Justin Fox The Curious Capitalist
The Democrats are going to raise your taxes (in 2011)
During the just-concluded campaign, President Bush and other Republicans did what they could to convince voters that Democrats would raise taxes after the election. Voters didn't seem to believe them or care, and the soon-to-be leaders of the Democratic House and Senate have been doing their best to emphasize that tax raising isn't on their agenda (unless you consider the minimum wage to be a tax on employers of low-wage workers).

Here's a prediction for you, though: The Democrats are going to raise your taxes in 2011. Maybe they'll be politically astute enough to convince voters that it's really George W. Bush reaching back from retirement on the ranch to raise rates on top earners, capital gains, and dividends. But the effect will be the same. Your taxes will go up (and by "you" I mean Fortune and CNNMoney.com readers, who make a lot more money and are far more likely to own stocks than the average American).

This will come about because of the weird way Bush and the then-Republican Congress designed the big tax cuts of 2001 and 2003. Most of the cuts will expire on Dec. 31, 2010 unless Congress votes to extend them. Then there's the estate tax, which barring Congressional action will disappear completely in 2011 2010, prompting a rash of mysterious deaths of elderly rich people in the waning months of that year, and then reappear in full force in 2012 2011.

If you assume that the 111th Congress will be controlled by the Democrats (it's a pretty safe bet that at least the House will be, given that it just doesn't change hands all that often), they'll be ones who would have to vote to extend the tax cuts in 2010 or before. And while House Ways and Means Committee Chairman-in-waiting Charlie Rangel has done his best over the past few months to make it entirely unclear what he wants to do about the expiring tax cuts (can you blame him?), I have a piece of pretty straightforward evidence that most of the cuts are probably history.

This was the May 10 House vote to approve the Tax Relief Extension Reconciliation Act, which extended soon-to-expire cuts in dividend and capital gains taxes to 2010. The tally was 244 to 185, with 15 Democrats (Charlie Rangel not among them) crossing the aisle to vote with the majority and 2 Republicans going the other way.

Assuming the same number of defections each way, in the new Congress the vote would be 216-209 against the tax cut extension. But the thing is, with Rangel as chairman of the Ways and Means Committee, it would probably never even come to a vote. Certain parts of the Bush cuts, like the new 10 percent bracket for the first few thousand dollars of taxable income, might come up for renewal. But I just don't see the Democratic leadership choosing to let Congress vote to extend tax cuts for people with high incomes and big stock portfolios. Do you?

And here's the thing: You can't really blame them. The Bush tax cuts were, as these things go, pretty well designed. The capital gains and dividend tax cuts in particular would, if allowed to survive, probably have a positive effect on long-run economic growth. But by failing to even try to find a way to pay for these cuts (no, they don't pay for themselves) through spending cuts or hikes in other, less growth-inhibiting taxes (the gas tax!), President Bush may have doomed them.

According to the projections of the Congressional Budget Office, just letting the tax cuts expire will reduce the deficit from $328 billion (2 percent of GDP) in 2010 to $54 billion (0.3 percent of GDP) in 2012. Accomplishing this kind of budget turnaround without ever having to bring it to a vote will be awfully tempting for whoever is running Congress in 2010, but especially if it's the Democrats.

UPDATE: Thanks to several commenters who pointed out that I had the dates wrong on the pending death and rebirth of the estate tax.
Posted by Justin Fox 12:06 PM 31 Comments comment | Add a Comment

You say "This will come about because of the weird way Bush and the then-Republican Congress designed the big tax cuts of 2001 and 2003." More accurately, the sunset provisions were a cynical and fraudulent attempt to reduce the costs of the tax cuts -- the Republicans got plenty of mileage claiming the costs would be lower due to the sunset provisions. Now that the taxes are in place, they castigate anybody willing to let them expire. If the Republicans really had the guts (or the votes) to stand by their positions, they would have voted initially for permanent tax cuts. Instead they wimped out up front and are now demonizing the other side on the back end for advocating a "tax cut." Par for the course.
Posted By Alex S., New York, NY : 1:58 PM  

Incorrect reference to federal non-estate tax year in this article. Stated as 2011. Should be 2010.
Posted By Bob Holmes, Little Rock, AR : 2:43 PM  

There you go again, assuming that taxing Americans to death is good policy. Listen closely (I may not repeat this); the top rate of personal income tax was reduced from 72% to 28% in 1981, and personal income taxes doubled by the end of the decade. In case you didn't notice that the first time, we've just seen the same thing, with enormous amounts of "normal" spending, paying for the worst natural disaster in American history, and increasing defense spending to keep the US safe, and the budget deficit is 1.9% of GDP and falling. Rangel has said he cannot think of a single tax cut he doesn't want to reverse, and he will attempt do so if given the chance.
Posted By Warren, Houston, TX : 3:08 PM  

As a FISCAL conservative republican, I welcome a couple years of the taxes coming back to punish those republicans who supported these big spending pseudo republicans. Someone has to pay for budget shortfall.
Posted By Preston, Manhattan, NY : 3:12 PM  

If I recall the tax cut specifics accurately, the estate tax goes to zero in 2010 and rearises with the old pre-cut rates on Jan. 1, 2011 (instead of 2012). Hopefully congress will be proactive and the expiration dates never come into play.
Posted By Donnie Martin, Charlotte, NC : 3:12 PM  

Many of the targeted tax cuts the Bush administration pushed through had a deceiving effect. Yes someone might receive the child credit but it also might have pushed them to the AMT. Another aspect is that as funding to the states was reduced (because of lower taxes), the states then reduced funding to local town. The net of all of this reduction in income taxes, was probably an increase in real estate taxes.
Posted By Justin, Waltham MA : 3:17 PM  

When as a community are we going to learn that nothing in life is free. This means we have to balance the federal budget. You can do this via one of three ways:
1. Cut Spending,
2. Raise Taxes OR
3. A combination of these two.
So lets look at our options here:
1. Cut Spending. This is just not that easy within the budget there are discretionary and non discretionary components. Cutting discretionary is particulary difficult and guess what it is the large part of the budget. Oh yes and what is line item one on Spending - "Paying Interest on debt" - this is interest from past budget deficits. (Thanks "W" and Alan G)

2. Raise taxes. Lets talk about this taxes pay for services, like schools, hospitals, roads (including federal highways) and the like. Whether they be local or otherwise taxes pay for services that we need as a community. Why is it so bad to pay for these by balancing revenue vs expenditure AT ALL LEVELS OF GOVERNMENT? In the US people want something for free, no taxes and all the services.

3. A combination of the above is of course most desirable and realistic, but is the most open to debate.

Want a real tax cut? Pay the national debt - that free ups over 100 Billion dollars a year in interest and more in the future. Pay for social security and medicare or reduce the benefits.

We as a community have a responsibility to each other and those who are going to retire to support them, they have responsibility to us to be responsible with their health care and social security.

If as you say the readers of this column are likely to experience a tax rise, is that such bad thing to ensure that our standard living does not deteriorate in the future, children are not paying for OUR debt, our retirees are not living in squalor, future economic growth is not stunted, etc.,
Posted By Mike Weiss, New York, NY : 3:42 PM  

Taking issue with the sunset provisions is like saying any good deed can be criticized.

Whether tax cuts are made permanent and then later reversed with new law, or they expire and must be amended...there's really no difference.

Democrats will make any and all efforts to find fault with Bush's decisions and will never yield on that.

A Democratic Congress and Senate just need to amend the tax cuts. If they choose not too, shame on them, not Pres. Bush.
Posted By Marc, New York, NY : 4:09 PM  

"Cynical and fraudulent"? This sort of ignorance should disqualify you from writing about politics. Of course Republicans wanted permanent tax cuts. They were prevented by legislation Robert Byrd had pushed through years before, which mandated that permanent tax cuts needed the sort of super-majority that in the present day is unthinkable. Everyone knows that the sunset provisions are a Democrat feature of the tax cuts. That you don't is embarressing, yet typical.
Posted By Wallace B.., Charlottesville, VA : 4:09 PM  

Raise Taxs, are you for real. If anything we are paying higher taxes because of Bush's bias attempt to undermind many americans with this billion dollar war. My taxes are higher because I am paying for illegal immigrants that the President has let come into this country.
Posted By alysia, atlanta, georgia : 4:18 PM  

Somebody has to pay the bills.
Posted By Charles Williams Flint Mich : 4:30 PM  

Since when is not renewing an unnecessary tax break an increase on taxes?

I sure do not find it to be such a shame that the rich might actually have to start paying for the burden of running an overpriced and unjust war in Iraq. Have you forgotten that keeping within budgets, or at least not going half a trillion dollars over budget are necessary means of keeping a vibrant and safe economy and country.

Yes, I am one of those CNNMoney.com readers who will have to pay more taxes (as in the tax amount that everyone was used to paying until W. got his way) on my dividends, so what. It is not going to break my bank account.

If you had any more brainpower you would realize that this is all integral part of checks and balances that the United States was founded on - every few years a next set of leaders�
Posted By Eric, NY, NY : 4:37 PM  

I guess the brave thing to do would be for the politicians of 2010 to extend the tax cuts and add the $328 billion to the debt, and countless hundreds of billions more in the future, just as the baby boomers are about to find that their Social Security IOU�s are to be paid back by taxes or more debt. Bush�s �tax cuts� are a thinly veiled and irresponsible tax deferral on to our children. Our children will be ashamed of us when they figure out that we were too cheap and greedy to pay our own bills and instead passed them on to them.
Posted By David, Durham, NC : 4:59 PM  

To many people in the US don't want to pay the bill for goods and services, it is a reverse welfare of soughts. It is time for us to pay the piper and get out of the mentality that goverment services are free. Lets pay our bills. How about 50 cents on the gallon for gas to pay for Iraq. By the way when did we get in the business of providing jobs by cutting taxes ( just another social program ) it is cheaper to let some people sit home.
Posted By Greg Perry, GA : 5:19 PM  

One of my favorite lines from Keynes' General Theory is found on page 211-212. He says "The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, . . . that an increased desire to hold wealth, . . .must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished. It is of this fallacy that it is most difficult to disabuse mens' minds." You say the Bush tax cuts would probably promote long-run economic growth if preserved. But that not paying for them through other tax hikes or spending cuts doomed them. If we had have had other tax hikes or spending cuts, spending would surely have to fall. But, if spending fell would not investment also fall thus discouraging long-run economic growth? Or do you adhere to the fallacy that increasing saving - by cutting taxes on the wealthy who save -would increase the demand for investment and thus increase there production? Again, if spending on the goods and services that businesses are producing falls,i.e. savings increases, will not those same businesses reduce investment in the production of those goods and services?
Posted By Bill Ballard, Lubbock, Texas : 5:26 PM  

This type of tax policy is exactly why the Republicans got thrown out. Charging our children, born and unborn, to pay for our spending today because we won't pay for it ourselves is the cynicism that drove Republicans who care about fiscal responsibility to say these people don't get it.

Having our large fiscal deficits and our Treasury bonds held by countries like China, means that we are subsidizing our competitors so they can tax their own people less. Thank goodness there's a light at the end of the tunnel.
Posted By Luke S, Vienna, VA : 5:43 PM  

Hey Justin, how bout learning a little bit about economics first. You claim that expiring tax cuts will bring up revenue. Did you take into consideration the negative effect a tax increase would have on the economy??????????? Didn't think you did.
Posted By joe, long branch, nj : 6:13 PM  

I agree with Alex S. The other way that the Bush tax cuts were financed was by allowing the AMT to creep further into the middle class. This amounted to a stealth tax increase on many mid-upper middle class members, making our overall tax system that much more regressive.
Posted By Jim K, San Jose, CA : 6:17 PM  

For all the political hay that's been made with these "tax cuts" no one seems to notice that they were paid for with borrowed money. In the past five years the national dept has increased by almost $3 trillion and deficit spending expands it every day. With $8.6 trillion in red ink, what will we do if a recession comes along (very likely) or a real war breaks out. Fiscal responsibility no longer seems to exist on Capital Hill.
Posted By Reagan Connell, Naples, FL : 6:22 PM  

Spoken by a true Massachusetts Democrat, everything is always the Republicans fault
Posted By Ed Surette, Wakefield MA : 7:48 PM  

Wallace --

Listen to yourself:

1) Moderates said they wanted to limit the size of tax cuts to retain some level of fiscal sanity.

2) Instead of limiting the cuts, the Bush et al. lopped a couple of years off the end, knowing full well that they would demonize any future voices of reason who wanted to let them lapse.

OK -- maybe not "fraudulent" but certainly cynical, and dishonest.
Posted By Alex S., New York, NY : 3:15 PM  

Great article, except the title should have added "The Democrats are going to raise your taxes...TO PAY FOR THE DEFICIT SPENDING THE PAST EIGHT YEARS".

A big problem in America is everyone is afraid of rising taxes (paying bills when due) but not afraid of spending for enjoyable things, like Wars ("put it on my credit card!"). It's not intellectually honest to make the Democrats the whipping boys and girls of raising taxes when the Republican controlled White House and Congress have done nothing to balance the budget. Remember the Surplus during the Clinton years? Ahhh the memories....
Posted By Jeff Smith, Kirkland, WA : 3:57 PM  

I'm amazed by this election. We hear the Democrats talking about "working with the Republicans" and the President. Amazing how just a few days after elections which always have stupid, idiotic rhetoric (as a poster said here at Penn State..."Vote Bob Casey if you want Cheaper oil"....HA!)

I admit, the Republicans haven't done the best job managing the economy. Yes, unemployment is low, but wages are just now increasing. However, to be fair, the Democrats haven't really proposed much. This election didn't give them a mandate so they have to be careful.

Overall, the debates here are a bit malicious. Let's stop bickering about Dems and Republicans and start worrying about America. Remember, John Kerry and George Bush are BOTH Americans and the fact that we are even having these debates are because we live in the best country in the world.

I respect all of you (even if I doubt your training in economics) for being passionate. Lets just hope that people like us can educate those who don't care. Those are the ones we should watch out for.
Posted By Brad Spencer, State College, PA : 5:36 PM  

I make about 200K per year and no, I don't want to see my taxes go up. On the other hand Bush and the Republican congress gave money back yet kept on spending; hence our massive debt. If my taxes go up to offset this debt and give my kids a future that doesn't include fixing this generations problems, so be it. The problem is I don't have confidence that either party would spend these additonal revenues wisely.
Posted By Don, Denver CO : 5:36 PM  

You rich people want it all. You want to make a ton of money and be able to keep all of it. I can't say that I blame you. But here's the thing. You can't have a government that has no ability to control it's spending and also have the lower and middle class people pay for it all. If you rich people want your taxes lower then do something to force the goverment to be monetarily responsible. You people seem to have lobbyists for everything else. Until that happens I hope they tax you up the ying yang.
Posted By Joe Mohoney, Pennsauken NJ : 10:37 PM  

And how much of these tax cuts would not need if the Bush administration had not spent like drunken sailors over the last 5 years?
Posted By Jack, Detroit, MI : 9:28 AM  

The demos will raise taxes in 2007. Remember the 'imputed rental income'. Pretty much died out after 1994. And the best part it will be limited somewhere after homes reach $1 - 2 million. After all the rich socialists running the party don't want to pay too much 'imputed rental income' for their more expensive estates. Also, some more 'tightening' of the mortgage interest deductions.
Posted By Hans Baechinger, Newman Grove, NE : 9:33 PM  

has anybody read or is aware of the APT TAX paper written by Dr. Edgar FEige, an economics prof at univ of wisconsin? i have never seen any comment on this nor hear any politician mention it. seems like this would be the way to replace our current tax system. the only downside to it is that the taxes would be so small, that the politicians might see it as a license to spend, they probably end up raising taxes ad infinitum to satisfy their spending appetite
Posted By m. madrazo, oregon, ohio : 7:33 AM  

Can anyone find out for me what the Democratic's defination of rich is? What income bracket would it be?
Posted By Mike Lynn, Cooter,Mo. : 1:28 PM  

How condescending to assume only the money makers are reading Fortune or CNNMoney. I'm barely middle income but strange enough smart enough to read!
Posted By Ginger, Statesville, NC : 2:53 PM  

Actually the Republicans already raised our taxes by funding a war in which we now owe trillions of dollars so you are saying that 2011 is when the Republican's war debt is going to start being repaid by us the taxpayers?
Posted By Dee, Roanoke, NC : 3:18 PM  

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.