EconomistMom.com

There’s a nice little article in today’s Washington Post (by Annys Shin) that quotes my friend, Bill Gale, speaking wisely of how we shouldn’t necessarily hold President-elect Obama to all of the campaign promises he made regarding fiscal policy:

So how will President Obama’s pocketbook promises evolve as he moves from campaigning to governing?

The financial crisis and the tottering economy will be the top priority and will probably slow the rollout of polices that would help improve the personal finances of individuals.

“That has to just take precedence over the other stuff,” said William Gale, director of economic studies at the Brookings Institution. “Remember, the plans were created at a time when we weren’t in this situation. Something has to give. Significant flexibility is required.”

What probably has to give is swift action on the myriad tax cuts that candidate Obama laid out on the stump, analysts said. His proposals would slash taxes by $2.9 trillion from 2009 to 2018 and boost the national debt by $3.5 trillion by 2018, according to the nonpartisan Tax Policy Center. House Democrats say they plan to move quickly to implement Obama’s tax plan. But a recession and the ballooning deficit may leave little leeway for the president-elect to speed his tax plan, analysts say.

That’s interesting that Annys seems to suggest that when President-elect Obama becomes President Obama, he might not be able to afford all the tax cuts he’s promised because of the deteriorating conditions in the economy and the “ballooning deficit.”  It seems to me we’re hearing the opposite argument just as often these days–that we can’t afford NOT to significantly increase the deficit as the appropriate response to the recession we’re obviously in.

I’ve written before here that I don’t think the two positions are contradictory.  The additional deficit spending has to happen immediately to deal with the immediate weakness in the economy.  We can pursue that deficit spending and yet still do it in a “fiscally responsible” way–pursuing policies that maximize economic bang per buck and that direct the assistance to those Americans who are suffering the most.  And meanwhile, the Bush tax cuts do not expire until the end of 2010, by which time I really hope this recession will be over, so that at that time we can decide, thoughtfully (rather than in a panic), which of the tax cuts (if any) we wish to extend and how we will pay for them.

Until then, President Obama’s tax policies might turn out to be slightly different from what he promised on the campaign trail, but the general shape of his tax agenda will stay the same.  If and when we decide we need to raise more revenues, the Obama Administration will favor raising taxes on the rich and keeping taxes on middle- and lower-income Americans as low as possible.  Annys makes that point in the article, but what got my attention, inspiring the title of this post, was the financial advice given (my emphasis added):

Some households, particularly those with higher incomes, may want to make some financial adjustments, advisers said. The planners stressed that it’s impossible to know exactly what shape the policies will eventually take, but they offered some general thoughts. If your family falls into Obama’s definition of wealthier Americans making more than $250,000 a year, then you might want to think about reducing your taxable income. Obama has proposed raising capital gains and dividend taxes, estate taxes, income taxes and possibly payroll taxes for this group.

“The question for those folks is how many different places can it possibly hit their income or portfolios?” said Barry Glassman of Cassaday & Co. in McLean.

Even if you earn less than $250,000, you may also benefit by reducing your taxable income. For instance, if Obama and Congress wipe out income taxes for seniors earning less than $50,000, as he has proposed, and you are a senior who earns a bit more, one strategy could be to turn taxable income into tax-free income by putting money in municipal bonds, Glassman said.

I just thought it should be clarified:  President Obama won’t raise marginal tax rates to more than 100 percent–not even close.  Everyone’s still better off earning more income, not less.  So what the financial advisors mean to say is that you should try to reduce the taxable portion of your income, not try to reduce your income.  In other words, the Obama Administration’s tax policies might encourage folks to reduce their TAXABLE income, not their taxable INCOME.  It’s tax avoidance that these financial advisors advise, not income avoidance.