[Congressional Record Volume 153, Number 35 (Thursday, March 1, 2007)]
[Senate]
[Pages S2476-S2480]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
TAX RELIEF
Mr. GRASSLEY. Mr. President, I rise to discuss the tax relief that
was passed by Congress and signed into law by President Bush in 2001
and 2003, and to bring some reality to an upcoming debate this month
that involves the budget resolution. Since that tax relief was enacted
in 2001 and 2003, and especially since last November, we have heard
from the liberal establishment in Washington and elsewhere that this
bipartisan tax relief must be ended and that taxes should be increased
on millions of Americans of all income levels.
Today, I am going to look at what is driving the tax increase crowd
and talk about why they are wrong and why increasing taxes is a bad
idea. The liberal establishment uses deficit reduction as a primary
excuse for their craving to raise taxes, but before we applaud their
efforts to balance the budget, let's think about their solution. When
anyone says we need to increase taxes to balance the budget, what they
are saying is they are unwilling to cut Government spending. In
actuality, the tax increase crowd wants to increase Government
spending.
Yesterday, I focused on what extending the bipartisan tax relief
package means to nearly every American who pays income tax. So today,
as I promised yesterday, I want to examine the tax relief and to look
at the impact it has on our economy.
Regardless of whether you look at Federal revenues, employment,
household wealth, or market indexes, the impact of tax relief has been
overwhelmingly positive. I am going to put a chart up that gives the
figures I want you to consider as I go through the points I am making.
The first chart illustrates the growth of revenue with the red line
and the growth in GDP with the green line. As we can see, revenues are
currently increasing, and are projected to increase in the near future,
even before tax relief is scheduled to sunset under current law in the
year 2010. Clearly, tax relief has not destroyed the Government's
revenue base. I want to point out that this chart shows percentage
changes in revenue and percentage changes in GDP. So if the lines are
flat in places, it means revenues and GDP are increasing at a constant
rate.
The next chart graphs the Standard & Poor's 500 equity price index
over a period of several years. So, here again, the lowest point of
both the red line, representing the weekly S&P, and the green line,
representing an average, seems to correspond closely with May of 2003,
which, not coincidentally, is when dividend and capital gains tax cuts
were signed into law. Aside from benefiting Americans directly invested
in the stock market, this is good news for anyone with a pension who
invests in the stock market as well. Of course, that happens to be well
over half the people. I think somewhere between 56 and 60 percent of
the people, either through pensions or directly investing in the stock
market, have money reserves in the stock market. So this is not
something that affects 10 or 15 percent of maybe the wealthiest people
in the country, as it did 20, 25 years ago; more people are vested in
the stock market, mostly through pensions.
According to the Federal Reserve--I have another chart--net wealth of
households and nonprofit organizations has increased from a low of
around $39 trillion in 2002 to more than $54 trillion in the third
quarter of 2006. Since tax relief went into effect, our Nation's
households and nonprofit organizations have benefited from more than
$15 trillion of new wealth.
This trend is also apparent when we are looking at employment. I show
you yet another chart. Total nonfarm employment was calculated to
consist of
[[Page S2477]]
around 130 million jobs in the summer of 2003 but is projected to be
137 million jobs in January of this year. This shows a 7 million
increase in nonfarm employment since the 2003 tax relief bill was
signed into law.
I have just described to you four indicators of prosperity. All four
of them have increased since bipartisan tax relief was passed by
Congress and signed into law. I wish to emphasize that word
``bipartisan'' tax relief legislation of 2001 and 2003. Federal
revenues are growing steadily at a rate, then, greater than the gross
domestic product. The S&P 500 ended a downward slide and began moving
upward around the time of the 2003 tax bill. Also, since the 2003 tax
bill became law, household and nonprofit wealth has steadily increased,
and literally millions of new jobs have been created. I think it is
more than a coincidence that all of these positive economic indicators
are correlated with tax relief. I do not think anything short of
willful ignorance could lead anyone to say tax relief has been bad for
this country.
Now, going back to what I was saying before, the liberal
establishment wants to reverse the tax relief that has done all the
good things I was just talking about and that we demonstrated by chart,
and all in the name of deficit reduction. However, this same crowd has
not expressed any interest in reducing the deficit through reduced
spending. I believe the reason for this is that this crowd, comprised
of lobbyists, the big-city press, and the entrenched Federal
bureaucracy, wants to raise taxes--your taxes--to spend your money on
growing Government rather than working to trim spending. In fact, the
more Government spends, the more power these interests are able to
accumulate. The Federal bureaucracy gets to control more money, which
will lead to more people hiring high-paid lobbyists to apply pressure
to take a bigger piece of the pie the taxpayers are paying for. While
these interests have no trouble thinking of themselves, they are not
thinking of America's families, America's senior citizens, America's
small business owners, and hard-working workers across America. These
people may not be able to hire lobbyists or write syndicated columns,
but their welfare should be our top priority.
I am going to talk in greater detail about America's families,
seniors, small business owners, and workers, but for now, I just want
to mention some more about our economy as a whole and how rolling back
the 2001 and 2003 tax relief would have dire consequences for our whole
economy.
There is an old saying that goes something like this: Figures don't
lie, but liars can figure. This saying is especially true in
Washington, DC. Any given issue has champions on both sides of the
aisle able to generate studies and research that just happens to
support their position. I say this because the source for the
information I am going to present now is not one of those groups but,
rather, the Goldman Sachs Group.
Goldman Sachs is an enormously successful and well-respected
financial services firm. I do not think it is possible for any
Democratic politician, liberal think-tanker, or liberal journalist to
accuse Goldman Sachs of being a tool of my party, the Republican Party.
Clinton Treasury Secretary Robert Rubin served as cosenior partner and
cochairman, and current New Jersey Governor and former Senator Jon
Corzine served as chairman and CEO of Goldman Sachs. Our current
Treasury Secretary also enjoyed a prominent career at that firm. So I
would recommend that Republicans, but especially Democrats, pay
attention when a Goldman economist sends up a red flag.
In a report that is titled ``Fiscal Policy: Marking Time until the
Tax Cut Sunsets,'' the U.S. Economic Research Group at Goldman Sachs,
in this report, projects a recession--projects a recession--if the 2001
and 2003 tax relief is allowed to sunset. Now, this study actually came
out in November of 2006, so I am a little surprised we have not heard
more about it.
For this report, Goldman Sachs economists used the Washington
University macro model. To give a little background on the Washington
model, it is a quarterly econometric system of 611 variables, 442
equations, and 169 exogenous variables. The Washington model was
developed and is maintained by Macroeconomic Advisers, Limited
Liability Corporation, out of St. Louis, MO. Macroeconomic Advisers is
where former Congressional Budget Office Director Douglas Holtz-Eakin
serves as a senior adviser. Plus, the firm won the prestigious 2005-
2006 National Association for Business Economics Outlook Forecast Award
for their accurate GDP and Treasury bill rate forecasts. That ought to
give them a great deal of credibility. Now, of course, Macroeconomic
Advisers and their Washington model must be accurate enough for people
to pay to use it, which is not true for every organization that has
been modeling the effects on the economy of letting tax relief expire.
Getting back to the Goldman Sachs study, the authors assumed that
Congress would let the 2001 and 2003 tax relief expire, so they reset
taxes to their year 2000 levels, grossed them up slightly to match the
Congressional Budget Office estimate of the revenue impact of letting
the tax cuts expire, and allowed for an appropriate monetary response.
For monetary policy, the study's authors assumed that the Federal
Reserve would call for interest rate cuts when output falls below its
trend and for interest rate increases when inflation rises above its
comfort zone.
The study states that:
In the first quarter of 2011, real GDP growth drops more
than 3 percentage points below what it would otherwise be.
Absent a strong tailwind to growth from some other source,
this would almost surely mark the onset of a recession.
If tax relief is allowed to expire, this study shows that a recession
is likely to result. By not extending or making tax relief permanent,
Congress will be deliberately inflicting a recession on the American
people. Is a lot of hollow, high-sounding rhetoric about balanced
budgets worth the job losses or business closures that would result in
such a recession?
The study eventually predicts higher output but notes that
consumption would be lower.
So that everyone has the opportunity to review this study, I ask
unanimous consent, Mr. President, that it be printed in the Record,
along with one of the very few news stories to note its findings.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the U.S. Economic Analyst, Nov. 10, 2006]
Fiscal Policy: Marking Time Until the Tax Cut Sunsets
Near-term changes in US fiscal policy are unlikely despite
the shift in control of the Congress. Key decisions on
extending tax cuts are not forced until 2010, after the next
election, while efforts to roll back these cuts before then
would surely trigger a veto.
As the tax cut ``sunsets'' approach, the Congress regains
power, as legislation will then be needed to extend the cuts.
The choice will not be easy given the magnitude of the tax
increase--about 1\1/2\% of GDP--that would occur if the tax
cuts all expired and its likely impact on near-term growth.
In a simulation exercise, we confirm that this ``do nothing
Congress'' scenario would quickly balance the budget but at
the cost of a sharp hit to growth in the short term. Farther
out, the benefits are higher output and lower inflation and
interest rates, at the expense of less consumption--an
inevitable price for this decade's tax cuts.
The Democratic Party has regained control of both houses of
Congress with a surprisingly strong showing in the mid-term
election. Although the new leadership will clash with
President Bush on many issues, several areas appear ripe for
compromise, including immigration policy, a minimum wage
hike, and Iraq policy. Each could have significant impact on
the economy.
Third-quarter real GDP growth could be revised up to about
2% (annualized), but the fourth-quarter prognosis remains
murky. Early reads on retail sales suggesting that October
spending was weak, and the factory sector must begin to work
off an inventory overhang. The labor market continues to
impress, though we expect the jobless rate to begin trending
higher soon as the housing correction triggers more job
losses.
I. Return to Divided Government
The Democratic Party has regained control of both houses of
Congress with a surprisingly strong showing in the mid-term
election. Although the new leadership will clash with
President Bush on many issues, several areas appear ripe for
compromise, including immigration policy, a minimum wage
hike, and Iraq policy. Each could have significant impact on
the economy.
Third-quarter real GDP growth may have been a bit stronger
than first reported, with data in hand suggesting an upward
revision to about 2% (annualized). However, the fourth-
quarter prognosis is murky, with
[[Page S2478]]
early reads on retail sales suggesting that spending was weak
in October, and a substantial inventory overhang in the
manufacturing sector. The labor market continues to impress,
though we expect the unemployment rate to begin trending
higher soon as the housing correction triggers more job
losses.
Democrats Retake Congress
With surprisingly strong mid-term election gains, the
Democratic Party has retaken a majority not only in the House
of Representatives, but also in the Senate with a much
thinner 51-49 edge (counting two independents who will caucus
with the Democrats). This marks the first time that Democrats
have controlled both houses of Congress since 1994; the size
of the net changes (6 in the Senate, about 30 in the House)
approaches those of previous ``landslide'' mid-term
elections, especially given the relatively small number of
competitive races.
With Democrats setting the agenda, the initial focus of
Congress next year is likely to be on the six issues
highlighted in the campaign: (1) reinstatement of PAYGO
budget rules; (2) repeal of tax preferences for integrated
oil companies; (3) reductions in student loan rates; (4)
direct negotiation of Medicare prescription drug prices; (5)
an increase in the minimum wage, and (6) implementation of
the September 11th Commission recommendations.
Although President Bush and the Democratic Congress are
likely to clash on many fronts, several major issues with
ramification, for the economy appear ripe for compromise:
1. Immigration. Continued large inflows of undocumented
immigrants and bipartisan acknowledgement that current
policies are insufficient to address the situation have
created fertile ground for legislative progress. A potential
compromise on immigration policy would likely involve a
combination of increased quotas for legal immigration,
tougher enforcement of those quotas, and some sort of
procedure through which illegal immigrants could eventually
apply for US citizenship.
2. Minimum wage. As noted above, Democrats have targeted a
significant increase in the national minimum wage, to $7.25
from $5.15 per hour, as part of their initial agenda. A
majority in both houses of the current Congress had already
supported an increase even before the election, but the deal
was never consummated. More than half (26) of the states
already have higher minimums, covering a significant portion
of the US labor force.
3. Iraq. Iraq policy could see a fundamental shift, with
Donald Rumsfeld's departure as Secretary of Defense an
indicator of possible changes ahead. The upcoming report by a
special commission chaired by former Secretary of State James
Baker and former Congressman Lee Hamilton (who also co-
chaired the September 11 Commission) could offer both parties
political cover for a change of course. This might ultimately
reduce the drain on the federal budget from Iraq-related
expenditures.
However, compromise is less likely on many other issues.
The White House appeared to be considering making entitlement
reform its top priority in Bush's last two years in office,
but this now seems unlikely given the huge political
obstacles and the likelihood that lawmakers' focus will soon
turn to the 2008 presidential election. Federal spending is
unlikely to be dramatically different, though divided
government historically has meant more controlled spending
about in line with GDP growth (-0.02 points per year) versus
slightly faster (+0.23 points) when government was under
control of a single party.
Tax policy seems unlikely to change either. Most important
tax cuts don't expire until 2010, and there is little
Democrats in Congress can do to alter tax policy, given the
likelihood of a Bush veto. In addition, Democrats appear far
from unified on repealing many of these tax cuts, and the
resulting fiscal tightening would pose temporary downside
risks to the economic outlook. There is a small risk that
tighter budget rules could force the cost of extending these
cuts to be offset by tax increases elsewhere. Most likely,
these would come from the closing of corporate ``loopholes''
or other business-related revenue raisers. Relief from the
Alternative Minimum Tax (AMT) will be extended, but plans to
require the cost of any tax cuts to be offset could put two
of the Democrats' priorities in conflict (see this week's
center section for a fuller discussion of the fiscal
outlook).
More Growth Then, Less Now?
Economic news this week implied that third-quarter growth
might turn out to be a bit stronger than initially estimated.
In particular, better export performance and lower oil
imports resulted in a substantially narrower trade deficit
for September--$64.3 billion versus August's downward-revised
$69.0 billion shortfall. This, combined with more inventory
building than Commerce officials assumed, puts our best guess
for third-quarter real GDP growth slightly above 2%
(annualized). Upcoming reports on retail sales and
inventories could still swing this figure.
However, the market's focus is on the outlook, and here we
remain cautious. In theory, the sharp drop in energy prices
over the past three months should boost consumer spending in
the fourth quarter, but this acceleration has yet to
materialize. Early reads on retail sales activity--the
official government data are due out Tuesday--suggest that
October spending was weak. In fact, we have trimmed 0.2
points from our retail sales estimates, to -0.4% overall and
-0.3% excluding autos. Meanwhile, the manufacturing sector
will have to begin working off a significant inventory
overhang.
The labor market continues to impress. For example, initial
jobless claims moved back down near the 300,000 level,
implying that last week's rise was a head fake and
reinforcing the generally strong tone of the October
employment report. Although the labor market is clearly tight
at present, we expect job losses--particularly from the
housing sector--to begin pushing up the unemployment rate
within the next few months.
II. Fiscal Policy: Marking Time Until the Tax Cut Sunsets
Near-term changes in U.S. fiscal policy are unlikely
despite the shift in control of the Congress. Key decisions
on extending tax cuts are not forced until 2010, after the
next election, while any efforts to roll back these cuts
before then would surely trigger a presidential veto.
As the tax cut ``sunsets'' approach, the Congress regains
power, as legislation will then be needed if the tax cuts are
to be extended. The choice will not be easy given the
magnitude of the tax increase--about 1\1/2\ percent of GDP-
that would occur if the tax cuts all expired and its likely
impact on near-term growth.
In a simulation exercise, we confirm that this ``do nothing
Congress'' scenario would quickly balance the budget but at
the cost of a sharp hit to growth in the short term. Farther
out, the benefits are higher output and lower inflation and
interest rates, at the expense of less consumption--an
inevitable price for this decade's tax cuts.
Near-Term Fiscal Policy: No Major Shift
Talk of imminent change in fiscal policy, focused on tax
hikes, has surfaced as Democrats have regained control of the
Congress. They netted about 30 more seats in the House of
Representatives, giving them a comfortable margin. In the
Senate, the Democratic margin is much thinner--a 51-49 edge.
However, this shift in control of Congress does not
translate into an immediate shift in fiscal policy for four
reasons. First, the budget deficit has narrowed sharply over
the past two years, as shown in Exhibit 1. This may reduce
the sense of urgency in the minds of many lawmakers, and
therefore their willingness to strike deals even though the
longer-term imbalance remains serious and unresolved. Second,
the main components of President Bush's signature tax cuts--
enacted with ``sunsets'' to contain their budget impact--do
not expire until the end of 2010. Hence, the thorny issue of
extending these cuts need not be addressed until after the
next Congress (and president) is elected in 2008. Third, any
effort to roll back these cuts before their scheduled
expiration would almost surely trigger a presidential veto,
which the Congress could not override, and it would provide
the GOP with an election issue to boot. Therein lies the
fourth reason, that the impending 2008 presidential election
will limit the time and scope for meaningful progress.
Similar logic applies to the spending side of the ledger,
where any efforts to trim outlays for defense or homeland
security would be fraught with political risk. Our working
assumption is that total spending on national security will
not change much, although the composition might shift; for
other discretionary spending we expect gridlock between a
Democratic majority that would like to restore some programs
and a Republican president whose veto pen will suddenly be
full of ink. The same probably holds for Democrats' announced
intention to push for direct negotiation of Medicare
prescription drug prices.
One issue the new congressional leadership will face is how
to handle the various tax measures whose renewal has become
an annual ritual in recent years. By far the largest of these
is the temporary fix of the alternative minimum tax (AMT),
without which the number of taxpayers affected by this
obscure tax calculation would soar. Although renewing the AMT
would boost the deficit by an estimated $65 billion for
fiscal year (FY) 2008, it enjoys bipartisan support. This is
because many of its unsuspecting victims live in ``blue''
states. Hence, the new Congress will probably find some way
to make it happen and pass most of the other ones (another
$16 billion) as well. In doing so, the Democrats risk
compromising another objective they have championed in recent
years, namely to reinstate pay-as-you-go (PAYGO) rules for
federal budget legislation. Unlike the administration and the
current congressional leadership, who favor PAYGO only for
outlays, Democrats have pushed to have these rules apply to
taxes as well. Notably, the decision to resurrect PAYGO does
not require the president to sign off, as it can be
implemented simply as part of the budget resolution. Hence,
an early test of the Democrats' resolve to control the budget
deficit will be whether they restore PAYGO or something
similar and, more critically, whether they adhere to it.
2010: A Year of Wreckoning?
On balance, our expectations for significant change in
fiscal policy during the next two years are low. Thereafter,
the calculus changes radically as the 2010 sunsets approach.
Absent legislative action, the tax
[[Page S2479]]
code essentially reverts to its pre-2001 provisions on
January 1, 2011. Marginal tax rates on ordinary income rise
significantly, dividend income loses its special treatment,
the capital gains tax rate goes back to 20 percent, the
marriage penalty reappears, the child tax credit drops, and
the estate--oops, death--tax springs back to life.
One implication of this situation is that the initiative
reverts to Congress, specifically the one to be elected in
2008. It can opt for fiscal balance simply by doing nothing
and letting the tax cuts expire, or it can pass legislation
to extend any or all of the cuts. Although the president--
whoever that may be--obviously still has the right of veto,
he/she obviously cannot reject a bill that has not reached
his/her desk.
More importantly, the stakes are high, as the sunsets
potentially telescope into one year the reversal of tax cuts
implemented in various stages between mid-2001 and early
2004. According to Congressional Budget Office (CBO)
estimates, tax revenue would rise by $236 billion between FY
2010 and FY 2012 if all of the tax cuts were to expire.
Scaled to the estimated size of the economy at that time,
this is a fiscal drag of about 1\1/2\ percent of GDP.
Even the most die-hard fiscal hawks are apt to think twice
about the implications of this for the near-term performance
of the economy. After all, a tax increase of this magnitude,
imposed all at once, would likely throw the economy into
recession. How bad would it be, and what would the benefit be
in terms of budget improvement and longer-term economic
performance?
Costs and Benefits of Letting Tax Cuts Expire
To provide some perspective on these questions, we
simulated the effects of allowing all the tax cuts to expire
as scheduled--or, to twist Harry Truman's famous phrase, a
``do nothing Congress'' scenario. Specifically, using the
Washington University Macroeconomic Model (WUMM), we reset
taxes to their 2000 levels, grossed them up slightly to match
CBO's estimate of the revenue impact of letting the tax cuts
expire, and allowed for appropriate monetary policy response.
On the latter, we assume that the Fed follows a rule calling
for rate cuts when output falls below its trend and rate
hikes when inflation is above its ``comfort zone.''
Exhibit 2 illustrates the main results of this exercise,
showing how key variables would diverge from a status quo
forecast in which the tax cuts are extended. The results are
as follows:
Reversing the tax cuts quickly closes most, if not all, of
the fiscal deficit. The immediate effect is to cut the
deficit by about 1\1/2\ percent of GDP, as shown in the top
panel of Exhibit 2. This is about three-fifths of the
shortfall we currently project for FY 2011, based on
assumptions we consider realistic. Under the more restrictive
assumptions underlying the CBO's baseline projections, the
budget comes very close to balance, as indicated in that
agency's latest budget update as well as its estimates that
extending the tax cuts would boost the deficit by 1.6 percent
of GDP relative to its baseline.
More budget progress occurs in the out years. The budget
improvement persists and even increases over time without
further changes in tax law. This reflects the beneficial
effects of a sharp reduction in interest expense, which
results both from reduced borrowing and lower interest rates.
Five years out, the budget improvement swells to about 2\1/2\
percent of GDP, covering about three-quarters of our
projected deficit and putting the budget into modest surplus
under the CBO assumptions.
The economy suffers a lot of short-term pain. The jump in
taxes on January 1, 2011 squeezes disposable income and hence
consumption. This feeds through to the rest of the economy,
sharply curtailing growth and prompting an aggressive easing
in monetary policy. The lower two panels of Exhibit 2 lay out
the major elements of the macroeconomic story.
In the fIrst quarter of 2011, real GDP growth drops more
than 3 percentage points below what it would otherwise be.
Absent a strong tailwind to growth from some other source,
this would almost surely mark the onset of a recession. In an
effort to resuscitate demand, the Fed immediately cuts the
federal funds rate, bringing it 250 basis points (bp) below
the status quo level over the next year and one-half, as
shown in the bottom panel of Exhibit 2. Despite this, output
growth remains well below trend over that period, putting
downward pressure on inflation as slack in the economy
increases. Inflation drops by 150 bp during the sag in growth
before coming back up as the monetary stimulus pushes output
back toward, and eventually above, trend.
In the longer run, economic growth benefits from ``crowding
in.'' When the government runs a large deficit, ``crowding
out'' occurs in the capital markets: Its borrowing, backed by
the power to tax, takes priority over private borrowing and
therefore denies some companies the funds they need for
investment that is usually more productive than the
government's use of the funds. As a result, growth suffers
and real interest rates rise.
The opposite occurs in our simulation. Restoring better
balance to the government's books reduces the deficit and
hence the growth in its debt. This frees funds that now flow
to the private sector allowing the capital stock to grow more
rapidly and pushing down interest rates. As shown by the gap
between the lines in the bottom panel, real interest rates
end up substantially lower. This, eventually, raises output
by about 1 percent above the level that would have prevailed
without the tax increase.
At first glance, this seems like a straightforward case of
short term pain (recession) leading to longer term gain
(higher output). Unfortunately, this assessment is a bit too
optimistic. Although output is higher than it otherwise would
be, consumption is lower. Since the 2001 tax cuts helped
thrust the budget back into deficit, the federal government
has borrowed to fund its spending and, via the tax cuts, some
consumer spending as well. A reversion in 2011 to higher
taxes simply recognizes that fact and starts paying off the
debt. If instead Congress chooses to maintain the cuts, they
just push the due date for the 2000s spending bill even
further into the future. In that case, the ultimate payment--
the drop in consumption--would be even higher.
____
[From TCSDAILY, Feb. 6, 2007]
Hillary Clinton and Recession of 2011
(By James Pethokoukis)
How predictable. The fiscal 2008 budget that President Bush
put forward yesterday gets slammed for being unrealistic--if
not downright mendacious. If the $2.9 trillon proposal
actually got enacted as written--doubtful given that Bush is
dealing with a Democratic-controlled Congress--the plan would
theoretically balance the budget by 2012. As Team Bush
crunches the numbers, the U.S. government would run a $61
billion surplus in 2012 year after running tiny deficits in
2010 ($94.4 billion, or 0.6 percent of GDP) and 2011 ($53.8
billion, or 0.3 percent of GDP). All that while permanently
extending the 2001 and 2003 tax cuts due to expire in 2010.
Of course, journalists and think-tank analysts had barely
scanned the budget when critics started pointing out its
supposed flaws. Among them: the budget assumes more upbeat
economic conditions--and thus more tax revenue--than does the
forecast from the Congressional Budget Office. (In 2011 and
2012, the White House forecasts 3.0 percent and 2.9 percent
GDP growth vs. 2.7 percent for each of those years by the
CBO.) As the liberal Center on Budget and Policy Priorities
puts it, ``The budget employs rosy revenue assumptions; it
assumes at least $150 billion more in revenue than CBO does
for the same policies.''
Indeed, the CBO viewed by the inside-the-Beltway crowd as
the impartial umpire of all budget disputes--also predicts a
balanced budget by 2012. The catch is that it assumes the
Bush tax cuts are repealed leading to a surge of revenue in
2011 and 2012. It forecasts that the budget deficit would
drop from $137 billion in 2010 to just $12 billion in 2011.
And in 2012, the budget would move into the black with a $170
billion surplus. Yet if the Bush tax cuts are extended, CBO
predicts total deficits of $407 billion in 2011 and 2012 and
then continuing thereafter.
No wonder Democratic presidential candidates are finding it
so easy to pledge or strongly hint that if they are sitting
in the White House in 2010, they will veto any effort to
extend the tax cuts. One can easily envision President
Hillary Rodham Clinton harking back to her husband Bill's
1993 tax hikes and economic success as historical
justification for a repeat performance. Deficits are often
used as reason for higher taxes, such as in 1993 and 1982.
But to believe in higher taxes as sound economic policy in
coming years, you also have to believe in the CBO's cheery
forecast that hundreds of billion of dollars in new taxes
will have little or no effect on economic growth.
Now you don't have to be an acolyte of supply-side guru
Arthur Laffer to find that sort of ``static analysis'' a
little weird. Most Americans probably would. So, apparently,
did the economic team at Goldman Sachs, the old employer of
Robet Rubin, President Bill Clinton's second treasury
secretary. Thus the firm's econ wonks decided to try and
simulate the real world effect of letting the Bush tax cuts
expire at the end of 2010. Using the respected Washington
University Macro Model, Goldman reset the tax code to its
pre-Bush status, assumed all tax cuts expired, and watched
how the economy reacted as 2011 began. What did the firm see?
Well, in the first quarter of 2011 the economy dropped 3
percentage points below what it would have been otherwise.
``Absent a tailwind to growth from some other source,'' the
analysis concludes, ``this would almost surely mark the onset
of a recession.''
So actually it's CBO's economic forecast, not Bush's that
is overly, optimistic about future economic growth. But
wouldn't the Federal Reserve jump in and cut interest rates,
offsetting the fiscal drag of the tax hikes with easy
monetary policy? The Goldman Sachs experiment assumes it
would, but WUMM still shows the economy sinking;
``In an effort to resuscitate demand, the Fed immediately
cuts the federal funds rate, bringing it 250 basis points
below the status quo level over the next year and one-half. .
. Despite this, output growth remains well
[[Page S2480]]
below trend over that period, putting downward pressure on
inflation as slack in the economy increases.''
And guess what? A recession would throw CBO's carefully
calculated tax revenue assumptions out the window. Indeed,
the CBO admits that recessions in 1981, 1990 and 2001,
``resulted in significantly different budgetary outcomes than
CBO had projected few months before the downturns started.''
Of course, it's been the history of tax increases that they
tend not to bring in as much revenue as originally predicted.
President Rodham Clinton or President Obama or President
Edwards would likely find the same budgetary disappointment--
and then have to explain to an angry American public during
the 2012 election season why their president decided to
plunge the economy into a recession.
Mr. GRASSLEY. The Goldman Sachs study was clearly not written by
cheerleaders for tax relief; indeed, the authors seemed to share the
point of view of many in this Chamber that a cut in spending is not an
option. The authors regard an eventual drop in consumption as a forgone
conclusion of tax relief and equate it with the necessity to pay back
what had been borrowed over the previous decade. At the very least, the
study says: ``The economy suffers a lot of short-term pain.''
Congress needs to act to extend or make permanent tax relief enacted
in 2001 and 2003 or we risk plunging the country into a frivolous
recession. I say frivolous because the recession will be the result of
vanity on the part of those who use balancing the budget as a cover for
tax-and-spend politics.
More cause for concern of the impact of tax increases comes to us
from China. I am sure everyone is aware that the Shanghai Composite
Index lost 8.8 percent of its value this past Tuesday. According to
various news reports, including a dispatch from the Associated Press, a
factor in the drop may have been rumors that a capital gains tax on
stock investment was in order.
I ask unanimous consent that an ABC NEWS article entitled ``Shanghai
Shares Rebound Nearly 4 percent'' be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Shanghai Shares Rebound Nearly 4 Percent
(By Elaine Kurtenbach)
Shanghai, China.--Chinese stocks recovered Wednesday
following their worst plunge in a decade as regulators
shifted into damage control, denying rumors of plans for a 20
percent capital gains tax on stock investments.
The Shanghai Composite Index gained 3.9 percent to 2,881.07
after opening 1.3 percent lower. On Tuesday, it tumbled 8.8
percent, its largest decline since Feb. 18, 1997.
Bullish comments in the state-controlled media appeared to
reassure jittery domestic investors, who account for
virtually all trading.
China will focus on ensuring financial stability and
security, the official Xinhua News Agency cited Premier Wen
Jiabao as saying in an essay due to be published in
Thursday's issue of the Communist Party magazine Qiushi.
Markets across Asia were still rattled, with many falling
for a second day. Japan's benchmark Nikkei Index sank 2.85
percent, while stocks in the Philippines tumbled 7.9 percent.
Malaysian shares fell 3.3 percent, while Hong Kong's market
fell 2.5 percent.
On Tuesday, concerns about possible slowdowns in the
Chinese and U.S. economies sparked Wall Street's worst drop
since the Sept. 11, 2001, terror attacks. The Dow Jones
industrial average lost 416 points, or 3.3 percent.
Analysts said they expected China's stock market to
stabilize and keep climbing over time although further near-
term declines were possible given concerns that prices may
have risen too precipitously in recent months.
Tuesday's ``sell-off does not reflect any fundamental
change in the outlook for China's economy,'' Yiping Huang and
other Citigroup economists said in a report released
Wednesday. ``A sharp contraction in excess liquidity that
would reinforce damage in the stock market remains
unlikely,'' it said.
China's big institutional investors are all state-
controlled and would be unlikely to sell so heavily as to
completely reverse gains that more than doubled share prices
last year. With a key Communist Party congress due in the
autumn, the authorities have a huge stake in keeping the
markets on an even keel.
``They are acting now to nip a nascent bubble in the bud,''
says Stephen Green, senior economist at Standard Chartered
Bank in Shanghai, adding that it's a challenge given
generally bullish sentiment and the massive amount of funds
available for investment.
``So they have to somehow calibrate the rhetoric and policy
actions to keep a lid on this, while not triggering a
collapse,'' Green says.
One option is a capital gains tax on stock investments.
Rumors that such a tax may be enacted are thought to have
been one factor behind Tuesday's sell-off.
But the Shanghai Securities News ran a front-page report
denying those rumors. The newspaper, run by the official
Xinhua News Agency and often used to convey official
announcements, cited unnamed spokesmen for the Ministry of
Finance and State Administration of Taxation.
China has refrained from imposing a tax on capital gains
from stock investments, largely because until last year the
markets were languishing near five-year lows. The Shanghai
Securities News report cited officials saying that the
government had little need to impose such a measure now,
given that tax revenues soared by 22 percent last year.
The exact cause of Tuesday's decline in China was unclear,
given the lack of any significant negative economic or
corporate news.
Some analysts blamed profit taking following recent gains:
the market had hit a fresh record high on Monday, with the
Shanghai Composite Index closing above 3,000 for the first
time.
Others pointed to comments by former Federal Reserve
Chairman Alan Greenspan, who warned in remarks to a
conference in Hong Kong that a recession in the U.S. was
``possible'' later this year.
Adding to those factors was a persisting expectation that
China might impose further austerity measures, such as an
interest rate hike, to cool torrid growth: China's economy
grew 10.7 percent last year the fastest rise since 1995 and
most forecasts put growth at between 9.5 percent and 10
percent this year.
China's markets took off after a successful round of
shareholding reforms helped alleviate worries over a possible
flood of state-held shares into the market. Efforts to clean
up the brokerage industry and end market abuses also helped.
Their confidence renewed, millions of retail investors
began shifting their bank savings into the markets in search
of higher returns last year. Strong buying by state-
controlled institutional investors and overseas funds also
helped.
China still limits foreigners' purchases of the yuan-
denominated stocks that make up the biggest share of the
markets, though that is gradually changing as regulators
allow increasing participation by so-called qualified foreign
institutional investors.
Stocks have shown unusual volatility this year, with the
Shanghai index notching one-day drops of 4.9 percent and 3.7
percent already this year before recovering to hit new
records.
But there are limits to how far shares are allowed to drop
in a single trading day: total single-day gains and losses
are capped at 10 percent.
Mr. GRASSLEY. The same AP report notes that regulators have already
denied those rumors and that the Shanghai Securities News ran a front
page report to the same effect yesterday. Incidentally, the Shanghai
Composite Index gained 3.9 percent yesterday.
I think the Chinese regulator's swift debunking of rumors that a
capital gains tax was going to be enacted shows the negative impact
such a tax could have on growing markets and expanding economies.
As I have said before, what is missing from the debate on extending
tax cuts and clearly missing from the reasoning of the authors of the
Goldman Sachs study is the option, and necessity, of reducing
Government spending. The right thing to do is to let Americans keep as
much of their own money as we can and not seize it from them to promote
special interests, encourage high-priced lobbyists or give free rein to
the big city press to tell everyone else what to do.
It is often said by the Democratic leadership that tax cuts are not
free. That statement is true. Tax cuts score as revenue losses under
our budget rules. What is equally true, if you listen to economists
and, more importantly, the American taxpayer, is that tax increases are
not free as well. Taxpayers have to write a check to Uncle Sam.
Tax increases change taxpayer behavior. Tax increases will affect
work, investment, and other economic activities. From an economic
policy standpoint, tax increases, especially those that are used to
cover more Government spending, have a policy cost. Tax increases are
not free to the taxpayers and are not free to a growing economy.
So I would ask that the Democrat leadership, as they draw up their
budget resolution, to hopefully keep this in mind. Tax increases have
consequences to the American taxpayer and consequences to the American
economy.
____________________