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By Knight Kiplinger

The Kiplinger Washington Editors

May 16, 2008

Overall prices will rise 4% this year -- on a par with last year -- but inflation clearly feels much worse for businesses and households struggling to pay bills. This week's Kiplinger Letter analyzes the various pressures impacting prices and forecasts when inflation will ease.

ALSO INSIDE THIS ISSUE: The Dollar vs. Euro, Investing in Brazil, Mexican Drug Violence, Retail Trends, Fingerprinting Foreigners, Hotel Rates, Steel Pennies, Climate Change and Election 2008.

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Next President Will Jettison Many Campaign Pledges

As Oval Office hopefuls tout change, a reality check is in order.

By Richard Sammon, Senior Associate Editor, The Kiplinger Letter

February 27, 2008

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Is this truly a "change" election? We've heard it many times -- from the candidates, millions of voters, business executives and political scholars who rank 2008 up there with 1980 and 1960 as far as historic breaks with the past are concerned. But delivering on the promise of change will be far more difficult when the next president tries to tackle the difficult problems that he or she will face.

A honeymoon of sorts is a sure thing, and the next president will be determined to make a mark early on in several areas. The first year or two could be bountiful.

But that won't mean an end to gridlock. Some bipartisan cooperation will take place, especially with voters sending a clear message that they want Republicans and Democrats to work together. But don't count on a political miracle that will turn Washington into a well greased legislative and policy machine.

Daunting problems lie in wait. There will be money trouble right off the bat -- a much larger deficit near $400 billion. That alone will put the brakes on some major promises, such as repealing the alternative minimum tax, investing huge resources in green technology, passing a sweeping health care bill with expanded federal support, focusing resources on large infrastructure projects or even establishing a national service program. There will be more will than wallet.

The occupation of Iraq will continue well into the next presidency, despite rhetoric on the Democratic side suggesting a large drawdown early in 2009. Continued progress, however halting, in the Iraqi government's ability to manage state affairs and prevent factional strife will ease the Iraq spending debate in Congress, although the ever mounting cost and its effect on the deficit will renew talk of setting timetables.

Odds for an accord on immigration will improve. Most likely is a deal beefing up border controls followed later by a guest worker style plan favored by Democrats and employers. Whoever is elected -- John McCain, Barack Obama or Hillary Clinton -- would support such a plan. But figuring out what to do about the illegal immigrants already in the U.S. will still be a major sticking point.

An estate tax deal is a certainty. A compromise in 2009 will be a political imperative, but not the repeal the GOP wants. More likely is a permanent exclusion of at least $3.5 million in assets.

Expect mixed action on individual tax rates. President Bush's middle class tax cuts will be extended or even expanded, but families making over $250,000 will pay a higher marginal rate, probably 39.6%. If McCain wins and wants to extend all the tax cuts, he may not be able to. A Democratic Congress could simply refuse to act on an extension. There may be some higher dividend and capital gains rates as well.

A climate change bill will come next year or in 2010 after much committee work and deliberation. It will be a landmark measure for the next president. Details will be negotiated at length, but some sort of carbon cap and trade system will be included for large industrial polluters and power plants.

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POSTED BY: Jack (February 27, 2008 08:36 AM)
If they don't get rid of the alternative minimum tax, at least readjust the thresholds and amend the law so that in the future these amounts are pegged with inflation. That way it will do what it was meant to do, instead of tax lower income people more and more as time goes on.

POSTED BY: Joe Honick (February 27, 2008 09:02 AM)
Only the naive will disagree with what you have presented, and it is mostly they who will have thought it would all turn out otherwise. Reality is there is little to choose from right now that would appear as effective international leadership which is badly needed, given our irrelevant status on this count. While it is exciting to see the heightened level of interet and participation in the current presidential campaign burlesque, the likelihood of apathy re-emerging after the election is high if only because of the list of problems faced by too many people and the diminished consumer confidence. "Change", whatever it is, will be hard to come by.

POSTED BY: Ravi Kulkarni (February 27, 2008 11:19 AM)
I have two major objections to this article: 1. There is a wishful thinking in action here. Most well to do people, even democrats, want the status quo to continue. They have a vested interest in keeping the system as it is. This translates into votes for Clinton, at least on the democrat side. If Clinton or Mccain is elected, then the author will be right and nothing substantial will change. 2. What we need today, not 8 or 16 years from now, is a drastic change. Obama represents a hope for that kind of revolutionary change. Without that, America will have much tougher future. What we have now will look like a cakewalk in 2016 or worse in 2024. The fiscal irresponsibility, both at individual and the institutional levels has brought us here and it could get worse, a lot worse. Current downturn is a good opportunity to make the much needed changes. Revolutionary but prudent changes are needed in economic, education, healthcare, foreign policies. Obama is the most likely would-be president who can make it happen. Ravi

POSTED BY: By the Numbers (February 27, 2008 01:30 PM)
I've always maintained that campaign promises are just so much excrement. Most of what presidential hopefuls promise simply isn't in their power to deliver. So they make these over-the- top pledges and then blame Congress when they don't fly. The one promise that these guys and gals could actually keep is the one no one seems willing to make -- the promise to veto any bills that come before them with earmarks hanging all over it. These things cost us taxpayers billions (remember the bridge to nowhere in Alaska?) and serve little purpose except giving elected officials a way to pay back prime supporters at our expense. So where's the promise with some teeth? Alas, it appears that the Oval Office will remain toothless.

POSTED BY: BlairMcKee (February 27, 2008 02:15 PM)
I agree the AMT has to be amended! not having that in our tax software this year halved the time it took to do our federal taxes and greatly decreased the fear we had done something wrong! The AMT sure seemed to us like it was written by CPAs to increase the use of tax prep. services by commoners!

POSTED BY: bert powers (February 29, 2008 02:30 AM)
Obama will get a harsh reality check once he gets roughed up in the general election. Right now he is singing to the choir and they and the msm love what they hear. If he can beat McCain and or Hillary and becomes president, the size of the microscope will get bigger and his wax wings will melt.

POSTED BY: A (March 06, 2008 03:57 PM)
The AMT was enacted by a Democratic congress in response to legal but abusive practices by 51 individuals. They were too short sighted to index the law for inflation. Other laws have similar fixed numbers, so the lax thinking was not limited to the AMT. The real problem is that the tax code is so ridiculously long and complex that it is not manageable. Trusting software is merely trusting a programmer's interpretation. Recently, several professionals all got different results when presented with various returns. If Congress had some mettle; they would just rewrite the tax code. One possibility is getting rid of the original tax code and leaving the AMT. It is a mess; but less of a mess. In any case; real progress means simplification and not just eliminating the AMT. This is not a proposal of anyone's tax scheme (progressive, flat, etc); but just an appeal for common sense. Well, we're talking about congress here. Never mind the common sense. How about just some pity on the common tax paying citizen. Thank You!!!

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