"I think attempting to bludgeon China is a very risky course," is how Larry Summers, President Clinton's final Treasury secretary and former president of Harvard University, analyzed—in a chat with me this week—the wisdom of congressional attempts to push Beijing into quickly raising the value of its currency vs. the dollar in hopes of reducing America's massive trade deficit. Summers is currently working with his cabinet predecessor, Robert Rubin, to keep alive the embers of Clintonomics—balanced budgets, open trade—through the Hamilton Project, a public-policy initiative sponsored by the Brookings Institution.
Trade is major issue with the project, as is reforming the tax code to better meet the challenges of globalization. In a new paper on tax policy, coauthored with Jason Furman, the project's director, Summers advocates repealing the 2001 and 2003 Bush tax cuts—"at minimum"—to supposedly make the code more progressive, under the assumption that globalization is contributing to growing income inequality in America. Summers also explores the possibility of making tax increases on the rich automatic to ensure a certain level of income equality. An additional option is layering a value-added tax on top of the current income tax system to pay for universal health insurance.
Summers also wants to consolidate all the various education and child tax credits. Another idea: The Simple Tax Return, devised by economist Austin Goolsbee, where the IRS would basically do your taxes for you—if you preferred—using info from employers and financial institutions. Here are choice bits from my chat with Summers:
Are we asking too much of the tax code, to both raise revenue and solve various social issues?
The purpose of the tax system is to raise revenue in the best possible way, but you have to be aware of the changing economic context. At a moment like the present when inequality has increased very dramatically, it means that being smart about the tax code means making adjustments in the direction of increased progressivity. So I don't think we are asking too much of the tax code, given that we need to raise more revenue.
Does the tax code have an effect either slowing or quickening the pace of economic growth?
It does have an effect, and I think one has to be attentive to that, but I don't think anybody is going to talk about marginal rates in the 90 percent range, like we had after the Second World War, or in the 70 percent range, like we had in the 1960s and '70s.
Would the higher tax rates you're talking about slow the economy?
At a certain point [higher rates] matter, but I don't think there is any evidence that the Clinton increases had any adverse effect or that the Bush cuts had any beneficial effects, so I think to reverse [the Bush cuts] is almost certainly a good thing to do.
What about the current capital-gains-tax rate?
It is certainly not too high.
Why raise taxes when the economy is approaching a balanced budget?
That is a reflection of the economy, and with an aging of society, nobody thinks we are in a structurally comfortable position financially over the next quarter century, so I do think there is a clear need for more revenue, a clear need to do something about 46 million people without health insurance, and I think there is a clear need to strengthen the programs of education and retraining...And I think the evidence of the 1990s demonstrates that running budget surpluses is one of the best things you can do to push the economy forward.
What about congressional attempts to push China on the yuan?
I think attempting to bludgeon China is a very risky course, and I think we are better off addressing issues with China multilaterally, and I think we are better off engaging in dialogue than making demands...I think that is the right answer, and we don't have the prospect of bludgeoning them into anything else...And I think the effort to do so could be quite counterproductive.