Raising taxes in a housing slump isn't the smartest policy.
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.
And what are the urgent "fiscal problems" that justify a tax increase, anyway? As the nearby chart shows, federal revenues in fiscal 2006 were 18.4% of GDP, higher than the 18.2% post-1965 average. In October, the first month of fiscal 2007, revenues rose by 12% from a year earlier. Mr. Rubin thinks this windfall isn't enough; perhaps he wants to return to the late Clinton years, when the feds grabbed a record 20.9% of GDP and taxpayers demanded a refund by endorsing George W. Bush's tax cut proposal in the election of 2000.
By the way, the federal deficit for fiscal 2006 was only 1.9% of GDP, which is lower than all but eight years since 1975. Add in the budget surpluses at the state level, and the overall U.S. fiscal "deficit" is economically trivial. It is all but irrelevant to Mr. Rubin's complaint that the U.S. borrows too much from "foreigners." Those foreigners invest here because of safety and soundness and the expected after-tax return. The quickest way to drive away those investors is to reduce that return by raising taxes.
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.
If Mr. Rubin wants to help reduce the future entitlement benefits he frets so much about, he could always support reforming those programs. Yet when President Bush invited him to participate in a bipartisan entitlement commission last year, Mr. Rubin refused.
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.
By the way, how does Mr. Rubin continue to dodge any historical accountability for the dot-com bust of 2000 and the recession that followed? In the liberal economic narrative, we are supposed to believe that the Clinton Administration somehow ended in 1999, and that Mr. Bush is to blame for everything that followed. Yet the Nasdaq peak came in the spring of 2000 and the third quarter of that year recorded negative growth. The shallow recession began in March 2001, with slower-than-average growth continuing until the tax cuts on dividends and the top marginal income rate passed in 2003 and the expansion moved into high gear.
If Mr. Rubin and Senator Clinton really believe the economy needs a big tax increase, by all means they should make this a plank in their 2008 agenda. But they shouldn't do so by asking fellow Democrats to betray their recent campaign pledges or Republicans to make it easier for them by repeating the GOP's blunder of the early 1990s.