2011 predictions: Chest thumping but no action on taxes, spending, deficit

2011 predictions from tax policy experts at TaxVox include lots of chest thumping and growling from Washington, but no substantive legislation.

By , Guest blogger

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    A Western Lowland Gorilla thumps its chest at the Smithsonian's National Zoo in Washington on Aug. 18, 2009. In its 2011 predictions, nonpartisan think tank TaxVox argues that this year will see plenty more posturing and chest thumping from Washington – from Congress and the Administration, not just the National Zoo – but little substantive action.
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The battle lines, as they say, have been drawn. In his radio address last Saturday, President Obama said his goal for 2011 is to “do everything I can to make sure our economy is growing, creating jobs and strengthening our middle class.” Republicans may want to grow the economy as well, but in the party’s first 2011 radio address, newly-elected GOP senator Kelly Ayotte (R-NH) said the GOP’s prime focus is elsewhere: “Job one,” she said, “is to stop wasteful Washington spending."

The rhetoric reflects the very different messages each party took from the November elections. Obama’s lesson: Nervous about their jobs and overall financial security, furious voters punished incumbents for not jumpstarting the slumping economy. The GOP, by contrast, learned it could build an energized, highly motivated base by pounding away at big government without making any specific promises.

The challenge for Obama is obvious. If he can’t deliver on his pledge to revive the economy, his political career is dead man walking. The GOP, by contrast, must somehow satisfy the low-tax, small government demands of its activist base without alienating independent voters. Those independents, it seems to me, are far more inclined to favor those politicians who give them job security over those who fire the most GS 12s from the Environmental Protection Agency.

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Add divided government to the mix and 2011 is likely to feel a bit like the preliminaries of a sumo match. Much grimacing and stamping of feet. A lot of ritual throwing of rice. But no real action. And no results. Here’s what’s likely to happen in the new year:

Tax policy: Both parties will talk up tax reform. But Dems want to use reform to raise revenues, a step Republicans will simply reject. Besides, it is much more fun to talk about the need for reform than to actually vote to cut the mortgage interest deduction.

Spending: The House GOP leadership promises to slash spending (excluding–-take a deep breath–- Medicare, Medicaid, Social Security, defense, homeland security, veterans’ benefits, and interest on the debt) by $100 billion this year alone. Even if such a plan made it through the House, it would die in the Senate, where many Republicans much prefer to trim business regulation rather than shrink federal benefits for individuals. The GOP may succeed in slashing some regulatory budgets, limiting federal hiring and pay, and curbing what they consider waste, fraud and abuse. And Obama will probably go along with some small spending cuts. All of this may have great symbolic meaning for both the anti-government right and the pro-government left. But the impact on the overall deficit will be much less than the heated rhetoric will imply.

The deficit: Despite these modest spending cuts, the annual budget shortfall is likely to improve as the economy strengthens. Revenues will rise and some anti-recessionary spending will fall, or at least grow more slowly. With luck, the deficit may shrink back to the neighborhood of $1 trillion, and both Obama and Republicans will take credit. But don’t expect much in the way of structural deficit reduction.

Health Reform: It will be classic Washington drama. House Republicans will make a great show next week of voting to repeal “Obamacare. ” The president will put on an equally dramatic performance trying to preserve it. The public and media will be mesmerized by the theatrics but the players already know how the third act ends. The bill dies in the Senate, and the fate of the health law is decided in 2012 by the Supreme Court.

California: Watch the return of Governor Jerry Brown. Once derided as Governor Moonbeam, Brown faces a massive budget shortfall and seemingly intractable institutional opposition to doing anything about it. But he may surprise us all.

Energy: Cap and trade, carbon taxes, and other proposals to reduce demand for fossil fuels by raising prices are so 2009. On the other hand, Obama and Congress may agree on new subsidies to encourage the use of natural gas and alternative energy sources. Since new spending is passe, the subsidies are likely to find their way into the tax code. Still, nothing builds consensus like giving away more money.

In all, 2011 will be a year of much talk and little action—all aimed at setting the stage for the 2012 elections

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