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Giving Her Two Cents’ Worth

Rosanne Altshuler
"Right now," says Rosanne Altshuler, "for every dollar we spend, we borrow 40 cents. And we’re on a path to have public debt hit 90 percent of gross domestic product [GDP] by 2020." Photography by Nick Romanenko

Rosanne Altshuler resists pigeonholing. A registered Democrat, she served as chief economist on a bipartisan advisory panel on federal tax reform formed by president George W. Bush. Although she believes changes to Social Security and Medicare are both necessary and overdue, she thinks imposing austerity measures now could deepen the current recession.

Along with teaching and scholarly work, Altshuler, chair of the Department of Economics in the School of Arts and Sciences in New Brunswick, has spent time in the policy world, as director of the Urban-Brookings Tax Policy Center, a special consultant to the Congressional Joint Committee on Taxation, and as a consultant to the U.S. Treasury Department. This year she testified on tax policy before both the Senate Budget and the House Ways and Means Committees. She has taught at Columbia University, Princeton University, and New York University’s School of Law. Aware that she works in a field where dryly worded articles on tax policy can turn into gunpowder for political warfare, she is circumspect about proposals for taxing financial transactions and designing the tax system around the Buffett Rule. However, she has praise for Occupy Wall Street and demonstrators who are attempting to highlight the widening gap between rich and poor, even though she argues that “tax the rich” policies are not a panacea for the fiscal challenges the country faces.
— Steven Hart UCNB’92 

Rutgers Magazine: What should President Obama be doing, right now, to get the economy out of this recessionary spiral, and get people working again?

Rosanne Altshuler: That’s a tough one. We need to combine short-term stimulus with long-term deficit reduction, as President Obama has argued. But formulating a jobs plan is difficult. A lot of job losses have been in state and local governments and, as we know, in industries related to housing. Expanding and extending the payroll tax cut helps keep people spending and props up demand. That’s good for the economy. And sending aid to state and local governments is critical right now. I support his ideas, but we need more. What might be most important of all is providing leadership to get Congress to pass a credible plan that shows that we are prepared to face the long-run fiscal challenges ahead.

RM: Income inequality is very much in the national spotlight, thanks to Occupy Wall Street and its sister demonstrations across the country. And it is bound to be a big issue as the presidential election gets under way. What do you make of it?

RA: I find it to be a very interesting movement. It is really grassroots and a real counterpoint to the Tea Party. Some have criticized the protesters for not having specific policy recommendations. To me, they are simply making a point: that income distribution has become increasingly unequal and should be addressed by government policies.

RM: And yet you are skeptical of the idea that raising taxes on the rich can solve the nation’s budget problems.

RA: Right now, for every dollar we spend, we borrow 40 cents. And we’re on a path to have public debt hit 90 percent of gross domestic product [GDP] by 2020. The path we are on is simply not sustainable. We face a potential fiscal train wreck. The question is whether higher taxes on the wealthy alone can help put us on a sustainable budget path. The answer, of course, is that it depends on how many wealthy people there are, how wealthy they are, and the extent to which the higher taxes required of them will have an impact on the economy.

RM: But surely if we raise the taxes of those at the very top of the income distribution, we can make a dent in the budget while not hurting the economy.

RA: I wrote a paper called “Desperately Seeking Revenue” with colleagues at the Urban-Brookings Tax Policy Center. We looked at what rate hikes would be necessary to reduce the deficit to a sustainable 3 percent of GDP. We found that protecting low- and middle-income taxpayers from any tax increases would result in top rates that would stifle economic activity. For example, if families with income under $250,000 were protected, the top two rates would need to double from their current 33 and 35 percent rates to 66 and 70 percent. And we didn’t take into account any behavioral effects those at the top would have if their marginal tax rates doubled. Tax rates would have to be even higher if changes in taxpayer behavior in response to the increased rates were factored into the analysis.

RM: So, what do we do?

RA: We need to admit that simply increasing statutory marginal income tax rates on the rich within our current system is not a realistic approach to reducing the deficit. Changes must be made to the tax base if we hope to raise any additional revenue from the income tax system. We need fundamental tax reform.

RM: What does changing the base mean? What does it involve? And who does it hurt?

RA: It means eliminating a lot of tax breaks that are currently sacred cows. We cut back or eliminate the residential mortgage interest deduction. We tax your employer-related health benefits. We don’t allow you to take deductions for state and local taxes. We end up increasing the middle-class tax burden as well as the tax burden of those at the top of the income distribution. This type of reform would not only raise revenue; it would simplify the system, increase transparency, make the system less distorting by both allowing for a lower rate and reducing tax-induced biases toward certain activities, and, ultimately, improve the fairness of the system. Although politically difficult, this type of reform follows a wave of similar base-broadening, rate-reducing tax reforms that have been enacted in developed nations over the past 20 years. Most economists recognize that both the middle class and the rich will have to pay more or give up benefits in the future, or both.

RM: You were appointed chief economist to President Bush’s Advisory Panel on Federal Tax Reform, which proposed many of these reforms in 2005. What happened?

RA: Hurricane Katrina really did us in. After the collapse of his push to change Social Security and the botched response to the flooding of New Orleans, the president didn’t have enough political capital to advance tax reform. Our proposals were quietly shelved but not forgotten. Recent fiscal commissions have been taking our report off the shelf and using it to form their plans. The National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Tax Force reports borrowed many of our ideas. •