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News & Views |Cut Taxes, If Surplus Cannot Be Saved, Greenspan SaysWednesday, January 20, 1999 Deloitte & Touche OnLine The economy would benefit more from a tax cut than new government spending, if a way to save the federal budget surplus cannot be found, Federal Reserve Board Chairman Alan Greenspan said January 20. House Ways and Means Committee Chairman Bill Archer, R-Texas, said it is "very unlikely" that the government will save the surplus, so "if you had to choose between tax reductions or spending programs, what would you choose?" "Tax reductions," responded Greenspan, testifying before the House Ways and Means Committee. The Federal Reserve Board chairman added that the best option would be to continue saving the surplus and reducing the national debt. The political system is not really geared toward keeping excess money in reserve,
Greenspan explained. By their very nature governments tend to spend money in the form of
tax cuts or government programs, so it is unlikely that a way will be found to save the
money, he said. |
Rejects Clinton Plan Greenspan did not approve of President Bill Clinton’s plan to reform Social Security by setting aside more than 60 percent of the surplus and investing some of the funds in 401(k)-type plans that would be directed by an independent board. "The ability to insulate these funds from the political process is virtually impossible," Greenspan said. If politics influence how huge capital flows will be invested, investment decisions will be flawed and will produce return rates that are lower than what currently is generated in the equities market, Greenspan warned. Archer agreed with Greenspan, saying the federal government should not get involved with directing investments in the capital markets. "It doesn't take much to get control. Imagine if the federal government owned control of the stock in your corporation. It's different from allowing people to invest in their own accounts," Archer told the American Council for Capital Formation at a breakfast meeting. Studies show that whenever political appointees help make investment decisions, the result is lower return rates, the Federal Reserve Board chairman said. Rep. Robert Matsui, D-Calif., pointed out that pension plans with political appointees helping to guide investments in the equities market have higher rates of return than the Social Security system. The plans have lower rates of return than pension plans without political appointees, he acknowledged. Social Security ultimately must shift away from pay-as-you-go financing, in which current workers pay benefits to current retirees, to a full-funding system, in which retirement funds for all retirees are saved in advance, Greenspan said. Depreciation Both Reps. Michael Collins, R-Ga., and Philip English, R-Pa., asked Greenspan about the tax code’s cost recovery system. The Treasury Department currently is studying the depreciation system in response to a mandate from Congress. "I don’t know" the extent that current depreciation guidelines match what happens in the real world, Greenspan told Collins. English asked Greenspan what the economic impact would be if Congress eliminated
depreciation and replaced it with expensing. That would amount to a tax cut for
businesses, so policymakers would have to decide whether a cut in marginal tax rates would
be more efficient, Greenspan responded. |
Estate Tax Repeal Rep. Jennifer Dunn, R-Wash., who introduced a bill (H.R. 86) to repeal estate and gift taxes and the tax on generation-skipping transfers, asked what the economic impact would be if the taxes were repealed. Greenspan responded that he could not cite any evidence about how repealing the tax would affect the economy. The nation is becoming less agrarian, so the drag these levies place on family farms and other businesses is diminishing, he said. Tax Cut with "Other" 40 Percent of Surplus: Senate Budget Committee Chairman Pete Domenici, R-N.M., January 20 called for a "large and comprehensive tax cut," potentially using the remainder of the surplus after 60 percent is used to bolster Social Security, as President Clinton outlined in the State of the Union address. "The surplus should be dedicated to [tax cuts] since it is an excess of taxes paid by the American people," Domenici said during a Budget Committee hearing on tax policy. He asked witnesses if it would be "good fiscal policy" to devote 60 percent of the surplus to Social Security and the remainder to tax cuts. Sen. Frank Lautenberg, D-N.J., the committee's ranking Democrat, said the issue is not whether or not to cut taxes, but rather how taxes should be reduced. "Most Democrats support targeted tax cuts," he said, citing credits for low-income taxpayers and for school construction bonds as examples of tax cuts targeting the middle class. Other members of the committee echoed the leaders' sentiments. Republican Sen. Kit Bond, R-Mo., applauded
Domenici's call for an across-the-board cut. Sen. Ron Wyden, D-Ore., argued, "What this debate is really all about
is how you're going to promote long-term economic growth. We need to put in place a
middle-class savings incentive." |
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