(Updates with comments by Greenspan and other witnesses starting in fifth paragraph.)
Sept. 13 (Bloomberg) -- Economic growth is likely to be slow for years, increasing pressure on Congress to cut entitlement spending, former Federal Reserve Chairman Alan Greenspan said in remarks before a Senate panel.
“There is no credible scenario of addressing our current fiscal problems without inflicting economic pain,” he told a Senate Finance subcommittee today.
The former Federal Reserve Board chairman said his preferred option for addressing the U.S. budget deficit is a plan put forth by House Budget Committee Chairman Paul Ryan, a Wisconsin Republican. Greenspan told the Senate panel that because Ryan’s plan lacks votes for passage, Greenspan prefers a proposal from the Simpson-Bowles deficit-cutting commission, which addresses the deficit by ending tax breaks as well as through spending cuts.
“I do not know if whether a U.S. budget crisis is immediately on the horizon or is years off,” Greenspan said. “What I do know is that if we presume that we have a year or two before starting serious long-term restraint, and we turn out to be wrong in that optimism, the impact on financial markets could be devastating.”
Greenspan said the federal government needs more revenue and he recommended allowing the Bush-era tax cuts to expire.
2001 Tax Structure
He urged Congress to “go back to the tax structure that existed in 2001.”
President Barack Obama has proposed allowing the tax cuts for those with incomes of more than $250,000 annually to expire at the end of 2012 as scheduled. Greenspan emphasized that “all of the Bush tax cuts” should be rescinded.
While other panelists spoke about various ways to change the tax code, Greenspan underscored the importance of tackling the federal budget deficit.
He cautioned against worrying about whether reformulations of the corporate tax code should be revenue neutral without reducing the deficit. “It is essential that we get the level of the deficit down as quickly as possible,” Greenspan said.
Another witness before the Senate subcommittee, Harvard University professor Martin Feldstein, echoed Greenspan in urging lawmakers to overhaul entitlement programs. Feldstein was a chief economic adviser to President Ronald Reagan.
‘Gradually’ Reduce Benefits
“The key to those reforms is to reduce gradually the growth of the projected government benefits and to supplement those government benefits with universal investment-based annuities and health spending,” according to Feldstein’s prepared remarks.
Feldstein said lawmakers should lower individual tax rates by reducing tax breaks, which, he maintained, have led to wasteful behavior such as overspending on housing.
Lower tax rates would free money for education, savings and starting businesses, Feldstein said.
He also recommended allowing individuals to use all currently available tax expenditures “but to limit the total tax benefit each individual can get from those tax expenditures to a percentage of that individual’s adjusted gross income.”
Feldstein said he disagreed with the revenue components of Obama’s jobs package because they fall disproportionately on high earners. In addition, money raised by eliminating tax expenditures should be applied to deficit reduction, he said.
Senator Bill Nelson, a Florida Democrat who is chairman of the subcommittee, said an overhaul of the tax code is crucial to improving the economy.
“If that means lowering tax rates, eliminating tax expenditures and other loopholes, and simplifying the tax code, then so be it,” Nelson said in his opening statement.
Nelson said Congress needs to address “250 entitlement programs cooked into the tax code” in the form of tax credits, deductions and exclusions. They “are entitlement programs pure and simple,” Nelson said.
Congress enacted 158 new tax expenditures since the last major overhaul of the U.S. tax code in 1986, Nelson said.
--Editors: Jodi Schneider, Laurie Asseo
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