Tax Analysts Blog

Tax Triangulation

Posted on Dec 20, 2010

Earlier this year the British Labour Party was staging a comeback in the polls when--in the name of austerity--it proposed a payroll tax hike. That was the last nail in the coffin on its 13 years in power.

No rational or successful politician will propose a middle-class tax hike going into an election. And there is no reason to expect Barack Obama to do so during the 112th Congress--no matter how much the nation needs a broad based tax increase as part of a plan to restore soundness to federal finances.

So using the cover provided by the Bowles-Simpson Commission and all the subsequent happy talk about tax reform, the President will put the revenue side of fiscal policy into low gear. The Treasury will study the issue (yet again). He will limit his explicit tax increase proposals to tax hikes on families making over $250,000.

Business groups will happily go along and thereby improve relations between the White House and corporate America. And why shouldn't business be supportive? As far as the corporate tax is concerned, the Bowles-Simpson plan was revenue-neutral. And the two top reforms sought by business-- lower corporate tax rates and international tax relief in the form of a switch to a territorial system--figure prominently in the commission's view.

After getting Republicans to agree to an $858 billion stimulus-in-disguise plan at the end of 2010, Obama should have a very good year in 2011. The economic recovery (boosted by the stimulus) will help him immensely. The centerpiece of the Republicans' fiscal agenda will be trying to turn their promise to hold domestic spending to 2008 levels into action. This approximate $100 billion in annual saving is probably less than one quarter of the deficit reduction needed to return the federal government to a sustainable budget path. The President knows that this British-style austerity is inevitable, so why not let the Republicans take the political heat (if they succeed) or the embarrassment (if they fail)?

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