Most Bush Tax Cuts Should Be Extended, Pimco's McCulley Says

President George W. Bush’s tax cuts should be extended except for the top two brackets to help bolster the fragile economic recovery, said Paul McCulley, a managing director at Pacific Investment Management Co.

“Congress has to extend them or else the double-dip- recession risk will go up dramatically,” McCulley said in a Bloomberg Radio interview with Kathleen Hays on ‘The Hays Advantage.’

The administration wants to let tax breaks expire for households earning more than $250,000 a year, while maintaining reductions for households earning less than that. The tax cuts, enacted in 2001 and 2003, expire Dec. 31. With mid-term elections in November, Democrats and Republicans have been sparring, with Republicans insisting that tax cuts should continue for high-income earners, too.

McCulley, based in Newport Beach, California, suggested making permanent the tax cuts on all but the top two income brackets, individuals earning between $500,000 and $1 million and those who earn more than $1 million. Cuts in the lower brackets should be renewed for a few years, and Congress can revisit the issue when the economy is more stable, he said.

“The Obama administration wanted to restore some progressivity to the income tax code as a structural matter,” McCulley said. “I understand that and I actually have a fair amount of sympathy for that position. However, it’s a tricky proposition to do it at this stage of the business cycle.”

Slower Growth

Global growth will be below average during the next three to five years as developed economies struggle with mounting deficits and increased regulation in the wake of the 2008 collapse of credit markets, according to Pimco.

While the Treasury 10-year yield could fall further, while the yield on the two-year note could only slip a couple basis points lower before rebounding, McCulley said.

“The grand bull market in bonds of our lifetime is basically over,” he said. He recommended high-quality corporate bonds.

Pimco, which has been synonymous with bonds for almost four decades, in the past year has created an equity mutual fund and a unit to invest in hedge, real estate and buyout funds. The company, which managed more than $1.1 trillion of assets as of June 30, according to its website, is a unit of the Munich-based insurer Allianz SE.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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