WASHINGTON (Reuters) - Tax reform and infrastructure investment are essential to rebuilding the U.S. economy, former U.S. policymakers said on Wednesday.
Paul Volcker, who headed the Federal Reserve in the early 1980s, advocated bold steps to overhaul the taxation system for both corporations and individuals and it should be on a scale even more ambitious than the rate reductions seen in the 1980s.
“Very large changes are necessary. They need to be structural, they need debating, and this is the year to start the process,” Volcker told an economic summit sponsored by Atlantic magazine.
Larry Summers, who was U.S. Treasury Secretary in the late 1990s, called tax reform “the one thing that unites people right now.”
It is not only central to reducing the budget deficit and increasing growth, but also vital to economic fairness and social cohesion in a society that has largely lost faith in the political system, he said.
The richest 1 percent cannot expect a tax cut, and the U.S. budget deficit cannot be reduced by cutting spending alone. A creative approach to taxes must be part of the solution, he said.
“We should be open to every possibility,” Summers, a Democrat, said.
This would include considering a national sales tax, which liberals traditionally criticize as regressive because poor people consume more of their incomes than the rich, and conservatives reject as a cash cow that would fail to limit government spending.
Larry Lindsey, a Republican and former Fed governor, also said a value added tax should be on the table. “We need a combination of tax increases and spending cuts. But we need quality rather than quantity,” Lindsey said.
They all warned of the fiscal challenges the United States faces at the end of the year, when the Bush administration tax cuts are due to expire, the United States will hit its borrowing ceiling and deep spending cuts are due to take effect.
While tax reform as part of a budget overhaul is unlikely immediately after the November elections, Summers said progress needs to be made in crafting solutions.
Robert Rubin, who also served as U.S. Treasury Secretary in the Clinton administration, said he thinks there is a realistic chance that Republicans and Democrats after the election would be ready to strike a bipartisan accord on the budget deficit and taxes.
The former government officials also pressed for more investment in U.S. transportation, energy and information systems, which some studies show return over $1.40 to GDP for every $1 invested.
“Infrastructure has to be part of the solution,” Volcker said.
Reporting By Stella Dawson