Bush-Era Tax Cuts May Expire as Step to Budget Deal, Tyson Says

Bush-era tax cuts may be allowed to expire at the end of the year as a prelude to an agreement on the budget, according to Laura Tyson, an economics professor who advises President Barack Obama on the labor market.

An expiration “is the major scenario right now,” Tyson, a professor at the University of California-Berkeley and a member of Obama’s jobs advisory board, said in an interview today with Bloomberg News editors and reporters in Washington.

Tyson played down the impact of such a step on the economy, saying the tax cuts could be reinstated later and made retroactive to the start of 2013. The expiration though might help “force” through a deal on the budget, she said.

The Berkeley economist took Republican presidential candidate Mitt Romney to task for criticizing Federal Reserve Chairman Ben S. Bernanke and said the financial-services industry is undergoing a “secular” change that would restrict its profits during the next decade.

The income-tax reductions that were first pushed through in 2001 and 2003 by former President George W. Bush are the biggest single item in the so-called fiscal cliff -- a mix of more than $600 billion of tax increases and government spending cuts that will go into effect next year if Congress does nothing.

House Speaker John Boehner said on Sept. 11 that he was “not confident at all” that Congress will reach a deal on avoiding the fiscal cliff and blamed Obama and the Democratic- controlled Senate for the impasse.

Tyson, who served as chairman of the Council of Economic Advisers under President Bill Clinton, said the “tone may change” on Capitol Hill if Republicans lose seats in the Nov. 6 election.

Tyson Optimistic

“The willingness to deal might change,” Tyson said, adding, “I’m optimistic” there will be an agreement. She said she’s unsure whether that will occur later this year or early in 2013.

There’s little appetite in Washington for providing much in the way of stimulus for the economy, Tyson said. Some small measures though might be discussed in the context of negotiations on the fiscal cliff, including extending and possibly broadening the 2 percent payroll-tax cut due to expire at year-end, according to Tyson.

The economics professor said the Fed “did the right thing” last week in deciding to expand its holdings of long- term securities in a third round of quantitative easing.

The move showed that central-bank policy makers “are seriously worried about the economy,” she said. Growth slowed to a 1.7 percent annual rate in the second quarter from 4.1 percent in the final three months of last year, and the jobless rate has been stuck above 8 percent since February 2009.

Romney criticized the Fed’s action, saying it would do more harm than good, and repeated his determination to replace Bernanke as Fed Chairman when his term expires in January 2014.

‘Attacking’ Fed

“I would criticize the Romney campaign for attacking the Fed and the Fed chair,” Tyson said, adding that politicians in general should refrain from bashing the independent central bank.

Tyson, who is on the board of Morgan Stanley (MS), said the financial-services industry is undergoing a structural change in the aftermath of the recent crisis. Companies are trying to come up with new business models at a time of “very significant” uncertainty about the regulatory regime they face, she said.

It’s unclear how some of the new rules governing the industry, both domestically and internationally, will be implemented, she added.

Morgan Stanley and Goldman Sachs Group Inc. also are adjusting to being regulated by the Fed after converting into bank holding companies during the crisis, she said. Morgan Stanley is the sixth-largest U.S. bank by assets and Goldman the fifth largest. Both are located in New York.

“People have put their heads down to try to figure out what to do with their own institutions,” she said.

She said she does not see a return to the days before 2007, when the industry’s profits were growing as a share of the economy and as a share of corporate earnings.

“It’s not just cyclical,” she said. “There’s a change in the structure of the industry going on.”

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.