What should fiscal policy be right now?

When reading various policy proposals or speeches by politicians, I sometimes find myself saying, “that sounds like a good plan,” or, more likely, “that’s a terrible idea.” But instead of simply being dismissive or passively approving of proposals, I’m finding it helpful to imagine what my ideal fiscal policy would be, conditional on the world we’re living in right now. No time-travelling allowed to re-do something.

Naturally, in this thought experiment, Congress does not play a role.

The short-term measures are there to stimulate the economy. The longer-term measures are there to stabilize and lower debt/GDP while maintaining the integrity of the entitlement programs and diminish some of the most glaring inequalities in the current tax regime.

Short-term measures.

  • American Jobs Act . . .on steroids. A stimulus and jobs bill worth about 1.2 trillion is probably what I would go for. What would be in it? I think about $800 billion would be on infrastructure — a mixture of short-term, medium-term, and long-term projects. This could, directly and indirectly, put to work millions of the unemployed. Interest rates are low, and it’s presumably the best time to be investing in the future when much of the existing roads, bridges and buildings are in disrepair. The money should be as well allocated as the federal government is capable of allocating, though some of it will inevitably be spent on sub-par projects. It’s worth remembering, however, that right now there’s lots of money just sitting around, not being invested, and 10-year treasury yields continue to hover around 2%. We should do something with that money, even if a few of the projects turn out to be shitty. $300 billion should be some variation of what’s in the current American Jobs Act, that is, incentives for private employers to add workers, rather than just payroll tax cuts. In an environment like this where households are likely either paying down debt or just saving their money out of uncertainty, tax cuts aren’t likely to be spent and thus, they are not likely to be stimulative. These hiring tax credits and infrastructure projects should be done over the course of the next 4-6 quarters. Another 50 billion should be devoted to various kinds of job-training programs over the next 3-5 years. The final 50 billion would be to beef up R&D, the National Science Foundation, National Institute of Health, and loan/subsidies for various kinds of energy research over the next 3-5 years.
  • HARP (like what was recently proposed) to give relief to homeowners who are making payments but have low or negative equity in their homes.

Medium and long-term measures.

  • Complete implementation of the Payment Protection and Affordable Care Act, including authorities for the Independent Payment Advisory Board to try and slow the growth in health-related costs. Empower and cut in places where necessary.
  • Limit tax deductions for everyone with few exceptions. From 2016, severely limit or eliminate the mortgage interest rate deduction in particular. The main tax expenditures I would maintain: earned-income tax credit, student loan interest deduction (very small compared to the mortgage one), and a tax credit for children.
  • From 2013, begin taxing capital gains at the same rate as ordinary income.
  • Maintain the current tax rates EXCEPT: for those 1,000,000 and over, raise the tax rate to 39%. I can live with the  current Bush tax rates if we tax capital gains appropriately and limit tax deductions (see above).
  • For corporations, allow only one tax deduction: R&D. Eliminate all other taxes loopholes. Institute a flat 20-25% corporate tax rate (down from 35%).
  • Double or triple the federal gasoline tax from 2013 onwards to fund highway projects.
  • Raise maximum amount of income that is subject to the Social Security payroll tax from about 106,000 to 175,000.
  •  Increase Medicare/Medicaid payroll taxes by 1 percentage point from 2015 and on.
  •  DON’T raise the age of eligibility for Social Security benefits beyond what is currently in law. Possibly change to a chain-weighted CPI determination if it is deemed applicable to the elderly population.

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