Tax Cuts, Innovation Top Issues in Economists’ Debate

Capping the two-day Washington Policy Conference, NABE sponsored a March 4 debate among top economic advisers to four presidential candidates, two from each major party.  Much of the discussion focused on likely tax cuts in 2009 and how policy can best encourage innovation.

The economic advisers participating in the debate were: Brian Deese, adviser to Hillary Clinton; John Silvia, adviser to John McCain; Daniel Tarullo, adviser to Barack Obama; and French Hill, adviser to Mike Huckabee. [Huckabee withdrew from the race the evening of March 4.]

Moderator Thomas Keene of Bloomberg News began the debate by asking the advisers about policy choices that would help various U.S. regions cope with the housing and credit crises.  Later he asked how tax and trade policies might affect middle-income households and prospects for innovation.

Advisers to Democratic candidates Clinton and Obama focused their remarks on policies aimed at helping middle-income families through a variety of tax cuts and programs to promote job growth.  Advisers to Republican candidates McCain and Huckabee drew distinctions between economic issues that they argued are structural rather than cyclical and, therefore, less likely to respond to conventional tax incentives.

Relieving Squeeze on Middle Class

“We need to relieve the squeeze on the middle class and promote job growth” in Michigan and other states where the housing crisis and other economic problems have hit hardest, said Tarullo of the Obama campaign.  In both Michigan and Ohio, economic problems also reflect the long-term shift away from manufacturing, he pointed out.

Silvia of the McCain campaign emphasized the importance of “distinguishing between structural and cyclical change” and said the next president should not consider renegotiating trade agreements, such as the North American Free Trade Agreement (NAFTA).  “You don’t want to change the rules of the game by renegotiating NAFTA,” he said, referring to proposals by Clinton and Obama to reopen that agreement.

Making permanent the 2001 tax cuts, as proposed by the Bush administration, would boost innovation and business investment, and, therefore, benefit the overall economy, said Silvia, referring to McCain’s campaign pledge to support these tax cuts. “People innovate for an expected rate of return, so I won’t advocate for higher tax rates,” he said, adding that it is particularly important for lawmakers to remember that any increase in the capital gains tax rate would have a negative effect on research and development.

Hill agreed with Silvia about the tax cuts, but said the best option would be to change the system to Huckabee’s proposed “fair tax” or consumption tax.   Uncertainty over potential tax rate changes gets in the way of innovation and strong business investment, he said.

Deese said that Clinton agrees with making the R&D tax cut permanent.  “All GOP candidates say that all tax cuts pay for themselves. But in the last seven years, things have shifted out of balance,” he said.  In her tax proposals, Clinton “wants to extend the tax cuts for 98 percent of taxpayers, but not the top 2 percent,” Deese said.  “There is little to no empirical evidence that tax cuts for the wealthiest Americans have helped the economy.”

Obama supports policies that would “increase basic research” as well as incentives to “enhance productivity and innovation,” said Tarullo.  He cited tax breaks for “green technologies” as an example of policies that could promote job growth as well as encourage investment.

It was the second economic debate sponsored by NABE in this national election cycle. Held on Nov. 9 at the National Press Club, the first debate was among five economic advisers.  Organizers of the 50th Annual Meeting set for October in Washington, D.C., are planning a third debate between the top economic advisers for McCain and the Democratic presidential candidate.