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Budget Scorekeeper Says Tax Cuts Could Hurt Economy

Douglas Elmendorf
Douglas Elmendorf, director of the U.S. Congressional Budget Office. Photographer: Jay Mallin/Bloomberg

A permanent extension of Bush-era tax cuts would provide a temporary boost to the U.S. economy and then become a drag on growth by pushing up interest rates, the head of the nonpartisan Congressional Budget Office said.

Douglas Elmendorf said extending breaks due to expire at year’s end would increase demand in the next few years by putting more money in consumers’ pockets.

Over the long term, he said, the tax cuts would hurt the economy because the government would have to borrow so much money to finance them that it would begin competing with private companies seeking loans. That, in turn, would drive up interest rates, Elmendorf said.

“The problem is that if those tax cuts are not accompanied by other changes in the government budget and are simply funded through borrowing,” the borrowing “crowds out other private investment in productive capital -- in the sorts of equipment, the computers, the machinery, the buildings -- that are the source of long-term economy growth,” Elmendorf told the Senate Budget Committee today.

“That connection is less visible, and I think thus less apparent in most people’s intuition, but it is no less important for being not-so-visible,” he said.

Elmendorf said lawmakers wouldn’t avoid this dilemma by extending the tax cuts only for individual income up to $200,000 and up to $250,000 for couples filing jointly, as President Barack Obama has proposed.

20 to 25 Percent

The administration’s proposal, which would cover about 97 percent of taxpayers, would reduce needed borrowing only by 20 to 25 percent compared with the Republican push to extend the cuts for higher-income brackets as well, he said.

“Extending all the tax cuts except for those higher-income people has three-quarters or four-fifths, roughly, of the positive effects and the negative effects of extending all of the tax cuts,” he said.

Elmendorf said lawmakers could avoid crowding out private investment by pairing tax cuts with offsetting spending cuts or tax increases elsewhere in the budget. He also said large increases in government spending would similarly push up rates because that too would require additional borrowing. “It’s symmetric,” he said.

Lawmakers have been at odds over who should be covered by a tax-cut extension, a dispute exacerbated by looming deficits fueled by rising health care costs and an aging population. Goldman Sachs Group Inc. said in a research note released Sept. 22 that even a temporary failure by Congress to extend the cuts may erase U.S. economic growth in the first half of next year.

Senate Democrats have postponed a vote on the tax cuts until they return to Washington for a lame-duck session following the Nov. 2 elections. The tax cuts were enacted in 2001 and 2003 during President George W. Bush’s administration.

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