Big economic names weigh in on tax increase debate

It looks like our elected officials in the nation’s capital might finally get around in September to debating the issue of the 2001 and 2003 tax cuts that are due to expire at the end of December. Nothing like waiting until the last minute.

Over several years — from a Republican White House and a Republican Congress to a Democratic White House and a Democratic Congress — nothing was done to make these tax measures permanent. That restrained the benefits of tax relief and, as the end of 2010 crept ever closer, helped weigh down the economy.

Contrary to making these measures permanent parts of the tax code, the push is in the opposite direction by President Barack Obama and Democratic leaders in Congress. There looking to impose huge tax increases directed at upper-income earners, but which also would hit many entrepreneurs, small businesses and investors — and therefore affect business expansion, economic growth and job creation.

Some big economic names from the past recently chimed in on the issue, supporting the current effort to jack taxes.

Robert Rubin, former treasury secretary under President Bill Clinton, supports the Obama plan to raise taxes on upper incomes. Paul O’Neill, who headed up the treasury for a time under President George W. Bush, admitted on CNN that part of the reason he was fired was his opposition to the 2003 tax cuts. O’Neill also mentioned that he was OK with letting all of the tax cuts expire.

Most strange, however, former Federal Reserve Chairman Alan Greenspan seems willing to tell anyone who will listen he favors allowing all of the tax measures to expire at the end of this year.

What are their respective explanations for backing big tax hikes during a down economy?

O’Neill said he doesn’t care and wants tax reform. Rubin and Greenspan are focused on deficit reduction and apparently don’t care how that might be achieved.

Rubin has long been a deficit hawk, buying into the argument that a U.S. balanced budget or surplus leads to low interest rates and therefore, more economic growth. Unfortunately, history reveals no relationship between the federal budget deficit and the level of interest rates. That could not be more evident than now, given where deficits and interest rates are.

Greenspan once supported the Bush-era tax cuts, but now favors their repeal. In a New York Times interview, Greenspan said he previously supported those tax cuts because large budget surpluses were being projected and now favors big tax increases in the face of huge budget deficits.

Greenspan said, “I was against deficits, but I was also equally against surpluses.”

Greenspan obviously has abandoned the libertarianism he once held (he would be arguing for smaller government, rather than higher taxes), in favor of an extreme budget-balancing mentality. One wonders if all economic problems would melt away if federal government revenues and outlays perfectly balanced?

Make no mistake, today’s federal budget deficit constitutes a great concern for three reasons:

Big deficits show the federal government is spending too much — with the key emphasis on spending. Huge and increasing levels of government spending are bad for the economy because resources are shifted away from private enterprises subject to the disciplines of the marketplace and spent on politically driven, inefficient government projects.

These deficits threaten to drive taxes higher — as advocated now by President Obama, congressional leaders, Rubin, O’Neill and Greenspan.

The cost of borrowing further drives up future expenditures by government.

It’s important to point out that few serious economists on either side of the aisle are advocating tax increases right now.

While supporting more government spending, Keynesians view higher taxes as a drain on aggregate demand, which they see as the driving force behind economic growth.

Meanwhile, supply-side economists argue against increased taxes, which serve as disincentives for the critical undertakings of working and risk taking — such as investing and entrepreneurship — that drive the economy forward, while also feeding government spending that is far less productive than private-sector economic activity.

From an economics standpoint, the pro-tax hike positions staked out by Rubin, O’Neill and Greenspan — along with President Obama and the congressional leadership — can find no roots in sound economics. Nonetheless, their statements will feed the political drive for increased taxes.

Raymond Keating

Raymond Keating is chief economist for the Small Business & Entrepreneurship Council, a group based in Washington, D.C.,  dedicated to protecting small business and promoting entrepreneurship.  Reach Keating through the Web site at