Looking into the Crystal Ball for Tax Policy in 2011

December 30, 2010

As we get ready to ring in the New Year, it is fun to look into the crystal ball and see what 2011 will bring us in the world of tax policy.

Of course the good news for many taxpayers is that 2011 will look a lot like 2010. Because President Obama and the Congress extended the Bush era tax cuts, taxpayers will wake up on January 1st without the hangover of higher taxes. There will be no increase in tax rates, the marriage penalty relief will remain, the child credit will be the same, and the lower rates on dividends and capital gains will all be the same.

The only difference in 2011 from 2010 will be the estate tax rate, which will go from 0% to 35% on estates greater than $5 million ($10 million for couples), and every worker will be getting a 2 percentage point reduction in their payroll (or FICA) taxes. That will mean an extra $1,400 in the pockets of a couple earning $70,000.

Here's what I'll be watching in tax policy during 2011:

The first question is, Will Obama adopt any of the recommendation of his deficit reduction commission chaired by Erskine Bowles and Alan Simpson? They put forward some very bold tax reform proposals—including a flattening of the personal tax rates and a cut in the corporate tax rate financed by the elimination of many popular tax breaks. Obama can't very well disown all of these proposals so which ones will he include in his budget? 

There is a lot of chatter right now that he will include some corporate tax reforms in his budget. This could be a very positive move to make the U.S. more competitive since the U.S. has the second highest corporate tax rate among industrialized countries. And Japan, which has the highest corporate tax rate, is planning to cut its rate by 5 percentage points in 2011, which will make the U.S. number 1 in terms of high corporate rates. The business community will be watching to see what deductions they will be asked to give up in order to lower the corporate tax rate.

It is an open question whether Obama will include any reforms to the individual tax code. The Bowles/Simpson reform proposals actually raised about $1 trillion in new tax revenues for deficit reduction. Republicans will welcome tax reform but reject any tax hike for deficit reduction.

On that note, I'll be watching the budget plan that new Budget Committee Chairman Paul Ryan puts forward in March. Ryan is the author of a very bold tax and entitlement reform plan called a "Roadmap for America's Future." The question is, how much of that plan will be included in the Republican budget? He got only 15 cosponsors for his legislation, so can he garner the support of the entire Republican caucus for a real budget plan? We'll see.

I expect 2011 to end with a fight over what do about the scheduled expiration of the temporary cut in the payroll tax. I think we will see a replay of this year's debate over allowing a "tax hike on working families." This is the trouble with these temporary tax measures; not only do they cause taxpayers uncertainty, but they make taxpayers political footballs. Moreover, the payroll tax cut issue is wrapped up in the larger issue of funding the Social Security trust fund and that adds another dimension to the whole debate.

Lastly, we should remember that the 2011 tax debate is a prelude to the 2012 presidential election which begins in one year. Both sides will be positioning themselves for that debate, and let's not forget that all of the Bush era tax provisions expire at the end of 2012. But by 2012, they will no longer be the Bush-era tax cuts, they will be labeled the Obama compromise plan. Although Obama has been against "tax cuts for the rich" can he really argue against extending a plan that he signed into law? Stay tuned.    

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