Will Obama's Tax Policies Need to Change?

One of the questions in the back of my mind over the past few weeks has been how the slowing economy will impact our taxes. Already, some commentators think the economy "could force Obama to shelve his tax plans while he focuses on the economy," according to the San Francisco Chronicle.

Both long- and short-term economic pressures will converge to influence the direction of tax policies. The Government Accountability Office has summed up the situation quite succinctly. "Absent policy change, a growing imbalance between expected federal spending and tax revenues will mean escalating and ultimately unsustainable federal deficits and debt," from their Long Term Fiscal Outlook.

Congress and the new President will need to face tough tax decisions sooner rather than later. The political and economic situation is summarized quite nicely in an article from the Economist:

"But the president-elect has precious little breathing room. He faces momentous and unpleasant choices. One deadline is the expiration of Mr Bush’s tax cuts at the end of 2010. Mr Obama had originally promised to extend them for all but the wealthiest 5% of households, whose higher taxes (along with a withdrawal of troops from Iraq) would finance tax credits and health-care subsidies to working-class families. The Tax Policy Centre, a research group, puts the cost of his health-care plan alone at $1.6 trillion over ten years. His more liberal supporters will expect him to keep those promises. But with a deficit threatening to exceed the post-war record of 6% of GDP (set in 1983), such largesse risks revolt by the financial markets, a point that Mr Obama’s more conservative advisers will doubtless make.

"In 1993 Mr Clinton, facing similar tension, ultimately sided with the deficit hardliners. If anything, the pressures on Mr Obama are even more acute. With baby-boomers about to retire in growing numbers, the cost of America’s public-health and retirement programmes, if left unchanged, will rise from 8% of GDP now to 19% by 2050. Some economists dream that the time is ripe for a grand bargain that reforms the tax code, entitlements, and health care simultaneously, boosting productivity, raising revenue, expanding health-care coverage and putting the budget on the path to long-term balance. "

I note how the article indicates hope for reform of the tax laws. I detect a similar aspiration in an article from BusinessWeek, which spells out likely targets for reform of corporate taxes.

We have come to expect that the tax laws change frequently. But it would be nice if we could step back and take an good look at how we want to be taxed, and how that will help strengthen the American economy. Perhaps it's time to take a fresh look at recommendations from the last tax reform panel?

More resources for digging deeper:

• Obama's economic platform
• Obama's economic stimulus package