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Advice To The Next President: Taxes And Spending

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The power to tax and the power to spend are two of the most important tools the federal government has to affect the broader economy. What direction should the next president take? More spending or less? Higher or lower taxes? And for whom?

Longtime friends and colleagues — and economic advisers to presidents from different parties — Lawrence Summers and N. Gregory Mankiw offer their ideas.

Lawrence Summers is the Charles W. Eliot University Professor at Harvard University and served as Treasury secretary under President Bill Clinton.

The next president faces a situation unprecedented since 1945: prolonged weak demand in a recovering economy combined with high debt levels. In the short term, the number one policy goal should be to put more Americans back to work.

With banks not lending, households de-leveraging, and the U.S. government able to borrow money for 30 years at historically low rates, this is the wrong time to "lurch to austerity" by cutting federal spending.

This is the wrong time to "lurch to austerity" by cutting federal spending.

Instead, the president should make targeted additional public investments in education and infrastructure to increase short-term demand, and lay the foundation for the country's 21st century economic infrastructure. Now is not the time to increase taxes on the middle-class. Instead, the president should act to maintain current tax rates on the first $250,000 of income, but raise rates modestly on income above $250,000. Any future tax increases on the middle-class should be linked to a return to full employment.

Once the economy is moving forward again, the president — and Congress — will need to confront the issue of entitlement reform. According to the Congressional Budget Office, reforms to health care and retirement programs (i.e. Medicare and Social Security) will either require cutting benefits by 25 percent, or increasing taxes by 16 percent. As part of a major (e.g. $4 trillion) medium-term deficit reduction package, some combination of benefit cuts and new revenues is needed to return the nation's long-term finances to a sustainable course.

N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University and chaired President George W. Bush's Council of Economic Advisers.

The next president would do well to follow this old economic adage: "Take care of the long term and the short term will take care of itself." With lingering questions about the effectiveness of President Obama's stimulus bill and recent economic research suggesting tax policy is a more effective recession-fighting tool than fiscal policy, the next president would be well advised to focus on getting U.S. tax policy — last overhauled in 1986 — right.

Take care of the long term and the short term will take care of itself.

Broadly speaking, tax reform should follow the example of a bipartisan Tax Reform Act: simplify the tax code, reduce tax rates and broaden the tax base by eliminating and reducing tax exclusions and deductions. These reforms should apply to both individual and corporate taxes.

Although politically difficult, the next president should also look at ways to increase taxes in areas — such as air and water pollution — where market prices fail to account for costs borne not by the buyer, but by the wider society.

A package of policies — like those proposed by the Simpson-Bowles Commission — to address the structural deficits in Social Security and Medicare is needed.

Finally, I think the next president, and all of us, need to consider the possibility that health care costs — which have risen faster than the rest of the economy here and around the world for the past 40 years — will continue to rise as a share of our national economy. If so, then the key question will be how we pay for it.

Related content:

  • WATCH video of these lectures — plus a Q & A with Summers and Mankiw — here.

This program aired on October 2, 2012. The audio for this program is not available.