GWEN IFILL: Now to the first of several conversations on whether or not to extend tax cuts that expire at the end of the year.
We begin with someone who believes all the cuts enacted in 2001 and 2003 should stay in place. Glenn Hubbard was the chair of the Council of Economic Advisers under President George W. Bush, and he helped to design those cuts. He’s now dean of Columbia University’s School of Business, and he is co-author of a new book on economic policy called “Seeds of Destruction.” He joins us from New York. Welcome, Mr. Hubbard.
GLENN HUBBARD, Dean, Columbia Business School: Thank you.
GWEN IFILL: So, why should the tax cuts be preserved?
GLENN HUBBARD: Well, I think there’s an excellent argument for preserving the tax cuts for at least two years, until we’re ready to have a serious conversation about the size of government.
The truth is, if we want the government that we presently have, we’re going to have to raise taxes massively, not just the Bush tax cuts, but many tax increases. If we want a smaller government, we can keep them.
GWEN IFILL: Well, let’s talk — just talk about the decision. Obviously, there’s not going to be a big discussion about what — the size of government between now and December, but we do know that there is going to be a discussion whether these tax cuts, as they exist, would hobble growth, whether taking them away would hinder growth.
What is your opinion on that?
GLENN HUBBARD: Well, I think there is no question that removing the tax cuts, any or all of them, in the next couple of years would impede the recovery. And I think prudence would suggest keeping them there, again, until we’re ready to have that discussion about our government and how we want to pay for it.
GWEN IFILL: Well, let’s — let’s turn the flip side of the argument. President Obama has said many times lately that keeping these cuts in place for the wealthiest percentage of the population would cost $700 billion. Is that a number that makes sense to you?
GLENN HUBBARD: Well, that would be the cost, yes, over 10 years. There would be modest offsets to that.
But the question is really, what kind of tax system do we want? I mean, if we were starting from scratch, we would want a tax system that has low marginal rates and reduced taxes on saving and investment, which is exactly the spirit of those tax cuts.
If we want President Obama’s government, as I argue in my book, yes, we do have to raise taxes, and not just the Bush tax cuts.
GWEN IFILL: What’s wrong with doing what the president is suggesting, which is raising taxes — or lifting — letting the tax cuts expire for people under the ages — I have got this backwards — letting the tax cuts expire for people who earn less than $200,000 a year for individuals, $250,000 — the middle class, as it’s defined — and just taking that tax cut — keeping that tax cut in place — the opposite of that — for people who are making more?
GLENN HUBBARD: Well, I think there’s an economic problem and a budget problem with what the president proposes.
The economic problem is that the bulk of those tax increases would fall on business owners and on saving and investment, precisely at a time when the economy is struggling to recover. The budget problem is, we can’t really have President Obama’s government in his budget, a government of 25 per of GDP, and repeal only the tax cuts for upper-income households.
We would need to repeal all of the tax cuts, and still impose new taxes. It’s time for some budget honesty.
GWEN IFILL: Which is the more — the more effective way of stimulating the economy, cutting taxes or spending? As the president has been talking about the stimulus package — we just heard President Clinton say that it worked better than people say it did. Which was a — which is a better stimulus?
GLENN HUBBARD: Well, I think the first, best stimulus right now would be to stop the policy uncertainty that’s coming out of Washington.
If you’re asking questions about, you know, which do economists believe might have higher multipliers, I could imagine good tax cuts being very effective and some spending being effective. Unfortunately, the stimulus package we had, had neither.
GWEN IFILL: OK. So, one of the things we’re seeing happening in Washington — and I think it will come out of the House tomorrow — it came out of the Senate last week — which was this plan to provide tax breaks for small business.
Is — does that begin to speak to some of your concerns, that kind of approach?
GLENN HUBBARD: Well, I think the bigger concern is to make sure we have a steady, stable long-term tax environment.
For small businesses, I think the best thing we could do is not raise taxes on them next year, as the president has proposed. The president did constructively talk about investment incentives. And I agree with him. I think that would be an important element of stimulus. It would, however, be offset by his tax increases.
GWEN IFILL: So, you think that it’s — he would be giving with one hand and taking away from the other? Why wouldn’t that offset in the opposite way? Why wouldn’t it help?
GLENN HUBBARD: Well, no, think about it. The investment incentives, in and of themselves, that the president proposed, the faster write-offs for investment, is definitely pro-growth, and I give him credit for that.
But that’s offset by raising taxes on small business next year. He really should just say, let’s let the current tax code stay in place until we’re ready to have that serious conversation. And that’s probably in 2012.
GWEN IFILL: Are there other ways of limiting — of getting some of the money back from higher-income workers, like limiting deductions, or finding other ways other than raising taxes on them?
GLENN HUBBARD: There absolutely are. And that’s a great question. If the president had as his goal raising revenue from upper-income taxpayers, there are ways to raise tax burdens that don’t have costly distortions in raising marginal tax rates. And limiting deductions would be an example.
Going forward, you know, thinking about longer-term reforms, scaling back the growth in Social Security and Medicare for upper-income households is another example.
GWEN IFILL: But is that an example which is likely to get any kind of enthusiasm from Democrats or Republicans in Washington?
GLENN HUBBARD: Well, the question is — you know, as I argue in the book, when are we going to own up to our long-term problem? We have an enormous debt problem in the country.
We can fix it by reducing the growth of spending and by raising taxes, or a bit of both. The trick is to do so in a way that’s fair. And I think we need to put the burden of adjustment on upper-income households, but the way to do that is by lowering spending.
GWEN IFILL: What about a — the short-term concern? You’re making an argument for tackling — taking the big bite, tackling the long-term fiscal problems of the nation.
I guess I’m asking about, what about the short term, and what should be done between now — with no action, these tax cuts will expire. But what has to happen between now and December, assuming they’re not going to fix all of the larger problems for the long term?
GLENN HUBBARD: Well, two things. One, the more we can address long-term problems, we give ourselves breathing room in the short term. If we have a credible path for fiscal policy, it’s easier to say, look, we need some higher deficits now to address the economy.
Second point was, if we were to do anything, we should make it effective. Examples would be a payroll tax cut or investment incentives. But the stimulus package the president originally had simply wasn’t very effective.
GWEN IFILL: How much of what you’re suggesting — whether it’s long-term, or even short-term, preserving these tax cuts for another couple of years, how much of that can be done in an environment in which we are facing these competitive midterm elections right around the corner, or even, after that, more competitive elections for — in 2012?
GLENN HUBBARD: Well, I’m not a politician, but, as an economist, I would say the arguments should really be two.
One, it’s going to provide support for growth in the next couple of years, at a time we need it. And, second, it really does set the stage for this bigger conversation of, how big is government going to be? What do we want it to do? And then what’s the best tax system for paying for it? That’s a 2012 discussion, and I think probably a winning argument.
GWEN IFILL: Glenn Hubbard, the dean of the Columbia Business School, thank you so much.
GLENN HUBBARD: My pleasure.
JUDY WOODRUFF: In our next conversation, we will hear from Alan Greenspan, the former chairman of the Federal Reserve, who once testified in favor of the Bush tax cuts. He now argues, it’s time to let them lapse.