Opening act for Congress: raising taxes

But the 2010 ball is in the Democrats’ court.

House Speaker Nancy Pelosi opened her briefing Thursday with a pledge of “fiscal discipline.”

Raise taxes on those over $250,000
In response to a question about the tough tax decision she and the Democrats face next year on taxes, Pelosi quite forcibly said, “Put me down as clearly as you possibly can as one who wants to have those tax cuts for the wealthiest in America repealed.”

When asked at what income level she’d repeal the 2001 and 2003 tax cuts she said, “That number will be determined. But we have talked in the $250,000, $300,000 range.”

She added, “Put me down as one in favor for repeal as soon as possible.”

The CBO forecast about the shrinking size of the deficit in future years assumes that Congress does not “fix” the Alternative Minimum Tax, as it's been doing recently to prevent a biting of the middle class.

Harsh bite of the AMT
The AMT is a parallel tax system originally designed to ensure that high-income people did not escape taxation. But since the AMT is not indexed to inflation, each year it affects more and more people who think of themselves as middle class.

And the AMT has an especially harsh bite in states such as New York and California with high state income taxes.

Democrats will need to decide what to do about income tax rates and AMT.

Hoyer vowed Wednesday that “we are going to pursue… getting us back to a place of fiscal balance by executing fiscally responsible policies. That obviously will not be possible in the short term, given the deep distress our economy is in…”

He added, "Republicans proceeded over the last eight years as if deficits didn't matter. They didn't want to pay for AMT, they didn't want to pay for the war, they didn't want to pay for other things they pursued...Deficits matter."

Financial markets willingness to believe in credibility of Democrats commitment to fiscal balance depends on the Democrats’ answers to those tax questions.

But the cigarette tax points to one way to raise revenue without broad hikes on middle-income workers — increase duties on undesirable activities and products.

How about, for instance, a federal excise tax on sugar-sweetened beverages? A recent CBO study of various health care policy options says there is more than $50 billion in revenue over ten years to be gained from taxing soft drinks.

The problem, of course, is that cola drinkers can shift to non-taxed liquids, such as apple juice or ice water.

And while $50 billion in revenue may seem like a large amount, it is really quite small compared to the $3 trillion in deficits which the CBO forecasts from now until 2019.

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