Policymaking and the New President: Tax Priorities:  First, Clean up the Mess; Then Plan for Tax Reform

Eric Toder

The economy will be in recession and possibly a deep slump when the next president takes office. A new economic stimulus package could help speed recovery in the short run, but would add to an already exploding federal deficit. In the long run (and maybe not so long), the increased debt and unsustainable fiscal path we’re on will cause slow economic growth and put us at risk of losing international investors’ confidence in the dollar and government debt.

If President Obama enacts a stimulus program, the nation must have something to show for it afterward. Thus, to the greatest extent possible, carefully targeted investments should get priority over more consumption.

In tax policy, three issues should be addressed right now to avoid potential harmful consequences of current law. In addition, tax changes should make budgets transparent to make it harder for politicians to avoid addressing fiscal imbalances.

• Extend the alternative minimum tax patch. The AMT is projected to hit 32 million taxpayers by 2010. The patch could be extended through 2010 without any link to an explicit revenue offset if President Obama includes it in his budget. In discussing the budgetary effects of his tax proposals in the campaign, his advisors assumed a permanent extension of the AMT patch.
• Reform the estate tax. This levy will expire at the end of 2009 and then, in 2011, revert to much higher taxation under pre-2001 tax rules. This temporary suspension creates bizarre incentives to keep dying people on life support as 2009 winds down and disconnect others before the end of 2010. Congress and the president should work out a reasonable compromise to enact a permanent estate tax law in 2009.
• Resolve expiring tax provisions. Congress should either make permanent or eliminate each expiring provision—including the Bush tax cuts. Ideally, Congress would act before the scheduled expiration of the Bush tax cuts in 2010 to avoid the temptation simply to extend them one more year. Resolving expiring provisions clarifies what the tax law will be in the future.

In the long run, our current tax system needs to be reviewed and reformed to make it simple, fair, up to date and in tune with our global economy, and responsive to the strain entitlement programs will have on federal revenues as baby boomers retire. President Obama should start planning for tax reform now.

Other Policymaking Advice for the New President:

• Tax and Budget Policy in Year 1 by Len Burman
  
• Combat housing segregation and support diversity by Margery Austin Turner
• Expand Apprenticeship: A Sensible Way to Train Workers and Increase Their Wages and Mobility by Robert I. Lerman
• Financial Relief and Community Service: Helping Nonprofits Weather the Financial Crisis by Elizabeth Boris
• Refocus on Rental Housing by Margery Austin Turner
• Improve Public Safety and Save Money through Better Reintegration of Ex-Offenders by Justice Policy Center
• Governing for Results: Improving Federal Government Performance and Accountability by Harry P. Hatry