The Administration’s Tax Proposals

Peter R. Orszag

My testimony argues that the Administration’s tax proposals are not well-designed for boosting economic growth in either the short run or the long run:

-In the short run, the key to economic growth is expanded demand for the goods and services firms could produce given current capacity.

-In the long run, a key to economic growth is higher national saving, which finances ongoing expansions in capacity over time.

Yet the Administration’s proposals would have only modest effects on demand in 2003 and would expand budget deficits in the long run. All else being equal, the expanded budget deficits would reduce national saving in the long run, exactly the opposite of what would be needed to boost long-term economic performance. Furthermore, the proposals would exacerbate after-tax inequality of income in the United States.

It is also important to put the current proposals in context. The first wave of baby boomers will become eligible for retirement benefits under Social Security in 2008; they will become eligible for Medicare in 2011. As the baby boomers begin to retire, the Federal budget will come under increasing pressure. Given that budgetary outlook, policies that significantly exacerbate long-term deficits seem especially reckless. As a recent report from the Committee for Economic Development, a leading organization of business leaders and educators, put it: “The first step in climbing out of a hole is to stop digging. We cannot afford economic policy decisions today that further raise deficits tomorrow.”