Austan Goolsbee on the Bush tax cuts, a payroll-tax holiday and what he'd do with $700 billion

[ProSense]

Austan Goolsbee on the Bush tax cuts, a payroll-tax holiday and what he'd do with $700 billion

Austan Goolsbee was the Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business and is currently serving as staff director and chief economist on the President's Economic Recovery Advisory Board and as the chair of the Council of Economic Advisers. We spoke this morning about the Bush tax cuts, using a payroll-tax holiday for stimulus, how to spend $700 billion and what to look for in 2011. A lightly edited transcript follows.

Ezra Klein: You guys attack the Republicans for pushing unaffordable tax cuts, but even your plan would add $3 trillion to the deficit over the next 10 years. How can we afford that?

Austan Goolsbee: Look at the decade the middle class has had, where middle-class incomes fell by $2,000 during an economic boom -- a first in our history. That was followed by the worst recession since 1929.I don’t think, in that environment, you can afford to balance the budget on the back of the middle class. You have to address the long-term fiscal challenges facing the country through the bipartisan commission in some bipartisan way.

EK: But indefinitely? Why not do two or three or four years? That way, when it’s time to let them go, you can do so with a veto, rather than requiring 60 votes in the Senate.

AG: I’m not an expert political strategist. I’m just a policy guy. I think the long-term squeeze on the middle class is the most pressing problem facing the sustained growth of the country. But the main way we’re going to balance the budget is ask the middle class to pay for it? You can’t look at the economic performance of the middle class over the last 10 years and think that’ll work.

EK: But on the point of middle-class incomes, the Congressional Budget Office looked at the question and concluded that extending the tax cuts indefinitely would lower incomes by 2020. In other words, it would actually hurt the economy.

AG: As you know, behind any statement like that is some model. In their model, they’ve made an assumption of what deficits do to the interest rate, and my understanding is they’re assuming a relatively significant impact. We’ve had a major deepening of the world capital market in recent years, and so the impacts of tax cuts on the interest rate may not be as big as they’re assuming. If you take a step back, the underlying fiscal crisis facing the country is driven by health-care inflation and entitlement spending. And so we need some outcome from the fiscal commission. But the center of that effort can’t be balancing the budget on the back of the middle class.

EK: The CBO also said that extending all of the tax cuts, including those for income over $250,000, would do less damage to the economy than just extending the middle-class tax cuts. Obviously you disagree, but why?

AG: Having been a major player in, and studied the academic evidence on, how people respond to changes in tax rates, I don’t think the old-style argument that high-income people have big responses to small changes in tax rates is warranted by the evidence. Even a casual look at our experience in the '90s and the 2000s suggests that high-income marginal tax rates aren’t the primary drivers of growth. Bill Clinton raised rates on exactly this group that we’re talking about, and it did not have a significant negative impact on the growth of the country. Then, in the 2000s, we cut high-income tax rates by as much as they’ve ever been cut, and we certainly did not experience a massive renaissance in economic growth. There should be a higher burden of proof on people saying that rates going up by four points on income above $250,000 will have a huge negative effect.

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[flpoljunkie]

1. Way to go, Austan Goolsbee!