Obama Economic Advisor Says Keeping Taxes Low Spurs Economic Growth, Leads to More Tax Revenue

December 8, 2010 - 9:44 PM

Lawrence Summers

In this Oct. 16, 2009, file photo, Lawrence Summers, White House chief economic adviser, speaks at the Buttonwood Gathering in New York. Summers, plans to leave the White House at the end of the year, a move that comes as the administration struggles to show an anxious public it's making progress on the economy. (AP Photo/Mark Lennihan, File)

Washington (CNSNews.com) – In an unusual argument from a Democratic administration, the director of President Obama’s National Economic Council, Larry Summers, contended Wednesday that a deal with Congressional leaders to keep taxes low for another two years will not only jumpstart the economy but increase government revenue in the long run.

Summers said failure to pass the legislation – criticized by both Democrats and Republicans in Congress – could significantly increase the likelihood of a double-dip recession.

“The deficit will be higher in the short run and lower in the long run because of this bill,” he told reporters. “Lower in the long run for two reasons – because the frontloading of business allowances means more revenue collections after 2012 and because the extra economic growth lifts the economy, which in turn lifts tax collections.”

Republicans in Congress have argued for extending the Bush-era tax cuts permanently for all income earners, to encourage economic growth. Obama wanted to increase taxes on workers earning more than $250,000. Republicans argued that many small business owners earn more than $250,000, and conservatives have long argued that lower tax rates spur growth, which leads to more tax revenue.

On Monday, the administration reached a tentative agreement with leaders of both parties in Congress that essentially maintains the status quo on taxes for two years.

The agreement, which requires a vote by both houses, has drawn criticism on Capitol Hill from liberal Democrats for extending the tax cuts for high earners, and from conservative Republicans for running up deficit spending on the unemployment insurance.

Although the deal allocates more money to many Democratic initiatives, liberals in Congress are unhappy. Democrats have called the move a tax cut, even though extending the Bush tax rates will not reduce anyone’s taxes below current levels.

Democrats won an extension of federal unemployment benefits for another 13 months. The estate tax also returned as part of the deal, but only for estates valued at more than $5 million.

The compromise also includes a patch to prevent the alternative minimum tax from ensnaring most middle-class Americans; a reduction in the payroll tax; extension of the earned-income tax credit, child tax credit, college tuition credit; and certain tax and expense breaks for businesses.

Outgoing House Speaker Nancy Pelosi (D-Calif.) was quoted as describing the estate-tax deal as “a bridge too far.” Other prominent Democrats, including Reps. Barney Frank (Mass.), Chris Van Hollen (N.J.) and Anthony Weiner (N.Y.), have also criticized the compromise.

On the Republican side, Sen. Jim DeMint of South Carolina and Minnesota Rep. Michelle Bachmann have also criticized the legislation, on the grounds it relies on deficit spending to cover unemployment benefits.

Summers said tax compromise would lift the economy for five reasons:

-- it ends the uncertainty.

-- it extends unemployment benefits

-- it provides a two percent payroll tax cut

-- it maintains tax credits such as the earned income tax credit and the college tuition tax credits, some credits which go to people that do not pay federal taxes

-- the bill provides a 100 percent business expense write-off for 2011 and a 50 percent business expense write-off for 2012.

Summers is leaving the administration at the end of the year.