A key member of the White House economic team is throwing cold water on a leading compromise proposal in the debate over the extension of the Bush tax cuts for the wealthy.
In a sit-down with the Huffington Post on Monday, Jared Bernstein, Vice President Joseph Biden's chief economist, expressed skepticism with a plan to "phase out" the tax cuts for the wealthy as opposed to simply allowing those tax cuts to expire (as scheduled) later this year.
"There are many good reasons not to extend the high-end parts of the Bush tax cuts having to do with the fear that a temporary extension could be made permanent," Bernstein said. "What you are talking about -- a $30 to 40 billion range in terms of adding to the deficit by extending the high end -- could easily become $700 billion over a ten-year budget window."
"I think the phase out suffers from that vulnerability," he went on. "You are exposing yourself to the risk that it could be made permanent. The president, [Treasury Secretary] Tim Geithner have been very articulate on this point. If you wanted to, and we do, provide more help to the economy that is about the worst way you could do it. Those folks tend not to be liquidity constrained and therefore the kinds of multipliers associated with that type of spending are the lowest. So it simply is not good stimulus policy and it is not good budget policy."
The comments from Bernstein were offered, in part, as a response to a proposal suggested by Moody's economist Mark Zandi. A former adviser to Sen. John McCain who has increasingly become a philosophical ally of President Obama, Zandi has suggested that an abrupt increase in the tax rates on those making over $200,000 a year would have a freezing effect on job creation and economic recovery. Simply not raising the rates, however, would blow a massive hole in the federal budget. As a compromise, Zandi argues, the government should gradually reinstate the higher tax rates over the course of several years.
The White House has favored letting the Bush tax cuts on the wealthy expire as they are set to do under the law. But administration officials haven't been pressed about the middle-ground proposal. Bernstein's comments are the closest that White House aides have come to fully rejecting the idea and they portend an even more dramatic and heated political fight once the issue of the Bush tax cuts re-emerges following Congress' August recess.