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Glenn Hubbard: Tax Reform Could be Next for Dysfunctional Washington

By Daniel Gross

The debt ceiling debate was resolved with a deficit-reduction package that consisted entirely of spending cuts. No tax increases, no closing of loopholes, no ending of tax credits, no cracking down on tax expenditures. So what should we look forward to in the coming year and a half? Probably some higher taxes. That's what Glenn Hubbard, dean of the Columbia University Business School and former Chairman of the Council of Economic Advisers in the first George W. Bush administration, suggests in our interview. I largely agree, but disagree about the form.

Hubbard is a conventional, non-Tea Party Republican economist. Like most of his colleagues, he believes that the U.S. has more of a spending problem that it has a taxing problem. "If you look at CBO's long-term budget office, you'll see a rising revenue to GDP share, but an exploding spending share," he said. And while he's not seeking to undo expensive Bush administration legacies like the Medicare prescription drug benefit, Hubbard believes the Bush-era income tax cuts should be regarded as something close to sancrosanct.

"It's okay for taxes to be part of the solution, but anything that would raise marginal tax rates would weaken growth," he said. (Which is pretty much what every Republican-leaning economist told me in 1993 when the Clinton administration and a Democratic Congress proposed raising tax rates on high earners.) A healthier economy would generate more taxes, Hubbard says, but so would a healthier, more rational tax code. Which is why Hubbard favors comprehensive tax reform that would simplify rates, eliminate loopholes, and crack down on some of the expenditures that have grown to massive proportions. "A political solution to raise taxes is a fine idea, if that comes from raising average tax rates, not marginal tax rates."

Of course, this is something of a dodge. Hubbard acknowledges that going after tax expenditures (the panoply of tax credits that corporations enjoy, the home mortgage deduction, etc.) " is politically very difficult to do." What's more, we have a situation where one of the parties refuses to sign off on anything that would result in more taxes being collected. During the recent debt-ceiling negotiations, every time the discussion turned to tax expenditures, higher tax revenues, etc., the Republicans essentially walked away from the table.

Still, Hubbard remains sanguine about the prospects for tax reform — in large measure because all the Bush-era tax cuts are slated to expire at the end of 2012. For Democrats, this would seem to represent an opportunity. Simply doing nothing would result in taxes rising — especially on high earners — and thus generating large amounts of revenue that would help reduce the deficit. And Washington as it is currently figured specializes in doing nothing. But Hubbard notes that he doesn't expect President Obama to embrace such a strategy. After all, the tax rates on all earners, including middle-income Americans would rise. The Republicans want all the Bush tax cuts to remain in force, while the Democrats want most of them to remain. The desire to avoid a change in marginal tax rates, Hubbard argues, will push both parties to the table. "I see the likely outcome, is that both sides have to give and we have to start talking about fundamental tax reform."

I wish I could share Hubbard's optimism. Grand bargains aren't exactly in vogue. If there's one thing today's Republicans like less than making mutually beneficial deals with Democrats, it's raising taxes on anyone — in any way, shape, or form.

Daniel Gross is economics editor at Yahoo! Finance

email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm