In my U.S.News & World Report cover story this week, I wrote about the impending push for bigger government—higher taxes, more regulation, more spending (though in the long term, that push will most likely be thwarted by fiscal constraints, global economic competition, and the verdict of the financial markets). And in a new report, my guy Alec Phillips over at Goldman Sachs sees higher taxes on the way (boldface mine):
1. The federal tax burden is likely to rise regardless of who wins the White House.... We assume that under any presidential scenario, the Democratic majority in Congress is likely to expand by at least a few seats in each chamber. In addition, the fiscal situation will be much different.... From a budgeting perspective it is hard to see how Congress can finance extension of broadly supported tax policies, let alone those on which there are disagreements between the parties.
2. The majority of expiring tax cuts is likely to be extended under either presidential scenario. Despite the fiscal situation, the Democratic majority in Congress has on multiple occasions endorsed the extension of much of the Bush tax package; the most recent House Democratic budget resolution supported extension of alternative minimum tax relief, the 10% bracket and other "middle class" provisions, selected corporate tax incentives, and a compromise estate tax policy.
3. The presidential election is more important for investment related tax rates, the estate tax, and to a lesser extent the top marginal rates.... Of these three items, we suspect McCain would be most likely to compromise on the top marginal rate given previous statements he made on the Senate floor in 2003 regarding legislation to accelerate the tax cuts, which he objected to at the time based on his assessment that they favored the wealthy.
4. The presidential outcome will be more important for the outlook for new tax policies, particularly if a Democrat is elected to the White House.... From a political perspective Democrats are likely to argue that they are simply letting existing law play out. Raising rates above existing law denies them this argument. In addition, a permanent change in tax policy would require 60 votes in the Senate, and even under optimistic scenarios for Democrats they are unlikely to gain such a majority. While a temporary tax increase—beyond simple expiration of existing provisions—could be enacted with a simple majority through the budget process as was used in 2001 and 2003, we suspect that the economic environment in early 2009 will lead the next president to avoid proposing such policies off the bat.