A Few Tax Policy Suggestions for Our New President

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Jeffrey Frankel | Nov 5, 2008

Three areas that our new President will have to address during his term in office are the recession, energy and the environment, and the long-run fiscal outlook. The recession is the most urgent. But the long-run fiscal outlook will be the most difficult. Social Security and Medicare would have made addressing the long-run fiscal outlook difficult in any case. (Did you know that the first baby-boomers are starting to draw Social Security this year?) The Bush tax cuts of 2001 and 2003 made it worse. The rapid spending increases of the last eight years made it still worse. The financial crisis and recession are now making it still worse. To be clear, fiscal stimulus today is appropriate, given the weak economy. The trick is to combine it with the minimum damage to future budgets.

I offer some recommendations to the new President regarding tax policy that address all three areas simultaneously:

1. Make clear the intent to let the Bush tax-cuts-for-the-rich expire in 2011 as scheduled. No, the Republicans can’t legitimately claim that this would be a tax increase, because their budget projections (remember, the projections that said we were going to have a budget surplus by 2011) have always built in the assumption that these tax cuts would expire. This plan will help maintain some semblance of long-term fiscal responsibility and therefore help keep long-term interest rates low, which one hopes will have the Rubinomic extra benefit of promoting investment.

2. Give the 90 % or 95 % of American workers who don’t make the highest incomes a tax cut now, as Barack Obama talked about in the campaign. This is good for incentives, good for distribution, and good for boosting demand which is what we need in the short run.

3. Take steps to raise future tax rates on fossil fuels, including gasoline. This would accomplish lots of objectives:

raise much-needed revenue in the future (or else help finance those reductions in tax rates on lower-income workers),
enhance national security by reducing dependence on imported oil
improve the trade balance
reduce emissions of greenhouse gases, particularly in the future by sending the right price signal today
reduce local air pollution, traffic congestion, and traffic accidents.

In the past, such tax proposals have always been considered political suicide. But here are two ideas to reduce political resistance: (i) put a floor under domestic prices of fossil fuels at current levels, by making up any future falls in world energy prices by means of taxes; (ii) respond to any future major national security setback, if it were to occur (god forbid), by asking Americans to do their part toward sacrifice in the form of energy conservation. Since the responses tried by the Bush Administration to the tragedy of 9/11 didn’t work very well (invading an irrelevant country and telling Americans to go shopping), the public may be open to an intelligent response next time.

Originally published at Jeff Frankels Weblog and reproduced here with the author's permission.

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Comments

Hi Jeff,

I think its time for modern economics to step outside the puzzle and take a broader view.

Investment has an ultimate dependency on natural resources. Our brightest long term sustainable outcome resides in shifting our wealth/wellbeing focus from GDP to a measure of the health and sustainability of our resources. Not just for this generation but for many generations to come. Investment will continue to fail if it cannot be evolved to renewable resources.

Investment itself is nothing more than a tool to efficiently provide our soul (Standard of Optimal Living).
I know this is an old argument, but Benjamin Franklin was right. You get a better long term outcome if you place the financial instrument in government. Profits and losses benefit the most people, not just losses. The issue becomes how do you ensure efficiencies. The answer, an body of economic regulators (authority similar to a high court) having ultimate authority. Government gets veto rights but only through a public forum.

Another thing to consider is moving to a single world currency and consolidation of government authorities on a global scale where practical to reduce costs. Simplifies trade.

Yet another, remove the responsibility of unemployment from the public sector to commerce.
If you have 3 Billion hours work to meet your SOUL (which is governed by optimal expert economic management of resources ensuring sustainability) then share that work amongst the available workforce. Reduce tax, get everyone in work and the associated benefits that brings, and forever bond production to its consumer base. This guarantees that no matter the course we take, we are all in it together for better or worse.

Of course you still need incentives for innovation and leadership. That would be in the form higher salaries and above SOUL living. However we should cap a working persons salary to a quality style of living. That is address the monster salaries of CEO's for example.

Time to reconsider. Continuing to see a solution in Growth will be a disaster.

It's only an opinion.

Kind Regards

A Guest.

Reply to this comment By Guest on 2008-12-17 17:00:06

Hi Jeff,

Great post, I do believe that Obama has his plate quite full, especially with the housing market the way it is. As far as the Obama real estate recovery plan goes, it will NOT work in many higher home value areas like San Diego, Los Angeles, New York City, etc.

I came across a San Diego real estate broker's blog post that is to be the only one I've seen that does not spout the 'industry line: "It's always a good time to buy real estate." This broker calls it like it is. No it's not PC, but it is amazingly informative and insightful. Bob Schwartz, the San Diego real estate broker who publishes the blog, wrote a great article on 2-19-09, titled: San Diego Real Estate - No Relief From Obama the url is: http://www.brokerforyou.com/brokerforyou

Thanks again for the great info,
Evelyn

Reply to this comment By Evelyn on 2009-02-24 16:36:03

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