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Tax Cuts: Robert Rubin

February 23, 2001 at 12:00 AM EDT


MARGARET WARNER: Robert Rubin served as President Clinton’s Treasury Secretary from 1995 to 1999. He’s now with City Group, the financial services company. He recently wrote an op-ed piece in the “New York Times” sharply criticizing the Bush tax cut proposal. Welcome, Mr. Rubin.

ROBERT RUBIN: Good to be with you, Margaret.

MARGARET WARNER: So what is it about the Bush tax cut plan that you don’t like?

ROBERT RUBIN: Well, in a nutshell, Margaret, I think it’s a very, very serious error of economic policy. If you look back over the last eight years, we’ve had remarkable economic conditions. I don’t think there’s any question fiscal discipline has been central to this in terms of bringing interest rates down and keeping confidence up. And I think that the Bush tax cut as announced would undermine fiscal discipline. I think there’s a high probability it would lead to deficits on the non-entitlement, that is to say the non-Social Security, non-Medicare side of the budget. And I think those kind of deficits could lead to exactly the kind of economic conditions that we had in the early ’90s.

MARGARET WARNER: Now, you know the White House is citing the Congressional Budget Office that those non-Social Security… That surplus is going to be something like three-plus trillion dollars over the next ten years, and they’re only proposing they say to give about half of that back. What do you say?

ROBERT RUBIN: I think in reality, Margaret, you’ve got a $5.6 trillion projected surplus. If you take out Social Security and Medicare, which most people in Congress think should be excluded, it gets you down to 2.7 trillion. If you take out realistic projections with respect to discretionary spending and to dealing with expiring tax cuts, you probably come to somewheres around $2 trillion or $2.1 trillion available over the next ten years. And the administration proposed tax cut would cost $2 trillion, including the interest that would have to be paid on the debt that you don’t pay down. In addition, Margaret, all of this is based on five- and ten- year projections, and five- and ten-year budget projections are enormously unreliable.

MARGARET WARNER: So I assume you would then take great issue with what the President said on Saturday in his radio address, when he said essentially we can have everything we want: We can have increase on education and spending on defense, we can protect Social Security and Medicare, we can pay down the debt, and we can have a tax cut.

ROBERT RUBIN: I think, Margaret, that that is not a realistic notion. I think what we should do… if we’re to have a tax cut– and I think a moderate tax cut at this point would be very sensible– I think we should have a moderate tax cut. I think there are some programs we should support, like prescription drug benefits. But I think we should operate prudently, and we should wait at least two or three or perhaps four years before we consider having a very large tax cut, something I wouldn’t have in any case. But even if you want to have it, wait two or three or four years, probably three or four years until we know how reliable these projections are likely to be. And all the past history of such projections is that they have a very high tendency not to be reliable.

MARGARET WARNER: Now to guard against that one the ideas some of the Democrats on the Hill are talking about is some sort of trigger mechanism in which you would enact tax cuts, but each year it wouldn’t take effect if the budget surplus didn’t materialize.

ROBERT RUBIN: I think the trigger is conceptually an attractive idea. I think the problem– and I’ve given a lot of thought to it, Margaret– is that I think it’s very hard to design one that as a practical matter will work when you actually face difficult circumstances. I also think that there’s a very real… probably a very high probability that a trigger would result in unintended consequences. For example, if the economy is doing badly and at the same time the trigger hits so that you have to raise taxes because the surplus is no longer what you thought it would be, you’re doing something counter- cyclical. I think it is much sounder, much sounder, to start with a moderate tax cut. And then if what you want is a very large tax cut– something I personally would not choose to use the surplus for, but if that’s what you wanted– then after two or three years, if the budget surplus projections look like they’re realistic, then you can increase your tax cuts somewhat and phase into it over time, not by enacting it now, but by enacting a moderate tax cut now and additional moderate tax cuts some years down the road as the surpluses eventuate, if they do.

MARGARET WARNER: Now, you said that you thought this could actually put us on the road to deficits. Give us a scenario from where we go from these incredible surpluses it a deficit.

ROBERT RUBIN: Well, I think it was broad-based agreement that if we have deficits on the non-entitlement side of the budget– that is to say the side of the budget excluding Social Security, Medicare– that that is a serious…or could present a serious economic problem in terms of increasing interest rates and reducing confidence being associated with the low level of confidence that we had last time we had very large deficits, which was the early ’90s. And the numbers that have been laid out leading to that conclusion that this tax cut could very well lead to a deficit. As I said a moment ago, the $5.6 trillion realistically is probably about $2 trillion at most available for tax cuts, and the proposed tax cuts would lost $2 trillion, including the interest on the debt that wouldn’t be paid down because the money was being used for tax cuts. And you’re basing all of this on five- and ten-year budget projections, which all serious students in budget would agree are substantially unreliable. So I think this is a very real chance that this could lead to deficits on the non-entitlement side of the budget.

MARGARET WARNER: All right. Let me get your response…

ROBERT RUBIN: And I think is bad with respect to interest rates, bad with respect to confidence, and therefore with respect to jobs and incomes.

MARGARET WARNER: All right, let me get your response to the specific arguments that the Bush team is making. One that both he and his Treasury Secretary, his successor Paul O’Neill, are making is that if this tax cut were done quickly and effect made retroactive to January 1 of this year, that it would stimulate the economy, and would at least avert a worse slow down than we’re in right now.

ROBERT RUBIN: Margaret, virtually all mainstream economists would agree that… do agree that a tax cut enacted this year is likely to have relatively little stimulative effect in this year. But if what you want is a stimulative effect from a tax cut this year, then you can do that with a moderate front-end loaded tax cut. Most of the proposed tax cut has absolutely nothing to do with economic conditions this year or, for that matter, even next year, because the effects occur in far outer years. For example, the almost the entire state tax cut would occur in outer years. If in fact you think that a tax cut is important for this year or next year, you could accomplish the exact same purposes with the a moderate front-end load tax cut, and I would aim it towards middle- and lower-income people because they have a higher propensity to spend.

MARGARET WARNER: Do think that’s a good idea. In other words, do you think we’re in a situation in our economy right now where we need that stimulative effect?

ROBERT RUBIN: I think the most important thing we can do with respect to the current economic conditions– and think conditions are difficult at this time– is to make sure that we stay on the path that was so central to the last eight years, which is a path of fiscal discipline, creating confidence and lower interest rates. But if people feel that a tax cut would also be useful– and I think you could make a good argument to the effect that it might be useful– then you can accomplish exactly the same purpose with a moderate front- end loaded tax cut aimed toward working people, and avoid the adverse impacts on fiscal discipline that come from the vast tax cut that’s been proposed, most of which will occur in outer years that have nothing to do with economic conditions right now.

MARGARET WARNER: Another argument that the President and his advisors make is that basically Americans are taxed too much, and that for the wealthy it’s a disincentive, and that for working Americans, I think the President’s phrase is it’s “a toll booth on the road to the middle class,” that it really is a… It’s too much of a burden.

ROBERT RUBIN: Well, the key for middle- income and working people is to have a good economy, a strong economy. Incomes at all levels rose over the last roughly eight years. The bottom half of Americans basically had falling inflation adjusted incomes during the 1980s. So the key for working Americans is to have a good economy. But you can also provide, as I said a moment ago, a moderate tax cut, aim it at working people– that is to say the middle- and lower-income people– and you can avoid the vast tax cuts but, for the most part, by not having the estate tax repealed, perhaps having some adjustments but not a repeal, and not lowering the top brackets or perhaps having some minor adjustment at the top brackets. You can accomplish for middle- income people what you need to do, what you could… what is aimed to do with the large tax cut with a far smaller tax cut, and at the same time continue to effectively promote a strong economy and have low interest rates, which help people with mortgages.

MARGARET WARNER: Are you saying you wouldn’t advise any tax cut for the wealthy?

ROBERT RUBIN: I’m saying, Margaret, that the most affluent people in our society benefited most during the 1980s, and even during the 1990s, when all incomes rose, they benefited most. So I think that a tax cut should be aimed at middle-income people and working people. You might want to have some adjustment for the most affluent, but I wouldn’t do very much in that area. And if you eliminate most of what you’re doing for those people, then you would eliminate a good bit of the… of this vast tax cut, and pare it back to something that’s considerably more moderate. About 40% of this tax cut is estimated to go to the top 1% of taxpayers, and they’re the people who have done best over the last ten years and also the last 20 years.

MARGARET WARNER: Finally, what about the ideological or philosophical argument they make, which is, and the President says this often, that this is the people’s money. If the people have been overtaxed– and he believes the surplus shows they’ve been overtaxed– they ought to get that money back, that they deserve to get that back, if you leave it here in Washington, it will just get spent.

ROBERT RUBIN: I believe it is the people’s money, and I think what ought to be done with it is what is best for the American people. What is best for the American people– I think there is no question what is best for the American people: The overridingly best thing for the American people is to do what is best for economic well-being. In that case at the present time it seems to me, that which is best for the American people is to pay down the debt, because remember, the debt is also the debt of the American people. But as I said a moment ago, you can do that and also have a moderate tax cut aimed towards working people, and accomplish a lot for working people in terms of a tax cut, and do it as best to maintain a strong economy. As far as the spending is concerned, if you look back over the last roughly ten years, Margaret, a discretionary expenditure, even non-defense… Discretionary spending even away from the defense budget, has come down considerably as a percentage of the total economy, and is lower now than it was in the 1980s. There’s been some ups and downs in individual years, but basically there’s been discipline, and I think it is up to the President to provide strong leadership. He controls both parties and both the Houses of Congress, and that’s something he should be able to accomplish.

MARGARET WARNER: All right, Bob Rubin, thanks so much for being with us.

ROBERT RUBIN: You’re more than welcome. Thank you, Margaret.

JIM LEHRER: On Monday, we hear the other side of the tax cuts argument from former Housing Secretary Jack Kemp.