Furchtgott-Roth: Fiscal Reform Must Avoid Tax Increases

Friday, 30 Nov 2012 07:38 AM

By Forrest Jones and Kathleen Walter

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Any deal that steers the country away from the fast-approaching fiscal cliff cannot include tax hikes, as the healing economy just cannot handle them, said Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute.

At the end of this year, the Bush-era tax cuts and other benefits are scheduled to expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the country into a recession next year if left unchecked by Congress.

Lawmakers and the White House are currently negotiating fiscal reforms needed to avoid the cliff, though sticking points have arisen when it comes to taxes.

Democrats want the Bush tax cuts to expire for households bringing in over $250,000 a year to pump fresh revenue into government coffers, a proposal Republicans say would hit small business owners and prompt them to put off expanding and hiring.

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“I think it’s important that taxes don’t go up. If taxes go up we will have less growth than we would have otherwise,” Furchtgott Roth told Newsmax TV in an exclusive interview, without making specific reference to President Barack Obama’s plans to target households earning $250,000 a year with tax increases.

Fiscal cliff negotiations, however, should prioritize preventing taxes from rising over addressing the automatic spending cuts, which can take a back seat in the meantime.

“I don’t think the spending cuts are going to affect the economy dramatically, but every time taxes are raised, some projects are not undertaken, someone doesn’t go shopping who would otherwise have gone shopping. So that’s very detrimental to growth,” Furchtgott-Roth said.

The nonpartisan Congressional Budget Office has said that failure to steer the economy away from the fiscal cliff could tip the country into a recession next year, with gross domestic product contracting by an estimated 0.5 percent.

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“Dramatic increases in taxes are not good for the economy. If not an outright recession, there would be a slowdown,” she noted.

Turning to monetary policy, Furchtgott-Roth said the dollar must strengthen.

Since the 2008 financial crisis, the Federal Reserve has slashed benchmark interest rates to near zero and rolled out unorthodox stimulus measures to jolt the economy, including three rounds of quantitative easing (QE), under which the Fed buys bonds such as mortgage debt held by banks, pumping the financial sector full of liquidity with the aim of keeping interest rates low across the economy.

On top of QE, the Fed is running another stimulus program dubbed by the markets as Operation Twist.

Under Operation Twist, the Fed purchases longer-duration Treasury securities while selling an equal amount of shorter-duration Treasury securities with the aim of keeping long-term interest rates low.

Unlike QE, however, Operation Twist does not inject fresh liquidity into the economy and doesn’t expand the Fed’s balance sheet.

Still, such loose monetary policies aiming to spur recovery and encourage hiring come with side effects, namely a weaker dollar that pumps up commodity prices and stokes inflationary pressures.

Phasing out monetary stimulus polices and strengthening the dollar could bolster the economy.

“No country has ever depreciated itself into prosperity. Our dollar has been very loose, that’s one reason commodity prices are high, including oil prices and gasoline prices,” she said.

“As the dollar strengthens, interest rates will gradually rise, and savers will benefit. It’s very important that we get back to a strong dollar. That makes investors more willing to invest here in the United States.”

Repealing the president’s Affordable Care Act would open the doors to more robust growth as well.

The law, which was upheld by the Supreme Court earlier in 2012, slaps taxes on companies with 50 workers or more that do not provide health insurance for their employees.

“If they move from 49 to 50 workers, they have to pay the fine of $2,000 per worker per year if they don’t have the right kind of health insurance. That’s $40,000 moving from 49 workers to 50 workers because the first 30 are exempt,” she explained.

“Another incentive for them is they can avoid the penalty if they change full-time workers to part-time workers. So if full-time workers quit or if they lay off full-time workers and replace them with part-time workers, they don’t pay this very substantial tax. So that is a major impediment to hiring.”

Editor’s Note: New 'Obamacare Survival Guide' Reveals Dangers Ahead for Your Healthcare

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