings over $250,000, but extending Bush-era tax rates for those earning less than that amount.

Surprisingly, Republicans did not attempt to filibuster and the vote actually took place.  The Democrats’ bill passed with a simple majority of 51 votes.  It seems plausible that Republicans purposely did not filibuster the bill they viewed as nonthreatening, in order to make all Democrats (especially those in republican-leaning states) vote on this fundamental public issue.  The overwhelming notion is that it will be impossible for the Democrats’ bill to pass in the Republican-led House of Representatives, so the Democratic win is more symbolic than anything else.   

While President Obama is pushing for a 39.6% (43.4% including the 3.8% investment tax under Obama’s Affordable Care Act) tax rate on dividends and a 30% rate on capital gains, the plan presented by Democrats in the Senate entails keeping the tax rate on dividends and capital gains at 20% (23.8% including the 3.8% aforementioned tax). However, the rest of the Senate Dems’ plan is aligned with that of Obama, which includes a rise from a 33% to 36% tax rate on married couples’ earnings above $250,000, and a rise from a 35% to 39.6% tax rate on married couples’ earnings above $390,000.

The question being asked by nearly every onlooker is obvious—Will Congress be able to strike a deal?  It’s unlikely that a deal will emerge before the November elections, but we are hopeful that members of Congress are aware they can put off this issue for the time being, and still secure a deal come January.  Since deficit reduction is the true driving force behind the tax re-haul discussion, we are confident that our congressional leaders will be able to compromise by the start of next year.  In terms of what that compromise will look like, stay tuned, and stay tuned through November, because whoever takes the White House in the election will likely have a great bearing on what form the tax compromise will take.

The following chart illustrates individual tax rates under various tax plans that have been proposed.