Policymaking and the New President: Tax and Budget Policy in Year One
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Len Burman
FROM: LEN BURMAN SUBJECT: TAX AND BUDGET POLICY IN YEAR 1 As your sometimes pal, Bill Clinton, likes to say, “Don’t stop thinking about tomorrow.” The immediate priority for the administration must be to extricate the country from the perilous economic situation the financial market meltdown has created, but the short-term actions we take now should not exacerbate the country’s even more serious long-term fiscal problems. That means several things. First, any response to the immediate crisis should be temporary and targeted—temporary so that it does not add substantially to our long-term budget challenges and targeted so that we get the maximum bang for the buck. Temporarily extending unemployment benefits, expanding access to food stamps, and boosting aid to state and local governments meet those criteria. Second, the administration must review and reform financial-markets regulation to avoid future catastrophic bubbles. I’m no finance expert so I will not recommend specifics, but it seems the current crisis could have been avoided or lessened with appropriate regulation of the finance and insurance sectors. And the public must not expect the government to bail out reckless investors and profligate consumers because doing that creates terrible economic incentives. Third, we need to get the federal budget under control. To do that, you’ll have to rethink your promise of making the middle-class Bush tax cuts permanent, fixing the alternative minimum tax, and showering the middle class with new tax credits. When you developed those proposals, the country’s fiscal situation was markedly different. The OMB, assuming all the Bush tax cuts would be extended, was projecting that the budget would be balanced by 2012. Now, we are looking at trillions of dollars of deficits over the next ten years if we continue current policy. Indeed, just extending all the tax provisions that would otherwise expire over the next few years would create trillion dollar annual deficits by 2018, even if we fully recover from the current economic mess before then. I know the conventional wisdom is that acknowledging our economic problems and proposing sensible solutions is political suicide, but maybe the American public is ready for some real straight talk. As you know, the consequences of continuing our current course is a fiscal nightmare—record high interest rates, an economy in shambles, truly confiscatory tax rates just to pay the interest on the debt, and a government that can’t provide even the most basic public services. And if the crisis comes because the U.S. government is bankrupt, there won’t be any bailout package in the offing. In the short term, Mr. President, you should establish a baseline for the pay-as-you-go rule (PAYGO) that would lead to budget balance by the end of your second term and promise that, barring an economic recession or other national emergency, your budgets will meet PAYGO targets. Lean on congressional leaders to adopt the same standards and impose rules to enforce it. Over the long term, the largest threat to our fiscal health is the unrestrained growth in the costs of medical care for the elderly. Thus, health reform must include Medicare and Medicaid, including meaningful cost controls and a plausible strategy to pay for those programs over the long term. I have proposed a value-added tax (VAT) dedicated to pay for medical care. This would virtually eliminate our long-term fiscal imbalance and allow substantial income tax cuts, which should appeal to conservatives. And the direct connection between the VAT rate and health care costs should build a constituency for sensible measures to limit health cost inflation. One more thing. You probably want to fix the estate tax before the end of 2009. Otherwise, the tax disappears for only a year in 2010, returning in full force in 2011. We just don’t want to see how greedy potential heirs would respond to the incentives created by a one-year “death tax” holiday… So good luck with that. And God bless America. Other Policymaking Advice for the New President:
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MEMO TO PRESIDENT OBAMA