This week, Republicans have solidified the notion that they will hold an extension of middle class tax cuts hostage unless $830 billion in tax cuts is also given to the richest two percent of households. To justify such a move, they’re relying on the phony argument that letting the Bush tax cuts for the richest two percent expire would disproportionately harm small businesses.

But a group of conservative Congressional Democrats are also making the same bogus argument. This week, a number of self-styled Blue Dogs sent a letter to Speaker of the House Nancy Pelosi (D-CA) saying that they opposed allowing the cuts for the wealthy to expire. One of the main drivers behind the effort — Rep. Jim Matheson (D-UT) — told the Washington Post’s Greg Sargent today that his rationale for making the push is to protect small businesses:

“I recognize $250,000 is a lot of money for an individual to make for an individual,” he said. “But we’re also talking about businesses. That’s not a lot of money for small businesses.” Asked how many people in his district fell into the above-$250,000 category, Matheson answered: “I don’t know the answer to that.”

Before getting to Matheson’s specific argument, let’s review: Fewer than two percent of small businesses and less than three percent of households with any business income at all would be affected if the Bush tax cuts for the rich expire.

Republicans concede that very few businesses would be affected, but then claim that half of small business income would be hit. But that statistic only matters if you’re concerned about a slight tax increase on Bechtel Corp., the Tribune Company, doctors, lawyers, and corporate CEO’s receiving a speaking fee on the side, all of whom fall under the GOP’s overly inclusive definition.

Matheson didn’t know how many households in his district would be affected if the Bush tax cuts for the rich expire, but according to the latest American Community Survey from the Census Bureau, the number is roughly 12,012. (The ACS survey cuts off at $200,000, not $250,000, so some of those 12,000 households would likely fall into the 28 percent marginal income tax bracket, and thus avoid a tax increase.)

The median household income in Matheson’s district is $55,000, while the median male full-time worker makes $46,000. Matheson’s favored extension would give a millionaire an annual tax cut of $128,832, or nearly three times what the median worker in his district earns in total.

Matheson is attempting to muddy the waters by making it sound like business revenues, not personal income, are what winds up on income tax filings. But that’s not how it works. As Matthew Yglesias has pointed out, “any small businessman who’s earning a middle class income isn’t paying in the top two brackets, just as any salaried employee who’s earning a middle class income isn’t paying in the top two brackets.” No matter how you slice it, extending the Bush tax cuts for the rich is spending $830 billion on the richest segment of the population.

A few weeks ago, Tim Fernholz detailed the short life and unfortunate death of the Financial Crisis Responsibility Fee, a bank tax aimed at recouping money lost from the Troubled Asset Relief Program (TARP) from the country’s biggest banks. At the moment, even though the TARP law states that losses must be recouped by some sort of bank fee, the bank tax is not going anywhere. And as Bloomberg reported today, if Wall Street has its way, Republicans will help them keep it that way:

Wall Street is preparing for a Republican surge in Congress that could help it block proposed taxes on banks and investments, blunt new financial regulations and regain some of the lobbying firepower it lost during the financial crisis…If Republicans take over the House, banks will try to stop the push for a tax or fee on the biggest financial companies.

This isn’t all that surprising, as the Republicans have been carrying Wall Street’s water regarding the bank tax since it was proposed by the Obama administration. Remember, when Obama emphasized his intention to implement a bank tax during his last State of the Union, Republicans refused to applaud, and then circulated a letter with the Chamber of Commerce announcing opposition to the tax. They also forced Rep. Barney Frank (D-MA) to strip a bank tax from the Dodd-Frank regulatory reform bill, in order to get it out of conference committee.

There are plenty of good reasons for implementing a bank tax on the biggest financial firms, even if one weren’t required to make up for TARP losses. It would level the playing field a bit between large and small institutions, where smaller ones are currently at a distinct disadvantage, by making it costlier to be a behemoth firm.

As Minneapolis Federal Reserve President Narayana Kocherlakota pointed out, a bank tax would also force huge banks to internalize some of the cost of their risky activities, instead of foisting them onto the public:

Financial institutions fail to internalize all the risks that their investment decisions impose on society. Economists would say that bailouts thereby create a risk ‘externality.’ There is nearly a century of economic thought about how to deal with externalities of various sorts — and the usual answer is through taxation. Taxes are a good response because they create incentives for firms to internalize the costs that would otherwise be external.

A bank tax could also raise some revenue in an age where structural deficits pose a real problem. So with the policy rationale against them, Wall Street is counting on Republicans blocking the fee before it ever sees the light of day again.

This week, Senate Minority Leader Mitch McConnell (R-KY) has been trying to make it abundantly clear that he has no interest in extending the Bush tax cuts for only the middle- and lower-class. Either all of the cuts get extended — including those for the richest two percent of Americans — or nothing happens.

In fact, McConnell has drawn up the Tax Hike Prevention Act of 2010 to show how serious about this he really is. Not only would the bill permanently extend the entire package of Bush income tax cuts, but it adopts a cut in the estate tax that would gift $91 billion to the richest 0.25 percent of households. McConnell has yet to receive a cost estimate for his package, but the Congressional Budget Office has already scored a similar package, which was astronomically expensive:

The nonpartisan Congressional Budget Office recently forecast that a similar, slightly more expensive package that includes a full repeal of the estate tax would force the nation to borrow an additional $3.9 trillion over the next decade and increase interest payments on the national debt by $950 billion. That’s more than four times the projected deficit impact of President Obama’s health-care overhaul and stimulus package combined.

But not to worry! McConnell has a plan to cover the hole he proposes blowing in the budget:

Asked how McConnell would cover the cost of his proposal, the Tax Hike Prevention Act, aides noted that he has backed a bipartisan plan to freeze spending that would save an estimated $300 billion over the next decade – a drop in the bucket compared with his $4 trillion-plus plan.

So when directly asked how he would pay for his massive tax cuts, McConnell points to a spending freeze that would save less than one-eighth of the money necessary. As Ezra Klein pointed out, “there is no policy that President Obama has passed or proposed that added as much to the deficit as the Republican Party’s $3.9 trillion extension of the Bush tax cuts. In fact, if you put aside Obama’s plan to extend most, but not all, of the Bush tax cuts, there is no policy he has passed or proposed that would do half as much damage to the deficit.”

This all simply confirms McConnell’s pronouncement yesterday that cutting taxes for the rich is a form of deficit spending that Republicans wholeheartedly support. Any pronouncement that he makes regarding his fiscal responsibility should be stacked up against this irresponsible plan.