Obama Talk on Education Veers Into Tax Cut Debate

President Barack Obama was challenged on tax policy by two members of his outside economic advisory board who urged him to extend all the Bush-era tax cuts, at least for two more years.

The meeting of the President’s Economic Recovery Advisory Board today was supposed to focus on the role of education in promoting economic growth and veered into the tax debate when Martin Feldstein, a Harvard University professor who was chief economic adviser to President Ronald Reagan, told Obama that extending the tax cuts for two years would stimulate demand and boost the recovery.

“We’ve been expanding at a slower and slower pace, quarter after quarter; this doesn’t seem to me a time when you want to pull back demand by letting tax rates jump,” Feldstein told Obama. Extending the current income tax rate would “help to keep demand alive when the economy is weak,” Feldstein said.

The tax debate is being played out before the midterm congressional elections, with Republican leaders calling for all the tax cuts to be extended. Obama argues that the U.S. can’t afford losing $700 billion in revenue by keeping the lower rates for the wealthiest taxpayers. All the rates, passed under the Bush administration, are set to expire at the end of the year unless action is taken to extend them.

‘Uncertainty’ and Demand

William Donaldson, who was chairman of the Securities and Exchange Commission under President George W. Bush, told Obama today that “uncertainty is depressing aggregate demand” and a statement from the administration that no one’s income taxes will rise would alleviate it.

Donaldson said extending the rates temporarily would quell criticism from the business community that companies don’t know what to expect.

“What I would I suggest to you is that your administration, and particularly you, set forward with a statement that you’re not going to this time increase taxes for anybody and relieve that uncertainty,” Donaldson told the president. “That isn’t to say that you’re not going to do something about taxes but you’re going to delay that” until after the economy improves, he suggested.

Obama rejected the advice, saying he’s been “unequivocal” about retaining tax cuts for most Americans while letting rates rise for individuals making more than $200,000 and married couples with incomes above $250,000.

Flat-Screen TVs

“I don’t know of any economist, including I think Martin, who would argue that we are more likely to get a bump in aggregate demand from $700 billion of borrowed money going to people like those of us around this table who I suspect if we want a flat screen TV can afford one right now and are going out and buying one,” he said.

The president said spending the $700 billion revenue from letting the tax cuts expire for the wealthiest Americans would help boost aggregate demand most efficiently.

If the tax cuts are extended for upper-income Americans it would be permanent because of the political climate, Obama said. “You do that now you’re going to do it forever,” he said. Obama said he wonders whether Feldstein would make the same argument if he knew “that if you extended all the tax cuts for two years that you couldn’t hold the floodgates back.”

Feldstein told Obama that tax cuts for the top earners “risks sucking a lot of demand out of the economy.”

Generating Demand

Laura D’Andrea Tyson, economic adviser in President Bill Clinton’s administration, defended Obama and his policies. In conversations with corporate executives about ways to aid the recovery, “this tax issue doesn’t come up,” she said.

“The money can be used in a more demand-generating way,” Tyson said. “The size of the problem is very large,” she said, referring to the deficit.

Former Federal Reserve Chairman Paul Volcker, head of the advisory board, said the debate illustrates that “the chairman of this committee faces an unruly membership.”

At the end of the meeting, Obama said the meeting was “a fun conversation” that “went a little off-script.”

Afterward, the president told a small group of reporters that it was a “robust discussion.”

When asked whether he was surprised that the discussion turned to income taxes he said, “sometimes everybody feels like they’ve got to follow up on the two minutes they’ve been allocated.”

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Kate Andersen Brower in Washington at kandersen7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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