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US coming to terms with tax rises, despite Ryan's road map

Finance Blogger: Ian Fraser Ian Fraser

A new front has opened in the war of words over the best macro medicine for the damaged US economy between the neo-Keynsians, who generally favor continued borrowing and continued stimulus, and the deficit hawks, who favor a form of starvation diet: and it’s tax.

The octogenarian former chairman of the Federal Reserve, Alan Greenspan, weighed into the debate last week with an interview in the New York Times. Surprisingly, given he endorsed them at the time, Greenspan is calling for a repeal of the 2001 and 2003 tax cuts introduced by President George W Bush.

In the interview Greespan said

“I’m in favor of tax cuts, but not with borrowed money. Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

The owlish Greenspan, who retired from the Fed in 2006, told the newspaper that unless action is taken to boost US government revenues and reduce the cost of Medicare, the US faces dire economic consequences. He said if these issues don't get addressed, fixed-income investors could instigate a run on Treasury Bills, which would push up America’s cost of borrowing and, in his view, precipitate another global economic crisis. Shades of Greece anyone?

Greenspan’s call for the scrapping of Bush’s tax cuts – repeated from his appearance on the political talk show “Meet the Press” and an interview with the Financial Times – has apparently “rankled” former colleagues at the Fed.

R Glenn Hubbard, a former chairman of the White House council of economic advisers who was a key architect of the Bush tax cuts, said that Greenspan’s proposal would equate to a massive tax rise – which he dismissed as “a very bad idea” given America's feeble economic recovery. Even liberal economists said they doubted whether Greenpan’s proposal cuts much ice, given the state of the US economic recovery (on August 6th, it emerged that US unemployment has risen to 9.5%)

However the de facto intellectual leader of the neo-Keynsians, Paul Krugman, said that in an ideal world he agreed with Greenspan (though he did not mention his name) that the Bush tax cuts should end. However, writing in his NYT blog, Conscience of a Liberal, Krugman qualified this by saying:

“If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending. Unfortunately, that’s not going to happen. Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire.

Krugman also wrote a searing critique of Paul Ryan, the Republican member of the House of Representatives who has been getting plenty of airtime in Washington for his plan for Newt Gingrich-esque tax cuts.

In Ryan’s "Roadmap” to rightwing economic nirvana, US income tax would be further be slashed, capital gains tax abolished and corporation tax abolished. Social Security would be privatized, Medicare and most of Medicaid terminated. These healthcare programs would be replaced with a system of vouchers, whose value would diminish over time.

Krugman, like a schoolmaster dealing with a lazy pupil who is unable to do his sums, demolished these proposals in a New York Times op-ed piece. He accused Ryan of being an economic illiterate and charlatan whose ideas would do absolutely nothing to reduce the deficit. He professed astonishment that Ryan's road map has been given any credence at all by the Washington establishment and political journalists. The Nobel laureate wrote:

“Mr. Ryan isn’t offering fresh food for thought; he’s serving up leftovers from the 1990s, drenched in flimflam sauce.”

So, it seems that round one in the battle over taxation has gone to those who favour a raise. And it also looks like president Obama is now on their side. Last week Treasury secretary Tim Geithner said that keeping current tax levels even on a short-term basis "would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits."

Further reading on taxation in the USA

Tags: economic recovery , fiscal stimulus , tax cuts , tax rises , taxation , US
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