Mundell: Tax Hike Will Cause Recession

Mundell: Tax Hike Will Cause Recession

Wednesday, July 16, 2008 1:57 PM

Nobel Prize winner and Columbia University economist Robert Mundell, a principal contributor to the creation of the euro, says that ending the Bush tax cuts ?- as proposed by presumptive Democratic presidential nominee Barack Obama ?- would cause "a big recession, a nosedive."

In an interview with The Wall Street Journal, Mundell said, "the most important thing that could be done with respect to tax rates is to make the Bush tax cuts permanent."

Mundell, an expert in many areas of economics including the proposition that low taxes stimulate an economy, also provided the intellectual groundwork behind the Reagan tax-cut revolution.

The Reagan-era tax cuts ?- the so-called "supply-side economics" approach to encouraging economic growth ?- were "as important to the United States as the creation of the euro was to Europe ?- a fundamental change," Mundell says.

Of the long list of financial woes afflicting the U.S. and global economies, Mundell says "the big issue economically ... is what's going to happen to taxes."

Abruptly raising taxes could be "lethal," according to Mundell.

"This would be devastating to the world economy, to the United States, and it would be, I think, political suicide," says Mundell.

U.S. tax rates fluctuated wildly throughout the 20th century, Mundell points out, with income tax at 3 percent in 1913, up to 60 percent during World War I, to a top rate of 92.5 percent at the height of World War II.

Taxes were cut to 28 percent under Reagan, then bounced up again to just under 40 percent during the Clinton administration, and they were then cut once more to where they are now under George W. Bush.

Making the Bush tax cuts permanent would eliminate economic uncertainty, Mundell says, and "would be more important than pushing for a further cut ... in the income tax rates."

An ideal rate, according to Mundell, would be a 30 percent ceiling on marginal rates, which he advocates. That would be 5 percent lower than the current 35 percent top rate.

To further stimulate the economy, Mundell would cut the corporate tax rate to 25 percent. "It could be even lower ... I made that proposal back in the 1970s."

Turning to an issue which now plagues so many Americans ?- the $4 or more per-gallon price of gasoline at the pump ?- Mundell says, "I really think the price is going to settle down, probably below $100, if not below $90."

To support his prediction of a pullback in oil prices ?- and therefore gasoline prices ?- he cites oil prices in 1980, which stood at about $34 a barrel.

"Oil prices [from 1980] would naturally double by the year 2000 ... And then...because the inflation rate's about 3.5 percent, it would double again by 2020. So the natural price ... would be something like $136 in 2020."

Always the visionary, Mundell advocates a revolutionary cooperation between the U.S. Federal Reserve and the European Central Bank to establish a permanent top and bottom on the euro and the U.S. dollar, with a predetermined and limited trading range.

Beyond that, Mundell says, quoting former Fed chairman Paul Volcker, "the global economy needs a global currency."