Congress should let the George W. Bush-era tax cuts of 2001 and 2003 expire to help trim the mushrooming budget deficit, former Federal Reserve Chairman Alan Greenspan says.
Tax rates will automatically revert to pre-2001 levels, unless Congress changes the law by year's end. President Bush proposed the tax reductions to pull the economy out of its slump at the time.
And Greenspan’s support helped convince Congress to approve them.
However, Greenspan now feels differently.
“They should follow the law and let them lapse,” Greenspan told Bloomberg Television.
The former U.S. central bank chairman told Bloomberg that the economy is in “a temporary slump” and would emerge with a “sluggish” 3 percent growth rate in the second half of the year.
Greenspan said that allowing the cuts to lapse "probably will" slow growth, but that the risk posed by doing nothing about the deficit is greater.
The budget deficit totaled a record $1.4 trillion last year, or about 10 percent of GDP. And the Obama administration forecasts an increase to $1.6 trillion this year.
Greenspan obviously believes spending cuts by themselves won’t be enough to get the deficit under control.
Many other experts agree with him.
“The political question is coming down to: What are the alternatives to solve this problem?” Clint Stretch, director of legislative affairs at Deloitte & Touche, tells Barron’s.
“You can’t solve the deficit problem with spending cuts alone. It’s inevitable that we’re going to have to raise taxes to do so.”
Congress is wrangling over what to do about taxes. If it does nothing, the top rate will increase to 39.6 percent next year from 35 percent currently.
President Barack Obama has proposed increasing rates for people who earn at least $200,000 a year and leaving rates unchanged for less wealthy taxpayers. Republicans want to leave rates unchanged for everyone.
Greenspan goes even further than Obama. He says the Bush tax cuts should be allowed to expire for middle-class as well as high-income taxpayers.
While ending the tax cuts would probably hamper economic growth, reining in the budget deficit is more important in the long run, Greenspan says.
“Unless we start to come to grips with this long-term outlook, we are going to have major problems,” he said.
“I think we misunderstand the momentum of this deficit going forward.”
Democrats may be coming around to Greenspan’s view. House Majority Leader Steny Hoyer, Md., said last month that the exploding government debt burden may make a permanent extension of the middle-class tax cuts unfeasible.
It would be difficult for members of Congress — Democrats and Republicans — to face voters in November having approved a tax increase. Of course, if they do nothing, they will in effect have implemented higher taxes.
The result may be a one-year extension of the entire tax-cut package, says Roberton Williams, a senior fellow at the Tax Policy Center.
“The simplest solution this year would be to say ‘we have a struggling economy; we don’t want to raise taxes at all,’” he told Bloomberg.
“It’s a compromise that would get things past the end of this year.”
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