The Democrats are going to raise your taxes (in 2011)

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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.

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