Bloomberg News

Feldstein Urges Tax-Break Cap to Cut U.S. Deficit: Tom Keene

July 01, 2011

July 1 (Bloomberg) -- Lawmakers should cut the U.S. budget deficit by limiting individuals’ tax deductions and credits, said Martin Feldstein, former president of the National Bureau of Economic Research.

“We don’t want to see higher marginal tax rates,” Feldstein, who served as chief economic adviser to President Ronald Reagan, said today in a Bloomberg Radio interview. “But I think we can see more spending cuts that are characterized as revenue increases by putting a cap, putting a limit, on the amount that individuals can take in the form of so-called tax expenditures.”

Most Republican members of Congress have signed a pledge from the anti-tax advocacy group Americans for Tax Reform saying that any elimination of tax breaks must be accompanied by an equal reduction in taxes elsewhere. Republicans say deficit cuts must be part of an agreement to raise the nation’s $14.3 trillion debt limit.

Limiting the tax breaks Americans get “for doing everything from buying a fuel-efficient car to installing solar panels” would narrow the deficit, Feldstein, 71, a Harvard University economics professor, said on “Bloomberg Surveillance” with Tom Keene. “That’s spending, but it’s built into the tax law.”

Feldstein said lawmakers should put a dollar limit on the breaks taxpayers can get from prominent rebate programs including mortgage-interest, state and local deductions.

Debt Ceiling

Democrats and Republicans are trying to negotiate an agreement to raise the debt ceiling by Aug. 2, when the Treasury Department says it will no longer be able to meet U.S. obligations. President Barack Obama says higher taxes on the wealthiest Americans should be on the table, while Republican leaders say they won’t agree to raise the ceiling if tax increases are used to reduce the deficit.

The stakes in this deficit debate are higher than in the past because the Congressional Budget Office forecasts that the ratio of debt to gross domestic product will rise to 100 percent from 70 percent, while previously there was an expectation that the deficit would decline in four or five years, Feldstein said.

“This is really a disastrous fiscal outlook,” he said. “What they’re talking about -- say, a trillion dollars of spending cuts -- sounds like an enormous number. Yet in reality it’s just a small part of the increase in the national debt that’s currently coming at us.”

Falling home prices and weakening consumer confidence are weighing on the recovery as well, said Feldstein, who also criticized the Democratic-backed 2009 fiscal stimulus as “badly designed.”

The housing market is “an enormous drag on the economy,” Feldstein said. The S&P/Case-Shiller index of property values in 20 cities fell 4 percent for the year ended April 2010, the biggest decline in 17 months, the group reported on June 28.

Separately today, a report showed confidence among U.S. consumers dropped more than anticipated in June, according to the Thomson Reuters/University of Michigan final index of consumer sentiment.

--Editors: Scott Lanman, Kevin Costelloe

To contact the reporter on this story: Jillian Berman in Washington at jberman13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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