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Posted at 4:43 PM ET, 12/ 7/2010

Hubbard: 'I wouldn’t support a permanent extension'

By Ezra Klein

Glenn Hubbard is dean of the Columbia University Graduate School of Business and coauthor of 'Seeds of Destruction: Why the Path to Ruin Runs Through Washington, and How to Reclaim American Prosperity'. From 2001 to 2003, Hubbard served as President George W. Bush's first chairman of the Council of Economic Advisers. During that time, he was instrumental in designing the Bush tax cuts. I called him to ask what he thought of their limited extension, and the deal Republicans cut to secure it. A lightly edited transcript of our conversation follows.

Ezra Klein: The tax cuts you helped develop look likely to be extended for at least two years. Are you happy about it? Feel vindicated?

Glenn Hubbard: I valued my time with President Bush. I think cuts in capital gains are good long-term policy. But I think a temporary extension is right. I wouldn’t support a permanent extension.

Why not?

There are two interesting questions. One is the size of government and the second is the proper structure of the tax code. I only support extending the tax cuts until we can decide those questions -- which I think will be by 2012. If the public says we want a government that’s at the size of the one in the Obama budget, we can’t have taxes at the Bush level. We have to repeal all of them and more. As for the ideal structure of the tax code, to my mind, there are elements of it in the Bush tax cuts, but I’d like to see a reformed system that emphasizes low rates but broadens the base.

The Bush tax cuts were developed during a time of surplus, though they came into effect during a recession. Are they a good fit for the current moment, when we have a weak economy and a high deficit? Or would we be better off with tax cuts that are more specific to these conditions?

You should set tax policy for your views about the long term, not to try and time the business cycle. The Bush tax cuts had a positive cyclical effect when they came out, but that was by chance, as you note. Much of the 2001 and 2003 tax cuts are very pro-growth, but some aren’t. The child tax credit, the 10 percent bracket, they aren’t. But they’re the popular ones. And the parts that are very pro-growth are the least politically popular: the high-income cuts, the dividend and capital gains.

Why are those considered more pro-growth? The argument you often hear, particularly when it comes to stimulus, is that a low-income worker will spend a dollar quickly while a high-income worker won’t, and so tax cuts focused on low-income Americans make more sense.

That’s precisely the mistake in logic. President Bush made this mistake and then President Obama made it. You shouldn’t think about propensity to consume, or stimulate. You need to think about which tax policy leads to better growth. The problem with the consumption argument is that it misses the decisions high-income people make. If you asked me whether a low-income person would have a higher propensity to consume than a business owner, I’d say probably. But the business owner isn’t solving a consumption problem, but an investment and hiring problem. So those are different decisions. And as a matter of economic theory, distortions in tax rates rise with the level of tax rates. So a change in a high rate matters more than a change in a low rate.

But you look at the Aughts and it’s hard to say that it was a very good economy. Wages were stagnant for most Americans, even as growth was relatively healthy. Doesn’t that suggest that simply maximizing growth without worrying about distribution may not be the way to go in the tax code?

That’s exactly the right question. The Aughts were a period like the ’90s when productivity growth was relatively high and the question is, why didn’t wages rise with it? And the answer is they did and didn’t. If you look at compensation, they pretty much rose with productivity. But money wages didn’t. And the reason was high and growing health-care costs. That’s why we need to look at long-term problems. If you look at stagnating money wages in that period, they’re more about rising health-care costs than the tax code.

So when you do look at the tax code, what are the principles that you think should drive reform?

First, you need to figure out the size of government. After that, we want to maximize economic growth. And we need adjustments to be borne by the most well-off among us. So if you want low marginal rates, for growth, you’ll need to ask for sacrifices from upper-income people on something else. That something else could be phasing out deductions that benefit them or reducing the growth in entitlement benefits for them.

And what’s your perspective on the estate tax?

My lens as an economist would be efficiency. Estate taxes are capital taxes, and the optimal capital tax is zero. But that won’t happen. So I’d say a high exemption and a low rate makes sense. The estate tax is not an efficient way to effect wealthy people. It would make more sense to solve the entitlement problem on their backs.

And the other elements of the deal? The payroll tax cut and the deductions for business investment?

That’s the ironic part. Before Obama even took office, many Republican economists, including myself, suggested payroll tax cuts and investment incentives. And Obama didn’t do it. But now they’re back. I’d have been bolder than he was, with a bigger payroll tax cut and putting it on the employer side, to do more on job creation.

By Ezra Klein  | December 7, 2010; 4:43 PM ET
Categories:  Interviews  
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Comments

Great interview!

"Why are those considered more pro-growth? The argument you often hear, particularly when it comes to stimulus, is that a low-income worker will spend a dollar quickly while a high-income worker won’t, and so tax cuts focused on low-income Americans make more sense.

That’s precisely the mistake in logic. President Bush made this mistake and then President Obama made it. You shouldn’t think about propensity to consume, or stimulate. You need to think about which tax policy leads to better growth"


EXACTLY. Stimulus isn't nearly as effective as true policies that push job creation that ACTUALLY THEN HAPPENS. Then the need for stimulus decreases. Sure it never totally goes away but eventually stimulus can't continue on forever (unless of course the Chinese agree to continue to allow us to increase our debt).

And i agree as well that job creation would be spurred on more by giving the tax cut to the employer side but if you thought his base was having a coronary now just imagine if Obama did that. Wonder what Krugman's analysis of unemployment in a year's time would be then??

Posted by: visionbrkr | December 7, 2010 5:01 PM | Report abuse

It would have been interesting to get some numbers on the impact of the tax deal. How many jobs will this tax deal create and how much will it reduce the unemployment rate? How many percentage points will the deal add to GDP growth?

Politicians and economists usually tout their tax packages on the basis of how many jobs and how much growth will be generated. But noticing the absence on this one.

Posted by: tuber | December 7, 2010 5:21 PM | Report abuse

"If the public says we want a government that’s at the size of the one in the Obama budget, we can’t have taxes at the Bush level."

This is precisely why the Democrats aren't willing to block extending the Bush tax cuts on those making over $250k per year on principle if it also means taxes on everyone else go up as well when all the tax cuts expire at the end of the year.

The Obama budget isn't politically sellable if it means the middle class has to pay more in taxes to fund it.

Posted by: jnc4p | December 7, 2010 5:22 PM | Report abuse

So the solution to historic levels of income and wealth inequality is an even more regressive tax structure. Nice.

Posted by: jonwp | December 7, 2010 5:45 PM | Report abuse

Hubbard is implying that the tax cuts are ok as long as government is sized appropriately. What he doesn't come out and say though is that he doesn't mean government exactly, he means government managed entitlements. In other words, the tax cuts are ok as long as we can gut Social Security and/or Medicare to pay for them.

Posted by: slantedview | December 7, 2010 6:27 PM | Report abuse

"That’s exactly the right question. The Aughts were a period like the ’90s when productivity growth was relatively high and the question is, why didn’t wages rise with it? And the answer is they did and didn’t. If you look at compensation, they pretty much rose with productivity. But money wages didn’t. And the reason was high and growing health-care costs. That’s why we need to look at long-term problems. If you look at stagnating money wages in that period, they’re more about rising health-care costs than the tax code."

What a brilliant, brilliant man.

Posted by: krazen1211 | December 7, 2010 6:30 PM | Report abuse

"That’s the ironic part. Before Obama even took office, many Republican economists, including myself, suggested payroll tax cuts and investment incentives. And Obama didn’t do it."

What he meant to say is that's ironic the Republicans filibustered these tax cuts and investment incentives that Obama has been calling for for two years.

Posted by: DavidCEisen | December 7, 2010 7:56 PM | Report abuse

So Ezra, does this mean that we've finally named the decade that just passed "The Aughts?" I've been waiting ten years for a viable name, and that's it?

Posted by: juliecon | December 7, 2010 9:54 PM | Report abuse


Ezra, I wish you would've asked Hubbard to explain what makes him think that lending institutions will start lending again or businesses will start investing again given that the largest 19 banks are hoarding over $1 trillion in cash and the largest American companies listed on S&P's 500 are sitting on over $1.84 trillion in liquid assets and still get tax cuts. Or that companies would start investing here when they can get a bigger bang for their dollar overseas and a tax break. Or start re-hiring workers in the US when they can get cheap labour workers in China and elsewhere to do the same job and more tax reductions thanks to Bush.

Last but not least, furthermore he failed to address the fact that businesses, large, medium and small alike, need paying customers to survive. Likewise people need money to survive, but that requires having a job.

In 1961 JFK stipulated that businesses had to first show new employees had been added to their payroll in order to claim a tax write-off; Reagan removed that provision; Bush gave companies tax breaks for investing off-shore and moving jobs overseas all of which has been on the tax payers dime.

So if corporations, lending institutions and banking companies want tax-breaks to continue, they need to give something back in-return. Otherwise it is difficult, at best, to see how the economy can revive under these conditions.

Posted by: serena1313 | December 7, 2010 9:54 PM | Report abuse

Would a business person hire people and expand because of tax cuts if he thought demand was going to be weak for the foreseeable future?

Posted by: carlbezanson | December 7, 2010 10:08 PM | Report abuse

Cutting through all this chatter, the reality is that at least 25% of all the savings in this Obama proposal is going straight into the pockets of the richest 1% of the population.They will receive an average of $70,000 a year in tax breaks.

An analysis by the non-partisan Tax Policy Center shows that by eliminating the Making Work Pay credit, individuals making less than $20,000 and families making less than $40,000 a year will actually wind up paying more taxes even with the payroll deduction tax break.

But then the poor seem to have no ear or voice with either Ezra Klein or Obama,

Posted by: jcinsanmig2008 | December 7, 2010 10:53 PM | Report abuse

Good interview. Of course the Bush tax cuts do not support the Bush-size government. Too bad you didn't ask him about that. Also, what's the pro-growth potential of military spending? What about occupying Third World countries?

Posted by: Hopeful9 | December 7, 2010 11:03 PM | Report abuse

Hubbard dissimulates:

The Aughts were a period like the ’90s when productivity growth was relatively high and the question is, why didn’t wages rise with it? And the answer is they did and didn’t. If you look at compensation, they pretty much rose with productivity. But money wages didn’t. And the reason was high and growing health-care costs. That’s why we need to look at long-term problems. If you look at stagnating money wages in that period, they’re more about rising health-care costs than the tax code.

Health-care costs rose comparably throughout the 90's, but real wages rose also. So Hubbard is basically lying. The reason is that jobs increased and so the supply of labor became less plentiful (and hence more expensive and hence better compensation for labor).

What Hubbard is leaving out (by concentrating on business decisions) is that someone has to buy the products produced by business. If the income is taken away from the middle-class (who desperately tried to keep up by tapping cheap credit offered as a substitute for wage increases) there won't be sufficient demand for products--hence we get into an equilibrium with insufficient jobs. Historically, this has happened quite often (Britain between the wars, the US after the closing of the frontier). It was only the New Deal tax and spending policies which created a large middle class in this country. This middle class is disappearing.

Posted by: garbage1 | December 7, 2010 11:32 PM | Report abuse

The Bush years were the worst years for job and economic growth in decades and you are interviewing one of the men responsible.

As several small businessmen are now saying, it is when taxes are high that they plow profits back into their businesses so they will not have to pay the taxes and instead grow their businesses.

As long as someone does the opposite of whatever he says the economy may recover.

Posted by: elemming | December 8, 2010 1:49 AM | Report abuse

A permanent extension? There are no permanent tax laws--each new congress can pass any tax laws it wishes--and the bills of revenue must originate in the House of Representatives.

Posted by: loel1044 | December 8, 2010 10:03 AM | Report abuse

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