President Obama has clearly stated what he intends to do with taxes and spending going into 2011. There has been a lot of speculation about Obama possibly changing his position on extending the current income tax rates due to the sluggish economy but now it is clear he will not. Despite his assertions the Republicans have no power to stop him from doing whatever he wants with tax rates or more spending. With 58 Senators and a large majority in the House of Representatives he only needs to work out the details with his own party members to do what he wants.
With an extremely high degree of certainty I can say that nothing will be done until after the November election so that Democrats running for office don't have to go on record regarding taxes. After the election what we will see is a bill passed that implements exactly what the Democrats want, tax rate increases on the upper income brackets along with keeping all the other tax rates at 2010 levels. The same will be true for capital gains taxes.
We should also expect to see the Democrats pass Obama's capital investment tax break that will allow companies to write off 100% of any capital investments purchased in 2011. The tax break is for one year only meaning in 2012 we will go back to the capital depreciation laws that we have right now.
To clarify, the capital investment tax break will allow companies to write off 100% of the things they need to run their business like computers and machinery. Typically they write off a fraction of the cost over a period of years so what this tax break does is allow them to write off the entire cost in 2011.
If we take a common sense look at how this will effect the economy two things should be very clear.
First, small businesses will face a substantial increase in income taxes starting in 2011 that will force many to layoff workers and shrink their business. The capital investment tax break will have little or no effect on these businesses as they can't afford to buy equipment simply because they can deduct it and because that tax break is gone in 2012 but the higher income tax rates will still exist. Businesses tend to look out 24-36 months when considering their costs and over that period taxes(costs) will be higher overall.
Second, large businesses that pay the corporate tax rate will not see their taxes increase and do have the money to buy large quantities of equipment in 2011 in order to take the 100% write off. They will substantially be able to reduce their tax burden over a 24 month period by buying items in 2011 that they otherwise may have held off on until 2012. Once again, all we will do is time shift the purchase of goods from 2012 to 2011. The net sales over that 24 month period will be unchanged but the large corporations will pay a lot less in taxes. When you consider how much of this type of equipment is made overseas what we will be doing is fueling the purchase of imported goods with money that we will have to borrow from other countries.
When you put these things together what you get is a dismal economic picture for 2011. Businesses have been planning for the tax hikes of 2011 by shifting profits to 2010 and costs to 2011 and now large business will have another way to reduce the taxes they pay even more. Combine this with even more money being pledged to new infrastructure stimulus spending and the 2011 deficit will be larger than anyone could have imagined.
Earlier this year the White House and the CBO released 10 year budget estimates that had us adding between 8-9 trillion to our debt by 2020 bring the total to around 20 trillion dollars. Those incredibly bleak estimates assumed that the economy would grow by 3.4% every year during that period, a growth rate that would rival the greatest boom period in our economic history. Now the CBO says that this year, the first in that 10 year span, our growth will be only 2% or less and that growth is slowing. If in fact this were to be the type of growth we can expect over the next decade our debt would be so much larger that defaulting our debt would become a real possibility.
The painful truth in all of this is that there is almost nothing that can be done while Obama is still in office. Even if the Republicans take back the House and Senate they will not have the type of majority to override a Presidential veto so the tax rates put in place this year will remain through at least the end of 2012. The same is true for the Health Care overhaul, Financial Regulation and Energy. The power to tax, spend and regulate has been handed over to unelected administrators in Washington and they will be setting the rules and costs of doing business in America until Obama is removed. The only possible recourse by the Republicans would be to not fund the government denying the regulators the funds they need to regulate but I doubt enough Republicans have the spine to do something so bold.
The next two years will be unlike any we have seen in America. We have handed over our economy to be centrally planned from Washington and soon the effects of that planning will begin to show. Those who produce will produce less while those who consume will expect more. Socialism only works until you run out of other people's money to spend and we are starting this process with not much money to take from those who have it. Americans expect there to be plenty of everything and when there isn't the reaction will be frightening. The gas shortages of the 1970s are nothing compared to the shortages in health care, energy, food and money that will occur in this decade. It is what Socialism produces, a more equal distribution of less. This is what Obama believes in. I have heard him say it and I have read his own words proclaiming it.
America and our constitution will survive this but only after many years of learning this painful lesson and possibly decades of determined resolve undoing the damage and restoring government to its constitutional limits. This period of hardship will force us out of our ignorant bliss and back to the realization that an uniformed and immoral people cannot hope to remain free. I have faith in the American people's ability to eventually see what is right and what is wrong and to choose what is right.