Big Deficits Mean Higher Taxes

Federal Reserve Chairman Alan Greenspan told Congress on Thursday that he expects higher taxes as part of a bipartisan agreement to bring the federal deficit under control.

“I don’t doubt, at the end of the day” that taxes will go up in any plan to cut the federal budget deficit, Greenspan told the Senate Budget Committee.

But he quickly added that there is “no way you can raise taxes enough” to cover future spending commitments, including Social Security and Medicare. Greenspan warned that tax increases would hold down economic growth and made clear he would prefer spending cuts to tax increases.

Greenspan’s concession that taxes will be raised could factor into the debate on a tax and spending plan that Congress hopes to enact this year. Greenspan’s statement could be a counterweight to the proposal of Republican leaders to extend tax cuts set to expire and to fix new tax cuts.

Possibly providing ammunition to tax cut opponents, Greenspan said that his support for President Bush’s 2001 tax cut package played a part in turning the federal budget from surplus to record-setting deficits.

With Republican members of Congress declaring in 2001 that they had Greenspan’s support, Congress enacted a $1.35 trillion, 10-year tax cut plan. Democrats blame that cut for the rising deficits. Republicans contend that the cut helped the troubled economy and staved off a more painful downturn.

In his Capitol Hill appearance Thursday, Greenspan for the first time publicly defended himself against critics who put blame on him for the expanding deficits.

It is “frankly unfair” to blame him for the deficits, Greenspan said, because Congress decided to “read half my testimony and discard the rest.”

He said that tax cut advocates ignored his warning in 2001 that forecasts for higher surpluses might be wrong. Congress also ignored his proposal for “trigger” recommendations that would have limited the tax cuts if spending targets were not met and the deficit began to soar, Greenspan said.

Sen. Paul Sarbanes, D-Md., reminded Greenspan that he is well versed in how Congress works and should have been aware that Congress would skip the triggers.

“I plead guilty to that,” Greenspan said. “I did not intend it that way.”

Greenspan’s statement came during a Senate hearing called to look for ways to reduce the federal budget deficit, which reached $412 billion last year and is projected by the Congressional Budget Office to be $427 billion this year, and even more in the years ahead.

The Fed chairman urged policymakers to move quickly to reduce federal deficits.

He said the U.S. economy on the short term is “expanding at a reasonably good rate,” but that the outlook is dire over the long haul.

“The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years,” Greenspan testified.