(Bloomberg News) Americans with the highest incomes and U.S. corporations, especially those with international operations, stand to be big winners as newly elected congressional Republicans signal they will extend existing tax benefits and push for new ones.

Republicans will use their new majority in the House to bolster their campaign to extend Bush-era tax cuts for couples earning more than $250,000. They'll also side with companies such as International Business Machines Corp., Microsoft Corp., Blackstone Group LP and Occidental Petroleum Corp., which have lobbied against President Barack Obama's proposals to increase taxes on overseas profits.

"Republicans have pretty much staked their claim that they're not going to raise taxes," said John Feehery, who was an adviser to former House Speaker Dennis Hastert, the last Republican to hold that top post. "Republicans are much more cognizant and care more about the financial impact of these taxes on jobs."

Midterm elections yesterday gave Republicans a majority in the House of Representatives with a net gain of at least 60 seats, their biggest increase since 1938. Republicans also scored a net gain of at least six seats in the Senate, though Democrats retained control of that body. Analysts say the new makeup improves the chances Congress will prevent any Bush-era tax cuts from expiring as scheduled at year's end. Businesses will get powerful allies as they seek to forestall tax increases sought by Obama to fund other priorities.

'Pillaged by Congress'

Businesses "are not going to be seen as a pool of funds to be pillaged by Congress anymore," said Curtis Dubay, a senior tax policy analyst at the Washington-based Heritage Foundation, a research organization that usually sides with Republicans.

Still, even with the gains in the House, the Republicans will need to reach compromises with Democrats to achieve anything of substance. The president has veto power and the Democrats retain a majority in the Senate that allows them to prevent any measure from getting the 60 votes required to overcome procedural hurdles.

Immediately at stake is the renewal of more than $5 trillion of tax cuts passed in 2001 and 2003 that expire Dec. 31. These include lower income-tax rates and reduced rates on most capital gains and dividends.

Permanent Cuts

Republicans want the cuts extended permanently for all Americans; Obama and most Democrats favor extending them only on the first $250,000 of a couple's income. The parties also disagree on what to do about the estate tax, which was repealed for one year for 2010. Failure by Congress to act would trigger $400 billion in scheduled tax increases this year and next.

"We're hoping the president puts the class warfare rhetoric aside, puts the redistribution ideology aside and works for the better of the economy and sends a signal to the markets that we're going to prevent these tax increases," said Wisconsin Representative Paul Ryan, the Republican likely to chair the House Budget Committee in the next Congress. Ryan said Republicans would seek to retroactively renew the Bush-era tax cuts next year if no action is taken in 2010.

If Congress fails to act, income tax-rates are scheduled to increase across the board. The $1,000 per child tax credit will be cut in half and other benefits for adoption, college tuition and child care will be reduced or lapse.

Capital Gains

In addition, incentives for small businesses to invest will decrease and tax rates on most capital gains and dividends will rise to 20% and as high as 39.6% from 15% now. The federal tax on estates, which lapsed for 2010 only, is scheduled to return with a top 55% rate on estates of more than $1 million.

Most lawmakers in both parties favor retaining lower taxes for joint filers earning less than $250,000. Republicans want to extend the cuts for everyone, while Democrats want to increase the two top rates -- currently 33% and 35% -- to 36% and 39.6%. Republicans also want to keep the preferential tax rates on investments and a repealed or lower estate tax.

The nonpartisan Congressional Research Service estimated on Oct. 27 that it would cost the government $5 trillion in revenue and interest costs on the national debt to extend the Bush-era tax cuts for all income classes through 2020.

Lame-Duck Session

The interim period and the looming deadline for expiration of the Bush tax cuts will present Republicans with a dilemma: They will need to decide whether it would be most beneficial to make a deal during a so-called lame-duck session, before the next Congress convenes and during which Democrats still have majorities, or whether they would prefer to negotiate with Obama on a reinstatement of the tax cuts on their own terms in 2011, said former Texas Representative Bill Archer.

"It's not going to be easy for them to cut what I would consider to be a good deal with Democrats who've got their nose out of joint because they're no longer in control and a president who wants to show he's still president," said Archer, who became the first Republican to head the tax-writing Ways and Means Committee in 40 years the last time Republicans took control of the chamber from Democrats in 1995.

Still, even divided government may benefit businesses such as Armonk, N.Y.-based IBM and Redmond, Washington-based Microsoft by making it impossible for Obama to push ahead with proposals to boost taxes on U.S. companies' overseas income. Mike Fay, a spokesman for IBM, and Mark Murray, a Microsoft spokesman, didn't respond to requests for comment.

Oil Companies

Gridlock may also stave off changes in tax policy sought by Obama that would cost oil companies such as Occidental tens of billions more a year by raising taxes on their non-U.S. operations.

Obama has advocated eliminating the so-called dual- capacity tax credit, which allows companies to deduct a portion of foreign taxes paid when calculating U.S. taxes. The credit lowers a company's U.S. tax burden by not double-taxing foreign sources of revenue. In 2009, 39% of Occidental's revenue came from foreign sources, yet 64% of the company's taxes due were to foreign governments. If the credit is eliminated, companies will owe more taxes in the U.S.

"The punitive-type tax changes against the energy industry will be much more difficult to pass with Republicans in charge of the House," said Gerald McPhee, senior vice president of federal relations at Los Angeles-based Occidental, the fourth-largest U.S. oil company by market value.

Carried Interest

The Republican victory may also give private-equity firms such as New York-based Blackstone some clout in their four-year fight to thwart efforts by congressional Democrats to raise taxes on the incentive pay paid to executives known as carried interest. That pay can currently qualify as capital gains, and be taxed at a 15% rate, and Democrats say it should be taxed at higher rates for wages, or as high as 39.6%. Most Republicans oppose the change.

Asked on Bloomberg Television on Oct. 30 whether a Republican win would delay the tax, Blackstone's Chief Executive Officer Stephen Schwarzman said he didn't know.
"There's a real need for revenue in the budget cycle," Schwarzman said. "What gets through Congress, I can't predict."

Tax Holiday

Besides blocking prospective increases, businesses may find the Republican sweep provides a ripe political environment for getting through Congress some long-sought tax benefits. Companies such as San Jose, California-based Cisco Systems Inc. may find new support for a temporary tax holiday on their foreign earnings that was rejected by the Senate in 2009. Terry Anderson, a Cisco spokeswoman, didn't return a call seeking comment.

Moreover, Obama and Republicans may cooperate on business tax incentives designed to stimulate the economy, said Grover Norquist, president of Americans for Tax Reform, a Washington- based group that advocates lower taxes.

That would benefit manufacturers including General Electric Co., Corning Inc., and Caterpillar Inc. Anne Eisele, a spokeswoman for Fairfield, Connecticut-based GE, declined to comment.

Daniel Collins, a spokesman for Corning, New York-based Corning, said, "we really haven't formed an opinion about what may or may not happen."

Research Credit

Obama has proposed renewing, expanding and making permanent a tax credit for research and experimentation along with a two-year period to allow companies a full deduction for equipment purchases that ordinarily would have to be depreciated over as many as 20 years. Republicans and business groups generally favor both policies, though they have objected to Obama's plan to offset the cost of those measures with tax increases on U.S. companies' global profits.

"It would have a very big stimulative effect for new investment," and the president needs a growing economy before the 2012 election, Norquist said. "Obama can hold his head up and say that was my idea."

Republicans and Obama also may find common ground on reducing the 35% top marginal corporate tax rate, the second-highest in developed countries, Norquist and Dubay said. Democrats such as New York Representative Charles Rangel, the former head of the tax-writing Ways and Means Committee, and Senator Ron Wyden of Oregon have offered proposals to trim it.

Gridlock Losers

Gridlock may have a downside for companies, by blocking efforts to renew dozens of business-oriented tax breaks that expired last January. The provisions, which are being pushed by companies including Corning and GE, include a different version of the research credit and deferral of U.S. tax on profits from foreign lending that benefits global lenders including GE.

There's also a separate tax issue that requires lawmakers' immediate attention: making a deal before year-end to prevent 30 million households from being subject to a $66 billion tax increase under the alternative minimum tax. That parallel system, introduced in the 1960s to ensure the richest Americans don't avoid taxation through the use of deductions, was never indexed for inflation and Congress has been forced to limit its effect by enacting a series of costly fixes. The latest such fix expired at the beginning of 2010.

Even if lawmakers reach a compromise before Dec. 31 that extends lower income taxes for a year or two, such a deal could be easily undermined by a separate fight over how to tax multimillion-dollar estates, said Clinton Stretch, a principal at the consulting firm Deloitte Tax LLP in Washington.

Estate Tax

Democrats generally want to reinstate the levy as it existed in 2009, with a 45% top rate that begins to apply when estates exceed $3.5 million. Republicans for the most part are holding out for a full repeal. Some in both parties back a bipartisan proposal by Arizona Republican Senator Jon Kyl and Senator Blanche Lincoln, an Arkansas Democrat, to increase the exemption to $5 million and reduce the rate to 35%. That compromise may be imperiled as Lincoln lost her bid for re-election yesterday.

"It's much easier to see a compromise between the still- Democratic House and the Senate on the Bush tax cuts," Stretch said. "It's harder to see compromise on estate taxes."

Dubay said he was less optimistic about the chances of all the 2001 and 2003 tax cuts being extended while Democrats still control Congress. "I can't imagine that the last act of Speaker Nancy Pelosi is to extend the Bush tax cuts," he said.