Fed Officials Warn Against Push for Tax Cuts Over Real Reform
October 18 2017 - 12:37PM
Dow Jones News
By Michael S. Derby
NEW YORK -- The leaders of the Dallas and New York Federal
Reserve banks warned Wednesday that any overhaul of the tax code
that emphasizes deficit-boosting tax cuts over making the system
more efficient could bring short-term gain but lead to long-term
pain.
Robert Kaplan of the Dallas Fed and William Dudley of the New
York Fed spoke at an event in New York about economic issues in
their districts and the nation as a whole. The officials reiterated
that they see a positive path for the economy, while staying
relatively quiet about monetary policy.
"We are a long way from tax reform," Mr. Dudley said. "If we
would be able to lower the corporate tax rate and broaden the
base," as well as make the system more efficient, "that would be
good for the United States" and help the economy over the long
haul.
But tax cuts alone wouldn't be a good idea, the officials
agreed.
"If it's a short-term stimulus, or basically a tax cut funded by
growth in the deficit, I actually think that could be harmful," Mr.
Kaplan said.
"We are either at full employment or are nearing full
employment, and my concern is that if we do a tax cut financed by
increasing the debt, the deficit, we'll get the short-term up and
then come right back down to trend growth, and when it's over,
we'll be more highly leveraged than we were before," he said.
Mr. Dudley agreed that government debt levels under a
tax-cut-only shift likely would become harder for the government to
pay for.
"I'm actually concerned people aren't talking about it more,"
Mr. Dudley said of what it costs to service the nation's debt.
Today's low interest rates have made it less expensive, but that is
likely to change as the Federal Reserve presses forward with rate
increases.
Debt service costs "are going to start to ramp up as the Fed
continues to raise short-term interest rates. Investors right now
aren't focused on debt service burdens anywhere in the world...That
could change quickly," Mr. Dudley said.
President Donald Trump and GOP leaders last month proposed
sharply reducing tax rates on businesses and many individuals,
kicking off a major legislative push to overhaul the nation's tax
code this year.
Steve Rattner, a former Obama administration official and
investor, reacted to the Fed officials' comments by saying: "On the
tax side, what I think I heard both of you guys say is that you
don't like the president's proposal."
Mr. Dudley denied that, while Mr. Kaplan said, "We didn't say
that, but you can draw that conclusion."
Critics say the tax plan would boost the nation's deficit, but
the Trump administration says the plan would generate enough
economic growth to offset the cost.
While Fed officials have no official role in setting tax policy,
the choices made by elected leaders can affect the economy's
trajectory and how central bankers set interest-rate policy.
The officials' comments on the economic outlook and monetary
policy were limited. Both were upbeat about growth and said they
saw no reason why it shouldn't continue. Mr. Dudley expressed
surprise at the weakness of inflation but added he still expects it
to rise.
Speaking with reporters after the event, Mr. Kaplan said he
needs to see data showing the potential for a rise in price
pressures to support another rate increase.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
October 18, 2017 12:22 ET (16:22 GMT)
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