Economists Debate Taxes

Former Clinton economic advisor Gene Sperling attacked President Bush’s tax cut plan last night in an ARCO forum debate, telling the audience that “we need a policy so that we can truly say that we’re investing in our children, not borrowing from their future.”

The debate, featuring Sperling and former Bush advisor R. Glenn Hubbard, was a clash of economic heavyweights, as both men have played key roles in shaping U.S. economic policy over the past decade.

Hubbard countered Sperling’s charges, asserting that the economy needed “a shot in the arm” to create the growth necessary to fund social programs and the war in Iraq.

Sperling, referring to his tenure under Clinton, called for a “return to fiscal discipline of the 1990s,” which he said was vital to the future of social security and medicare.

Both men agreed that a tax cut is necessary to fuel growth, but differed over whether it should be a one-time cut or a permanent reduction.

Hubbard, one of the architects of the Bush plan, said a slow economy with low investment rates needs fiscal stimulus.

Hubbard advocated making marginal tax-rate cuts, already approved by Congress to take effect in future years, instead effective immediately.

He also called for the elimination of “double taxation” of corporate income by taxing businesses for their earnings but not shareholders for the dividends on those earnings.

Noting that he had never seen evidence suggesting that one-shot tax cuts—an alternative proposed by Sperling—would be helpful in even the short term, Hubbard asserted that short-term deficits would be acceptable.

The growth they would theoretically stimulate, he said, would more than offset the current loss, and they could also help relieve short-term economic stagnation.

“Our ability as a nation to wage war, to fund social programs, to do anything we want to do ultimately depends on the size of the economy,” Hubbard said.

Sperling warned that the deficits created by the tax cut would not be small or temporary.  The so-called “moderate” tax cuts would cause a revenue loss equivalent to the amount needed to keep both social security and Medicare solvent, he said.

“This is fundamentally about resources. With the war and terrorism, we have learned why it’s important to save for a rainy day,” Sperling said.

Hubbard reacted to the criticism by noting that something either had to be done to stimulate the economy, or a rationale for doing nothing provided.

“One thing you didn’t hear is an alternative vision for the President’s,” he said.

Sperling responded that states badly need funding relief and that short-term stimulus of a different kind was needed.

“We should be willing to pump money into the economy if it is directed and puts money into pockets and do not incur long term obligation,” he said.  “It would stimulate the economy right now and it would send a message to the rest of the world that perhaps an era of fiscal dicipline is ushered in to the US.”

Much of the discussion was devoted to Sperling’s contention that the very wealthy would receive the direct benefit of the tax cuts and Hubbard’s rejoinder that the burden of taxation would be spread out to everyone in the long term no matter what the immediate distribution was.

“It matters very little who writes the check to the IRS,” he said.