James Pethokoukis

Politics and policy from inside Washington

Will 2011 be the year of the tax cut or tax hike?

October 29, 2010

There’s a brewing debate among conservatives over whether they should favor some tax increases to close the budget deficit. Some Republicans on Obama’s deficit panel are talking about cutting various tax breaks for individuals. Possible presidential candidate Governor Mitch Daniels of Indiana recently spoke favorably about a value-added tax and an energy tax.  And here is Kevin Williamson of the National Review Online’s Exchequer blog:

Here’s the problem: The deficit is, by my always-suspect English-major math, about 36.3 percent of federal spending ($1.29 trillion deficit out of $3.55 trillion spending). For comparison: Defense accounts for about 18 percent of federal spending. So you could cut out the entire national-security budget, and another Pentagon-sized chunk of non-military spending, and not quite close that deficit. You could cut the Pentagon to $0.00 and eliminate Social Security entirely and just barely get there.

Don’t get me wrong: In a perfect world, Exchequer would love to see the budget balanced and some tax cuts enabled through spending reductions alone.  … Not going to happen. So, our choices are this: 1. Hold out for the best-case scenario, in which a newly elected Speaker Boehner gives President Obama the complete works of Milton Friedman and everybody agrees to cutting federal spending by more than a third. 2. Keep running deficits and piling up debt. 3. Raise taxes. My preferences, in order, go: 1,  3, 2. And No. 2 is not really acceptable.

Like it or not, taxes are going up: If not today, then in the near future. Even once the deficit is under control, that debt is still going to have to be paid down, lest debt service alone overwhelm the federal budget, necessitating even more tax hikes.

What all this misses is that 2011 will more likely be the Year of the Tax Cut than Tax Hike. The Bush tax cuts will be extended, various business tax breaks passed, maybe even a payroll tax cut — all to do something about a slow growth, high unemployment economy. Here is how voters see things, according to Rasmussen:

When faced with a budget crisis, most Americans think “it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.” A new Rasmussen Reports telephone survey finds that 59% of Americans agree with that statement, while 26% disagree. Fifteen percent (15%) are undecided. … That’s down just slightly from August 2009, when 62% agreed that taxpayers are better judges of how to spend money. However, in January of 2009, just 53% agreed with that statement.

Fifty percent (50%) of Adults now say a dollar of tax cuts is always better than a dollar of public spending, up nine points from January of last year. Twenty-nine percent (29%) disagree, and another 21% are not sure. Just 27% think public spending provides “more bang for the buck” than tax cuts when it comes to economic policy and creating jobs. Forty-nine percent (49%) disagree, a seven-point increase from the beginning of 2009. But 24% are not sure.

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