Tax Vox’s Fearless Predictions for 2011

By :: January 4th, 2011

The battle lines, as they say, have been drawn. In his radio address last Saturday, President Obama said his goal for 2011 is to “do everything I can to make sure our economy is growing, creating jobs and strengthening our middle class.” Republicans may want to grow the economy as well, but in the party’s first 2011 radio address, newly-elected GOP senator Kelly Ayotte (R-NH) said the GOP’s prime focus is elsewhere: “Job one,” she said, “is to stop wasteful Washington spending.”

The rhetoric reflects the very different messages each party took from the November elections. Obama’s lesson: Nervous about their jobs and overall financial security, furious voters punished incumbents for not jumpstarting the slumping economy. The GOP, by contrast, learned it could build an energized, highly motivated base by pounding away at big government without making any specific promises.

The challenge for Obama is obvious. If he can’t deliver on his pledge to revive the economy, his political career is dead man walking. The GOP, by contrast, must somehow satisfy the low-tax, small government demands of its activist base without alienating independent voters. Those independents, it seems to me, are far more inclined to favor those politicians who give them job security over those who fire the most GS 12s from the Environmental Protection Agency.

Add divided government to the mix and 2011 is likely to feel a bit like the preliminaries of a sumo match. Much grimacing and stamping of feet. A lot of ritual throwing of rice. But no real action. And no results. Here’s what’s likely to happen in the new year:

Tax policy: Both parties will talk up tax reform. But Dems want to use reform to raise revenues, a step Republicans will simply reject. Besides, it is much more fun to talk about the need for reform than to actually vote to cut the mortgage interest deduction.

Spending: The House GOP leadership promises to slash spending (excluding–-take a deep breath–- Medicare, Medicaid, Social Security, defense, homeland security, veterans’ benefits, and interest on the debt) by $100 billion this year alone. Even if such a plan made it through the House, it would die in the Senate, where many Republicans much prefer to trim business regulation rather than shrink federal benefits for individuals. The GOP may succeed in slashing some regulatory budgets, limiting federal hiring and pay, and curbing what they consider waste, fraud and abuse. And Obama will probably go along with some small spending cuts. All of this may have great symbolic meaning for both the anti-government right and the pro-government left. But the impact on the overall deficit will be much less than the heated rhetoric will imply.

The deficit: Despite these modest spending cuts, the annual budget shortfall is likely to improve as the economy strengthens. Revenues will rise and some anti-recessionary spending will fall, or at least grow more slowly. With luck, the deficit may shrink back to the neighborhood of $1 trillion, and both Obama and Republicans will take credit. But don’t expect much in the way of structural deficit reduction.

Health Reform: It will be classic Washington drama. House Republicans will make a great show next week of voting to repeal “Obamacare. ” The president will put on an equally dramatic performance trying to preserve it. The public and media will be mesmerized by the theatrics but the players already know how the third act ends. The bill dies in the Senate, and the fate of the health law is decided in 2012 by the Supreme Court.

California: Watch the return of Governor Jerry Brown. Once derided as Governor Moonbeam, Brown faces a massive budget shortfall and seemingly intractable institutional opposition to doing anything about it. But he may surprise us all.

Energy: Cap and trade, carbon taxes, and other proposals to reduce demand for fossil fuels by raising prices are so 2009. On the other hand, Obama and Congress may agree on new subsidies to encourage the use of natural gas and alternative energy sources. Since new spending is passe, the subsidies are likely to find their way into the tax code. Still, nothing builds consensus like giving away more money.

In all, 2011 will be a year of much talk and little action—all aimed at setting the stage for the 2012 elections.


  1. AMTbuff  ::  5:17 pm on January 4th, 2011:

    >But the impact on the overall deficit will be much less than the heated rhetoric will imply.

    Agreed. Tough choices are tough because they cost votes. That’s why they won’t happen.

    I also agree that Jerry Brown has a “Nixon goes to China” opportunity to cut spending that no Republican governor would ever have. If he uses that opportunity, he could be the Democrats’ answer to Chris Christie.

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  5. Michael Bindner  ::  2:28 pm on January 5th, 2011:

    Tax reform may not be as imossible as we think, since Republican opposition to the VAT is based on the mistaken notion that it includes taxes on taxes previously paid (the entire markup) rather than simply the value added at each stage.

    Action may also be boosted if the Chinese grow impatient with lending us money.

    Energy taxes aren’t going anywhere, although you may see some pressure mount as prices go up to regulate futures trading again. Getting this issue out of the way in 2011 prevents it from coming up next year – when doing so would burst the current bubble and again cause investors to dump other assets to cover their positions – with a cascading effect on the economy.

    For the same reason, something may happen with housing unless prices begin to rebound this summer, particularly for those who are under water on their mortgages.

    Health care might also see some change, as the inadequacy of mandates in preventing people from relying on pre-existing condition reforms to drop their coverage until they need it may just show up on insurance company radar screens sooner than later. If this happens, either mandates will be increased or pre-existing condition reform dropped to be replaced by a low-priced public option for the chronically ill funded by increased payroll taxes or some kind of VAT or VAT-like business income tax.

    I wish Jerry Brown Godspeed. California dodged a bullet last year. I don’t think he will run as a Democrat in 2012, but may run on a third party ticket if drafted – or more accurately an emerging second party ticket if Palin chases the moderates out of the GOP and the economy keeps the independents away from Obama. Mitt Romney and Wes Clark are other possible alternatives.

    The big story will be the emergence of between 25 and 62 moderate Republicans in the House from Districts Obama won in 2008 (as reported by EJ Dionne earlier this week) who will vote with the Democrats and roll the leadership. The only real question is whether the leadership will sometimes facilitate their actions.

  6. Gordon Johnson  ::  12:02 pm on January 7th, 2011:

    The problem with VAT and other sales tax related schemes is that they do tax funds that have already been taxed if you count income taxes previously paid on savings and investments. Of course, if you lay VAT on top of the income tax then that argument cannot be made. I can’t believe anyone wants another tax on top of the income tax. It has to be either or>

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