The U.S. government should keep tax cuts in place — including those applied to the top income bracket — to avoid damaging the fragile economic recovery, says Harvard Professor Martin Feldstein.
Even tax hikes on dividends, interest and capital gains could hurt the economy, he warns.
Raising the top income bracket tax rates "would be a substantial blow to overall spending and therefore to GDP growth,” Feldstein says.
“Small-business investment and hiring would also be adversely affected because half of all profits, including most of small business income, is taxed at personal rates rather than at the corporate rate,” he wrote in the Wall Street Journal.
Tax hikes are often necessary to narrow budget deficits as are spending cuts, and the government should consider raising some taxes eventually but not for a couple of years, says Feldstein.
He explained that the economic upturn since last summer has been nurtured by Federal Reserve credit like the mortgage purchase program and by the fiscal incentives such as the tax credits for car buyers and first-time home buyers that are now coming to an end.
He said the fragility of the economic recovery means that it would be dangerous to allow any taxes to rise in 2011 and that it would be unwise to enact tax cuts that stretch beyond the next two years.
Congress should move quickly to reassure taxpayers and financial markets that the current tax rates will be preserved for two years and that further tax cuts will depend on the future fiscal outlook, he said.
President Barack Obama has proposed that lawmakers let tax cuts expire for households earning more than $250,000.
During his presidential campaign, Obama said he would not raise taxes on the middle class but appears to be rethinking that pledge, telling CNBC recently that he will listen to the advice from a bipartisan fiscal-policy commission on how to narrow the country’s gaping deficits.
“We should be able to solve this problem without putting a burden on middle-class families,” Obama said recently.
“Having said that, I'm also going to wait for the fiscal commission to provide me [with] their best recommendations. ... At a certain point, what we've got to do is match up money going out and money coming in.”
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