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Making Legislative Lemonade

The agenda on which President Obama campaigned is in the process of colliding with the agenda that events have forced upon him. How he responds will determine the course--and perhaps the fate--of his presidency.

In January of this year, the Congressional Budget Office projected deficits of $1.19 trillion for fiscal year 2009 and $703 billion for FY 2010. The stimulus package just signed into law added $185 billion to the 2009 deficit and $399 billion for 2010. By October of 2010, the debt held by the public will be almost $2.5 trillion higher than in October of 2008, an increase of 43 percent in just two years. The actual fiscal situation will be even worse than these numbers suggest: Spending for Iraq and Afghanistan will be higher, and the alternative minimum tax will be patched once again in 2010. The budget estimates are too optimistic for 2011 and beyond as well: The law requires the CBO to assume the full expiration of President Bush's tax cuts, which probably won't happen. The CBO also has to assume that all "temporary" increases in discretionary domestic spending will expire with the stimulus bill, which, too, is unlikely. And, of course, the administration must do whatever is necessary to stabilize the financial system and the housing market--tasks that will almost certainly require more than the second tranche of TARP funding provides.

In these circumstances, it is hard to see how the president can move forward on his big-ticket domestic priorities--health care, energy, and the environment--much before 2011, if then. While there is merit to the suggestion that better health, energy, and environmental policies will improve our long-term economic health, short-term fiscal realities preclude immediate action. The president can make "down payments" on these goals, some of which the stimulus bill already contains. But implementing his campaign's proposal for universal health insurance would add at least $100 billion per year in new permanent spending, and a cap-and-trade bill to restrain carbon emissions would have the effect of a significant tax increase--not the best prescription for an ailing economy struggling to recover.

It is not too early for the Obama administration to begin thinking anew about how to realize its key policy objectives. One promising possibility is to focus on a major tax reform package that raises new revenues in a manner compatible with robust long-term economic growth. In a grand bargain, liberals would agree to forswear increases in top marginal tax rates and to deemphasize both individual and corporate income taxes. In return, conservatives would agree to broaden the base of the income tax system by eliminating most loopholes and preferences, the core strategy of the successful 1986 reform. They would also agree to institute a value-added tax on each stage of production and sales, mirroring the system used in Europe--this would generate enough revenue to finance the health insurance subsidies for low and moderate-income people that Obama has advocated for. In place of a cap-and-trade bill, which the European experience suggests is hard to administer and vulnerable to political pressure, all parties would assent to a carbon tax, much of which would be rebated to individuals in the form of decreased payroll taxes. Surely liberals and conservatives can agree that taxing carbon more would reduce pollution, and that taxing work less would increase employment opportunities.

These proposals may seem radical, and perhaps they are. But our times call for bolder action than our political system has delivered in recent decades. The alternative is a stagnant status quo that delivers neither adequate revenue nor meaningful reform--not a formula for the transformational presidency Obama so clearly wants.