An overhaul of the U.S. tax code should raise more money, and arguments that tax cuts and spending reductions can restore the U.S. to fiscal health are laughable, said Lawrence Summers, the former U.S. Treasury Secretary.
Without additional tax revenue, the U.S. would need “close to inconceivable” cuts in entitlement programs and other spending, said Summers, who also was an adviser to President Barack Obama and now teaches at Harvard University.
“It is a near certainty that we are going to need a significant increase in revenues, and it seems to me that any discussion of tax policy needs to start there,” he said today at a conference in Washington sponsored by the Brookings Institution’s Hamilton Project.
At the end of 2012, the income tax cuts first enacted in 2001 and 2003 will expire. If Congress doesn’t act, tax rates will rise for wages, capital gains, dividends and estates.
Lawmakers from both parties and business groups have called for an overhaul of the tax code. They have been stymied, in part, by disagreements over whether a changed tax code should raise additional revenue to help narrow the federal budget deficit.
Republicans say the U.S. shouldn’t raise taxes and should reduce the deficit through economic growth and spending cuts alone.
Martin Feldstein, also a Harvard economics professor, said higher revenue should be part of a tax code overhaul that also would make the system simpler and curtail tax breaks.
“Raising revenue can be done in ways which have good side effects or bad side effects,” said Feldstein, who was a White House economist in President Ronald Reagan’s administration.
Feldstein said he thought that even Republicans who have signed pledges not to increase taxes would be able to support a comprehensive package that included higher revenue.
In introducing the sessions, former Treasury Secretary Robert Rubin said that overhauling the U.S. tax code may promote economic growth and reduce inequality.
Achieving those goals will require reconciling competing visions over how best to restructure taxation, Rubin said.
“Any substantial tax reform will have major winners and major losers, and that creates a very difficult substance with respect to tax reform and very difficult politics,” he said.
Feldstein and Summers disagreed as to how much the tax system should do to reduce income inequality.
“Our problem in the income distribution area is poverty, and you should be concerned about combating poverty, not inequality,” Feldstein said.
On international taxation, Feldstein endorsed a view favored by Republicans and many multinational companies that the U.S. should switch to a territorial tax system that doesn’t impose a significant U.S. tax on income earned outside the country.
Summers said the current approach -- in which U.S.-based corporations can defer taxation of offshore profits and Congress discusses a territorial system -- is a “bad middle” ground.
Companies have stockpiled more than $1 trillion in profits overseas that haven’t been taxed by the U.S.
“We’re running a library,” Summers said. “The single dumbest thing you can do is have everybody think that there’s going to be an amnesty on overdue books but then never have the amnesty.”