U.S. heavyweights trade jabs over fiscal cliff

WASHINGTON — The Globe and Mail

The U.S. Capitol Dome is seen behind the entrance to the U.S. Senate on Capitol Hill in Washington. (LARRY DOWNING/REUTERS)

Two wounded lions of the U.S. political centre-left and political centre-right published roadmaps for avoiding the fiscal cliff Tuesday. It will come as little surprise that they disagree.

Writing in the Financial Times, Glenn Hubbard, dean of the Columbia Business School and adviser to failed presidential candidate Mitt Romney, says cliff negotiators should start by raising the “average” tax rates of upper-income taxpayers.

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Prof. Hubbard is providing intellectual backing for Republican House Speaker John Boehner, who is attempting to reorient his party to accepting that narrowing the budget deficit will require increased revenue. The Columbia professor also is further clarifying what is emerging as the Republican concession to the Democratic Party’s desire to force the rich to pay more taxes. He says negotiators should leave individual tax rates alone and instead limit wealthier taxpayers’ access to the tax code’s plethora or deductions.

“There are ways to raise revenue without increasing marginal rates,” Prof. Hubbard writes. “Tax deductions should be scaled back, especially in the areas of mortgage interest, charitable giving and employer-provided health insurance.” He endorses the idea of capping deductions as a percentage of income as a “good place to begin.”

Enter Robert Rubin, the treasury secretary who oversaw former president Bill Clinton’s budget-balancing act in the 1990s.

Mr. Rubin, a mentor to current Treasury Secretary Timothy Geithner, writes in The New York Times that cutting off the rich from tax breaks won’t raise enough money to solve Washington’s budget problems. He cites a paper by the Congressional Research Service that says politicians realistically could gain $100-billion (U.S.) to $150-billion in additional revenue by reducing tax breaks because most are too popular to eliminate. That’s a start, but not enough to narrow a budget deficit that exceeds $1-trillion. Mr. Rubin says the marginal rates paid by the richest Americans should be allowed to revert to Clinton-era levels and that suggesting the deficit can be eliminated simply by tinkering with tax breaks is fantasy.

“If we invest too much time and effort pursuing plans that ultimately prove undesirable and unworkable, we may go down a road that leads nowhere,” Mr. Rubin says.

Mr. Rubin isn’t the force he once was, as Bloomberg Businessweek documented earlier this year. He was mostly invisible before, and during, the financial crisis even though he was highly paid senior executive at Citigroup, which was saved by a massive government rescue.

Still, he retains influence in the Democratic Party, as he groomed several of President Barack Obama’s economic advisers. Just as Prof. Hubbard provides important backing for Mr. Boehner, Mr. Rubin will bolster the position of Democratic lawmakers who oppose giving ground on their campaign promise to make the rich pay higher tax rates.

Prof. Hubbard and Mr. Rubin agree that there will have to be significant spending cuts, including an overhaul of entitlement programs such as Medicare. That suggests common ground. However, their fundamental disagreement over marginal tax rates heralds a difficult negotiation, explaining why most expect it will take weeks to sort out an issue that both sides say they want to fix urgently.

Prof. Hubbard, backed by research, maintains that raising tax rates on the rich will hurt the economy. Mr. Rubin, backed by research and his experience in the Clinton administration, says that is rubbish.

Who’s right? Who knows? But over the next few weeks, one of these lions will emerge with a certain amount of pride restored, while the other will be left further wounded.