Tags: Rubin | Loopholes | Fiscal | Cliff

Robert Rubin: Cutting Loopholes Won't Fix Fiscal Cliff

Tuesday, 13 Nov 2012 12:32 PM

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Calls to eliminate tax loopholes and write-offs in lieu of raising taxes won't steer the country away from a fast-approaching fiscal cliff, said former Treasury Secretary Robert Rubin.

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

A solution needed to avoid the cliff — as well as narrow deficits over the long term — should involve a balanced approach, one that will see spending cuts as well as tax hikes.

Editor's Note: The Final Turning Predicted for America. See Proof.

Eliminating tax deductions and exclusions, often referred to as tax expenditures, won't drum up enough revenue to narrow deficits and could have adverse effects on the economy.

"Many of these tax expenditures are important and popular policy programs on which people now rely," Rubin wrote in a New York Times OpEd. "They include the deductibility of mortgage interest, charitable contributions and the exclusion from income of employer-provided health insurance," he wrote.

"Some tax expenditures should be cut back and reformed. But when the substantive effects and political realities of large-scale reductions are examined, it becomes clear that there would not be sufficient savings to reduce tax rates and also cut the deficit."

When it comes to taxes, Democrats have proposed allowing tax breaks for wealthier Americans expire as part of a fiscal cliff solution, though some Republicans have disagreed, arguing such a move would hit small-business owners with tax hikes and prevent them from expanding and hiring, which the economy desperately needs.

Don't fear tax hikes on rich Americans, Rubin pointed out.

It worked in the past and can work again.

"Raising tax rates for those with the highest incomes challenges the supply-side proposition that even moderately higher rates would hurt growth," Rubin wrote.

"President Bill Clinton’s 1993 deficit reduction plan increased income tax rates for roughly the top 1.2 percent of incomes. Opponents said this would lead to recession. Instead, we had enormous job creation and the longest economic expansion in our history."

Meanwhile, the yield on the 10-year U.S. Treasury has fallen to 1.62 percent as investors flock to the safe-haven instrument out of fears the U.S. will drive over the fiscal cliff.

A figure below 1.7 percent indicates that investors expect the U.S. gross domestic product to contract by 0.3 percent next year, according to JPMorgan Chase research, as reported by Bloomberg.

“The fiscal cliff is being priced in because it’s the biggest risk facing the market right now,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, according to Bloomberg.

“Without the cliff we would grow 2 to 2.25 percent.”

Editor's Note: The Final Turning Predicted for America. See Proof.

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