President-Elect Obama's Tax and Stimulus Plans

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Abstract

During the presidential campaign, Barack Obama proposed a comprehensive tax plan that would raise taxes on high-income taxpayers, cut taxes for low- and middle-income households, and lose $2.9 trillion dollars of revenue over ten years. Obama will take office with the economy in sharp recession and a deteriorating fiscal situation, made worse by new spending on a bailout plan. Faced with those crises, Obama says he will pursue both his campaign tax plan and additional tax-related proposals addressing problems created by the downturn. This paper examines revenue and distributional effects of the tax plan and describes some stimulus proposals.

Introduction

In September 2007, with unemployment at 4½ percent and the Congressional Budget Office (CBO) projecting a cumulative budget surplus of nearly $300 billion over the next decade, presidential candidate Barack Obama presented a comprehensive tax plan to raise taxes on high-income taxpayers, provide tax cuts for low- and middle-income households, and lose an estimated $2.9 trillion dollars of revenue over 10 years.

Just 15 months later, now President-elect Obama faces an economy in a deep recession with unemployment at 6.7 percent and climbing, crippled housing and credit markets, and a rapidly deteriorating fiscal situation. In September, before the worst economic news hit, the CBO revised its budget projection to a cumulative 10-year deficit of $2.3 trillion-assuming that the Bush tax cuts expire after 2010 and that Congress stops patching the alternative minimum tax and renewing expiring tax provisions. Reversing all of those assumptions, the CBO projected that the 10-year deficit would balloon to $7.4 trillion. The situation has worsened dramatically since September and CBO?s next projection will show even larger future deficits.

In the last month of the campaign, Obama offered specific tax-related proposals to address some of the problems created by the downturn but did not revise his basic tax plan in light of changing economic conditions. In fact, immediately after the election, Obama's newly named chief of staff Rahm Emanuel clearly stated that the new administration would push Congress to enact the tax plan shortly after the inauguration. More recently, the president-elect and his advisors have stressed the need for immediate and substantial economic stimulus while reiterating his plan to enact his tax changes immediately.

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