Obama Gets Fiscal
During the transition period before his inauguration as President last January, Obama set in place the major pieces of economic policy that will determine the course of his administration. On December 7, Barack Obama announced it will consist of massive interventions to rebuild the country's infrastructure and in the creation of green jobs linked to efficiency increases in the country's energy use. It's likely that fiscal incentives will a play a major role in the implementation of his policy program.
The centerpiece of this fiscal program is the reduction of taxation for the middle class combined with the reintroduction of the principle of fiscal responsibility and fairness, thus augmenting tax progressiveness and limiting evasion. Other lines of intervention were drawn during the campaign. These were reduction in the fiscal burden for the middle class, tax breaks to improve competitiveness and create new jobs, the closing of loopholes negatively affecting tax revenues.
Families with incomes lower than $250,000 a year will see their taxes cut by a about $1000 on average for a working couple, while families earning more than that will keep paying the same taxes, and the richest (2% of the population) will end up paying higher tax rates. Tax reductions will also take the form of fiscal interventions in favor of families (with benefits for working families with kids), the elderly (no taxation below $50,000 a year, incentives for pension funds), and the young (tax credits for educational expenses), combined with tax credits on mortgage interest payments. This is a mix of measures redistributing the fiscal burden among social groups toward the strata that are worse off, but with a proclaimed invariance for the wealthier strata. On the competitiveness front, measures are based on a combination of reduction in taxation and tax credits. The former call for the elimination of taxes on capital gains made from the sale of physical assets by small firms, and a reduction in the tax rate for companies investing in the US, while the latter concern the premiums paid by firms on the health insurance of their employees and their investments in R&D.
But the most significant section of Obama's fiscal program concerns the elimination of tax loopholes and fiscal responsibility. This is a key concept: shutting down the loopholes should lead to a significant increase in tax revenues, thus financing tax cuts for the middle classes and limiting the kind of behavior that led to the current financial crisis. Over the last decade, the US tax system has reached mindboggling levels of complexity, linked to developments in the needs for tax planning related to corporate governance. Not only loopholes will be fixed, but tax havens will also be aggressively fought. Tax shelters have become widespread, leading to losses in revenues in the order of $100 billion.
Summing up, one can imagine that Barack Obama's fiscal plan, initially based on fiscal responsibility and tax cuts for the middle class will move toward fiscal incentives to jumpstart the economy. Reducing the area of tax evasion will contribute to the improvement of corporate governance and financial transparence, with positive fallouts for economic policy and the management of tax incentives.