Urbin Report

Tuesday, November 14, 2006

No surprise here...

Robert Rubin, the democrat who oversaw the dot com bust, is calling for tax hikes

That was fast. A mere two days after Democrats capture Congress claiming they wouldn't raise taxes, former Treasury Secretary Robert Rubin tells them they should do so anyway.

"You cannot solve the nation's fiscal problems without increased revenues," declared Mr. Rubin, the Democratic Party's leading economic spokesman, in a speech last Thursday. He also took a crack at economic forecasting by noting that "I think if you were to increase taxes right now, you would have probably about zero negative effect on the economy." The economics and politics here are worth parsing.

We suppose it's reassuring that Mr. Rubin now thinks the economy is strong enough to withstand a tax increase. That's a switch from his opposition to the 2003 Bush tax cuts, which he predicted would bust the budget and do little for growth. The U.S. economy proceeded to grow by an average of nearly 4% a year for three years following mid-2003, until the recent slowdown due largely to the housing slump.

Everyone makes mistakes, but raising taxes amid a housing decline doesn't sound like brilliant policy to us. Depending on inflation signals in the coming weeks, the Federal Reserve may not be done raising interest rates. The best hope for avoiding a recession next year and into 2008 is that strong corporate profits and the tight job market will lift business investment and consumer spending enough to offset the impact of tighter monetary policy. The last thing the economy needs now is a tax increase, too.
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Mr. Rubin's "fiscal problems" riff is really a rhetorical sleight-of-hand, using future entitlement problems to justify a tax increase today. He knows all too well that not a dime of new revenue raised today would be "saved" or otherwise devoted to paying for future Social Security or Medicare benefits. They would be spent on other things by the current Congress, just as today's surplus payroll tax revenues are spent, and just as they were spent when Mr. Rubin was at Treasury in the 1990s.
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Which is why we suspect that Mr. Rubin's real game here is politics. The Citigroup Inc. executive is part of Hillary Rodham Clinton's braintrust, and he and she would like nothing better than to coax Mr. Bush into raising taxes in the next two years. That would take the tax issue off the table in 2008, while splintering Republicans the way President George H.W. Bush's tax-hike deal with George Mitchell did going into 1992.

And if a tax increase did contribute to a severe slowdown or recession, Republicans as the incumbent party in the White House would get the political blame. Recall how Bill Clinton pinned the recession of 1990-1991 on Mr. Bush and Reaganomics, even though the Gipper had left office long before and the economy was growing at a 4% annual rate by late 1992. Readers may recall who won that election.
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