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.
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.
Glenn Hubbard: 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.