Tax cut squabble grows louder

WASHINGTON (CNNMoney.com) -- Washington's big debate - whether or not to extend the Bush-era tax cuts - heated up Wednesday, and appeared headed for a showdown when Congress returns from its summer break next month.

Top Democrats will tackle new tax legislation in September when they return from summer break, according to a spokesman for Senate Majority Leader Harry Reid, D-Nev.

Democrats want to try to extend the middle-class tax cuts passed back in 2001 and 2003 during the George W. Bush administration. But they want to let cuts lapse - essentially hiking taxes - for individuals making more than $200,000 and families making $250,000 annually.

Republicans accused Democrats of trying to quash the economic recovery.

"It'll have the devastating impact of raising taxes in the middle of a recession," said Senate Minority Leader Mitch McConnell, R-Ky., at a news conference of GOP senators.

Republicans say that imposing higher taxes on those in the upper-income brackets would be bad for many job-creating small businesses, which often pay taxes under the individual income tax code.

Economist Douglas Holtz-Eakin, who engaged in a public debate with Treasury Secretary Timothy Geithner Wednesday, has said tax hikes on people in the impacted brackets could stymie hiring by small business by as much as 18%.

Democrats accused Republicans of being fiscally irresponsible.

"Borrowing to finance tax cuts for the top 2% would be a $700 billion fiscal mistake," further increasing the nation's indebtedness, Geithner said in said before the Center for American Progress in Washington. "It's not the prescription the economy needs right now, and the country can't afford it."

Under the White House plan, the top two tax rates would revert to where they were in the late 1990s: The 35% rate would go to 39.6% and the 33% rate would go to 36%. The highest-income filers would also see their tax rates on capital gains and dividends go up.

During the Republican Senate news conference, a couple of small business owners said they couldn't take higher taxes.

But, according to Len Burman, former director of the Tax Policy Center at the Urban Institute, only 3% of small businesses are subject to the top two individual tax rates.

He also noted that much of the income from those businesses comes from private partnerships such as law and accounting firms and investment firms, and not from traditional mom-and-pop ventures.

-- CNNMoney.com senior writer Jeanne Sahadi contributed to this report.