Robert Rubin, Treasury Secretary during the Clinton administration, wrote an op-ed in the New York Times to put in his two cents about the fiscal cliff.
Though Rubin praises the work of Simpson and Bowles, whose blueprint stimulated discussion about deficit reduction, he believes the Commission’s formula for deficit reduction is not viable:
The plans that reduce both tax rates and deficits, like the impressive work by the Simpson-Bowles commission, have served a great public service — raising awareness of our fiscal risks, bringing Democrats and Republicans together, providing a framework aimed at stabilizing debt at an acceptable level, and recognising the need for substantial revenue increases and spending cuts. However, these same plans also pose a serious risk to achieving the very objective they seek. If we invest too much time and effort pursuing plans that ultimately prove undesirable and unworkable, we may go down a road that leads nowhere.
The Bowles-Simpson Commission is able to lower tax rates while still achieving deficit reduction by reducing tax expenditures (deductions). Rubin sees two reasons to avoid limiting deductions:
- Deductions are important. People rely on the mortgage interest deduction, charitable contributions, and deductions related to employer-provided health insurance.
- This approach does not generate enough revenues for deficit reduction. Limiting deductions will not achieve more than $100-$150 billion in deficit reduction per year, according to the Congressional Research Service.
For those reasons, Rubin thinks pursuing a ‘Grand Bargain’ that includes spending cuts and a reduction in tax rates is “the policy equivalent of a wild-goose chase.”
We should let the Bush high-end tax cuts expire, with an achievable, progressive reduction in tax expenditures. And we should have spending cuts, including entitlement reforms, equally matched by revenue increases.
Raising tax rates rather than limiting deductions is preferable to Rubin because it would generate substantial revenues and have less of an impact of economic activity. Rubin believes that the Clinton boom after he increased income tax rates on the top 1.2% in 1993 was a repudiation of supply-side economics, and cites a report by the Hamilton Project that indicates changes in the tax rate barely affect an individual’s propensity to work.
The most radical part of Rubin’s proposal is that spending cuts be matched by revenue increases – a far more progressive approach than Obama’s most recent ratio of 2.5 in spending cuts for every dollar of increased revenues.
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