If Congress approves the barrage of tax increases proposed in the Obama budget, they will simultaneously kill any chance of an early and sustained economic recovery, according to economist Martin Feldstein, a former adviser to Ronald Reagan and member of the National Bureau of Economic Research.
“The current outlook for an economic recovery remains precarious,” Feldstein writes in The Wall Street Journal.
"This is no time for tax increases that will reduce spending by households and businesses."
The Obama budget, Feldstein notes, calls for tax increases of more than $1.1 trillion over the next decade.
Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly, Feldstein points out.
Moreover, higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further.
Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.
And though the administration promises to cancel tax increases in 2011 for taxpayers with incomes below $250,000 and modify the Alternative Minimum Tax to avoid increases, these are “cuts” in which no one’s tax bill actually declines, Feldstein says.
“This is no time for tax increases that will reduce spending by households and businesses,” Feldstein says.
Martin A. Regalia, vice president for economic and tax policy at the U.S. Chamber of Commerce, clearly concurs.
"The administration's displayed an insatiable appetite for spending and they need to get money wherever they can,” Regalia told the Los Angeles Times.
“So they use the tax code the way Willie Sutton used a gun."
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