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Clinton Adviser Tyson: Drop Tax Cuts for Wealthy to Spur Spending

September 27, 2010 at 4:56 PM EST
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Next in our continuing series of discussions on whether to extend Bush-era tax cuts to all or some Americans, Jeffrey Brown speaks with Laura Tyson, who served as President Clinton's chief economic adviser.
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JEFFREY BROWN: And to another in our series of conversations about whether to extend the Bush-era tax cuts.

Last week, we heard from former Bush adviser Glenn Hubbard, who argued in favor of keeping the tax breaks for everyone, and from former Federal Reserve Chairman Alan Greenspan, who took the opposite view, calling for letting them all expire.

Tonight, we turn to Laura Tyson, now a business professor at U.C. Berkeley. She served as head of the Council of Economic Advisers under President Clinton and currently sits on President Obama’s Economic Recovery Advisory Board. Welcome to you.

LAURA TYSON, Obama Economic Adviser: Thank you very much. It’s a pleasure to be with you.

JEFFREY BROWN: So, you think we should let the tax cuts for the wealthy lapse. What’s the argument for doing that?

(LAUGHTER)

LAURA TYSON: Well, I actually think we have to step back and say, what are the problems? And then, once you know what the problems are, I think you can get to that solution.

One problem is the jobs deficit. Another problem is the fiscal deficit. And I would say also one that’s not mentioned too often is the growth deficit. So, the decisions we make about tax affect all of those things.

In the jobs deficit case, we’re talking about a lack of aggregate demand, insufficient aggregate demand. That means we certainly don’t want to allow all of the Bush tax cuts to expire right now. That would be not be a good policy, because those expirations will affect the purchasing capabilities of American households.

But at the same time, we have this long-run deficit problem. And I think we need right now to not only be introducing policies to handle the jobs deficit, but we have to have a credible plan on the table for multiyear deficit reduction.

And I believe part of that plan is most likely to be an expiration of the tax cuts for its top two income tax brackets. It’s a lot of money. It’s over $3 trillion over a 10-year period. We have a big deficit problem. This is an important source of revenue to help handle that problem.

JEFFREY BROWN: But we also, as you say, have a jobs and economic growth problem. So, you know the argument against what you are suggesting. We heard it from Glenn Hubbard.

JEFFREY BROWN: We hear it from Republicans.

LAURA TYSON: Right.

JEFFREY BROWN: We hear it from even a few Democrats, which is just, this is the wrong time to let any of these tax cuts lapse.

LAURA TYSON: OK. Well, I think, let me — let me distinguish here ideal policy from a compromise policy. My ideal policy would be to allow the top two brackets to expire at the end of this year, to move off of the Bush tax cuts for the top 2 to 3 percent of the American population, to take the resulting additional tax revenue, which is probably in the order of $35 billion to 40 billion dollars next year, and to take that money and spend it on job-creating programs.

The Congressional Budget Office itself has done an analysis of 11 different programs, ways you can stimulate job growth. Retaining the Bush tax cuts for the top 2 percent is number 11 on the list in terms of effectiveness. It’s not as effective as giving grants to state and local governments.

It’s not as effective as unemployment compensation. It’s not as effective as a temporary payroll tax reduction targeted at employment, or spending on infrastructure. So, by all means, we have to worry about the jobs deficit next year reaching into revenues.

JEFFREY BROWN: Exactly. Excuse me for interrupting. I was just thinking that, even though…

LAURA TYSON: Sure.

JEFFREY BROWN: … even though the argument that we hear often is that among those top earners are small business men and women, who create jobs.

LAURA TYSON: Well, unfortunately, that is a very misleading statement. Sure, there are some small businesses in those top two income brackets.

But the reality is that only about 2 to 3 percent of all small business filings every tax year are in the top two to three — two or three — the top two income tax brackets. So we’re really talking about 98 percent of small business filings wouldn’t be affected by allowing the Bush tax cuts for the top two income tax brackets to expire on schedule.

JEFFREY BROWN: Now, coming at it from the other side, the other problem that you have talked about, the deficit and the growing debt problem — because I talked to Alan Greenspan last week. He famously testified in favor of these tax cuts in 2001.

LAURA TYSON: Yes, he did.

JEFFREY BROWN: But now he thinks we should let them all lapse, because the debt problem, he thinks, greatly outweighs with the potential slowing of growth because — if we let the tax cuts lapse.

LAURA TYSON: Well, he is making a judgment that we can handle — that we need the tax cuts that have been introduced for the middle class and the lower-income groups. He’s making a judgment that those tax cuts have to expire for deficit reduction.

I think we have to have that conversation. I think there are many things that need to be on the table for the deficit-reduction package. I think they include looking seriously at Social Security. They include looking seriously at Medicare and Medicaid. How about defense? How about other kinds of tax issues?

I actually think, ideally, truthfully, what I would like to see happen is that we look at a deficit-reduction package in the context of a tax reform. We have a very, very complex, messy, expensive, unfair tax system, which is not very pro-growth in the way it’s organized.

So, I think, while I agree completely with Alan that we will need more revenue as part of the way to solve the deficit challenge we have — and I have already mentioned that the top tax cuts for the top income earners will generate $3 trillion of deficit over the next 10 years, if we don’t get rid of those things. These are big numbers.

But I think we really should look broadly at all of the issues that are part of deficit reduction.

JEFFREY BROWN: And when I interrupted you before — and I apologize again — but you were — you were making the practical case was that you would use that money for, what, for more stimulus?

LAURA TYSON: Well, I would say for more spending right now. Look, you’re using — no, in this case — remember, stimulus means you’re spending without a revenue stream. What I was saying is, if you allow the top two rates to go back to pre-Bush levels, back to the Clinton levels, when the top two income groups were doing extremely well, as they have been doing extremely well for the last 10 years, but let the Bush tax cuts expire for the top two income tax brackets.

That generates revenue of about $40 billion. Use that revenue to fund spending programs that we know from Congressional Budget Office analysis and analysis by Mark Zandi of Moodys.com and others, we know that those programs will have a much bigger effect on addressing the jobs deficit than simply keeping the lower tax rates for the top two income tax brackets.

This is a matter of what is effective. And I want to use the revenue we would collect from allowing the Bush tax cuts to expire for the top to be used for job-creating programs.

JEFFREY BROWN: And one last thing. Another issue that is out there is, if we do extend the tax cuts for the majority of people, as you’re arguing, and as the president argues, the president argues — seems to be arguing for making that permanent.

I gather you don’t — do you think that is a good idea, to make it permanent now, or just do it temporarily and then see where we’re at?

LAURA TYSON: I — I — I guess I come down to the fact that we should do a temporary extension for a few years and put that issue on the table as part of a broad deficit-reduction discussion.

The big items that have to be addressed are tax revenue, Social Security, Medicare, and defense. We should discuss what to do with the permanence of the Bush tax cuts, or eliminating the Bush tax cuts entirely, or reducing them, whatever, in the context of making up that plan. That is the credible thing that we must do quickly.

JEFFREY BROWN: All right, Laura Tyson, thank you very much.

LAURA TYSON: Thank you.

JEFFREY BROWN: And we will have another conversation about extending the tax cuts soon.