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The 2011 Tax Time Bomb

We growled about the so-called expiring Bush tax cuts on November 1, and pointed out that in addition to increasing taxes, the increased taxes would adversely affect Virginia. For example, Virginia would lose, on average, over 18,000 jobs annually and lose over $8,000 per household in total disposable personal income. Individual income taxes would also increase by $14.6 billion.

In the weekend edition of Investor’s Business Daily, Alan Reynolds, senior fellow at the Cato Institute, writes that policy makers should “zero in on 2011’s tax time bomb and leave 10-year plans for later.” He specifically writes:

“President Obama will soon meet with the congressional leadership of both parties to reach some agreement about whether or not several critical tax rates will suddenly increase on Jan. 1. He says his "first priority is to make the middle-class tax cuts permanent." Those words conceal a well-crafted trap for Republicans.

“The president can't possibly make any tax change permanent, since his term of office ends in two years. The lame-duck Congress can't possibly bind even the next Congress, much less all future ones.”

Pointing out that taxpayers aren’t lambs, Reynolds goes on to say:

“If Republicans would simply shut up about permanent tax cuts and focus on next year, the president's 10-year ploy would be revealed as the irrelevant nonsense that it is. Nobody with any common sense will be trying to set tax policy for the next 10 years by the end of 2010. The last time some fools tried doing that, we ended up with the tax time bomb we currently face.

“In all the months since President Obama presented his tax proposals in the phantom 2011 budget on Feb. 1, the 111th Congress apparently never bothered to glance at those plans. The related Treasury Green Book estimated that the centerpiece of the plan — raising the top two tax rates — would raise just $14.5 billion in fiscal 2011.

“Even that paltry sum is pure illusion. It assumes that higher tax rates do literally no harm to the economy, even though the targets of Obama's tax crusade account for a fourth of consumer spending and a much larger share of investment, entrepreneurship and GDP.

“It also assumes that the intended victims are docile lambs waiting to be shorn. On the contrary, the evidence is overwhelming that high-income taxpayers easily find ways to earn or report less income when marginal tax rates turn punitive, and likewise readily report more income when tax rates are more reasonable.”

The essay is well worth reading in its entirety, including Reynolds’ concluding advice for Republicans: “Republicans, for their part, must beware the twin traps — the president's false promise of "permanent" tax cuts and his pretense of grappling with 10-year budget plans in a few weeks. The Republicans need to keep a firm grasp on the difference between making a compromise and becoming totally compromised.”

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