One of the biggest priorities of the incoming President is to develop an economic plan.  Included in this economic plan will be the next President’s vision of the Internal Revenue Code and tax policy.   As illustrated by the Economic Stimulus Act of 2008, the Internal Revenue Code is frequently relied upon to influence behavior, including stimulation of the economy.  The 2008 Act included tax rebates for low- and middle-income taxpayers and tax benefits for businesses, with a substantial increase in the expensing limits of Internal Revenue Code § 179. Under § 179, taxpayers are allowed to claim a current deduction for the purchase of tangible personal property used in a trade or business instead of recovering the cost over time by claiming a depreciation deduction.  The maximum allowable deduction under § 179 is now $250,000, although that amount will be reduced to $128,000 in 2009.  The 2008 Act also created a new fifty-percent special depreciation allowance for certain property placed in service during 2008.  Unfortunately, the Act has done little to stabilize the economy, and the next President’s economic plan will also need to address the ailing stock and real estate markets and the overall financial crisis. 

In addition, the next President’s economic plan is particularly critical because it must address the fate of the numerous tax provisions that will sunset at the end of 2010. 

Because of its sunset, the § 179 allowable deduction will revert to its previous cap of $25,000 in 2011.  Under the Working Families Tax Relief Act of 2004, the $1000 child tax credit for each qualifying child will revert to $700 after 2010.  The top marginal rate for individual taxpayers will revert to 39.6 percent from the current thirty-five percent rate after the sunset.  The capital gains tax on most capital gains will return to twenty percent from the current fifteen percent rate after 2010.  The determination of the appropriate rate of capital gains taxation is subject to debate.  One theory is that a reduction of capital gains will unfairly benefit upper-income taxpayers because they hold the vast majority of capital assets.  The other theory is that a reduction in capital gain rates will result in an infusion of needed capital into corporations and other business forms, thereby enabling them to expand business operations, hire additional employees, and benefit the economy as a whole.

Another major issue that needs to be addressed is the future of the estate tax.  Estate planning has become complicated after the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  While decedents dying during 2010 will not be subject to the federal estate tax and the generation-skipping transfer tax, the repeal sunsets at the end of 2010, and both taxes will be reinstated during 2011 with an exemption of $1 million.  Given the economic volatility, it is unlikely that the next President will sign into law a bill that repeals the sunset.  There are four options for reform of the estate tax.  One option is to increase the unified credit so that only the most affluent individuals are subject to transfer taxes.  A second option is to lower the tax rate on the transfer taxes.  It is probable that the wealthiest individuals will prefer this option.  If a decedent dies with a $20 million taxable estate after 2010, the decedent is potentially subject to federal estate tax of $7,275,800 if the top marginal rate is fifty percent and the unified credit is $5 million.  Conversely, if the next President signs a law that lowers the rate to a flat rate of, for example, twenty-five percent and retains the $1 million unified credit, the potential liability falls to $4,750,000.  The third option is a combination of the first two options.  For example, the next President may propose in his economic plan a top marginal rate on transfer taxes of thirty-five percent, the top marginal rate for gifts in 2010, and a unified credit of $3.5 million, the unified credit for taxable estates in 2009.  The final option is to allow the taxation of estates and gifts to revert to its pre-EGTRRA form.

The next President should also address corporate tax in his economic plan.  The United States has one of the highest corporate tax rates in the world, second only to Japan when state corporate income taxes are factored into the analysis.  In recent years, several countries, including Canada, Germany, and Sweden, have lowered their corporate tax rates. Consistent with other aspects of tax policy, the impact of the corporate tax is subject to debate, and the next President should give meaningful consideration to several critical questions before he includes a corporate tax cut in his economic plan.  Is this country at a competitive disadvantage when compared to other countries because of the high marginal corporate tax rate?  Do consumers or employees actually bear the corporate tax?  Do the alternative forms of business not subject to an entity-level tax (e.g., Subchapter S corporations, limited liability companies, and partnerships) make the corporate tax optional for businesses? 

Finally, the next President must be concerned that the Internal Revenue Code is becoming increasingly complicated because it is being used to influence behavior and stimulate the economy.  Whether the next President includes tax cuts or increases in his economic plan, the goals of simplicity and ease of administration should not be overlooked.