Hearing of the House Budget Committee - Congressional Budget Office's Long-Term Budget Outlook

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REP. PATRICK T. MCHENRY (R-NC): Thank you, Mr. Chairman.

Dr. Orszag, I appreciate your editorial from yesterday and I know it's been referenced, but is there a such thing as a prohibitive tax rate, a tax rate that reduces productivity, that stagnates the economy? Is there a such thing as a prohibitive tax rate?

MR. ORSZAG: I think everyone would agree 100 percent would have a very negative effect on incentives.

REP. MCHENRY: Okay, but short of that?

MR. ORSZAG: Sure. The question becomes where the line is, and as tax rates rise, especially marginal tax rates, the distortions to incentives become more severe. I don't know that I can give you a, you know, cliff where the world falls apart as opposed to it just becoming gradually more severe.

REP. MCHENRY: But a jump in tax rates -- for instance, taxes that may go up 50 percent, does that have a harmful effect on the economy and productivity?

MR. ORSZAG: An increase in marginal tax rates does harm incentives and does negatively affect productivity. On the other hand, one does need to think about what that's financing. And to the extent it's reducing a deficit, there is a corresponding economic benefit from eliminating that deficit.

And actually, CBO's analysis suggests that the most important thing is to get rid of the deficit, and exactly how you do it is typically of less consequence than the economic impact of allowing the kind of runaway deficits that are present under the alternative fiscal scenario.

Or another way of putting it is you typically don't get effects on future national income by 2050 of 25 percent, which is the impact of the additional debt under the alternative fiscal scenario, from any plausible way of trying to close that gap.

REP. MCHENRY: Okay. All right. So my next question is going to be about the debt -- deficit -- but you've already touched that; very good.

But going to the debt, you know, we know that the deficit has an enormous multiplying effect on the debt; we're adding to the debt every day when we have a deficit. Thereby, if we balance the books, the debt scenario long-term is less harmful. What is the effect of long-term debt, of our long-term national debt?

MR. ORSZAG: Yeah, additional debt has a harmful effect both on the accumulation of productive investment at home -- that is, like, investment in computers and physical plants and equipment -- and also in terms of how much we borrow from abroad and the liability that we then owe to foreign creditors.

REP. MCHENRY: Okay. Well, certainly, I know that as a fact, but in terms of productivity, what does our tax structure, our structural deficit and our debt do to productivity in this country? And what can we do to actually increase productivity and investment in increasing productivity?

MR. ORSZAG: The best single thing that we can do to increase future national income and therefore productivity and income growth between now and the future is to increase our national saving rate, and part of that has to do with improving the nation's fiscal balance -- the federal and state and local side of things.

Part of it also has to do to encouraging private saving. And I think I mentioned at a hearing last week, there is a growing body of research about what works to get households to save, and a lot of it has to do with making it easy and automatic for them to do so.

REP. MCHENRY: Easy and automatic, and perhaps eliminating the tax code disincentives that we currently have on savings.

MR. ORSZAG: There is some effect from --

REP. MCHENRY: Tax policy?

MR. ORSZAG: -- after-tax rates of return and tax policy. The research that I'm familiar with suggests a far larger and more dominant factor really has to do with ease and simplicity, so things like being automatically in a 401(k) plan unless you opt out, trying to explore whether that's possible in an IRA setting, and other things like that so that households are doing what they want to do automatically and it's easy for them to do so.

REP. MCHENRY: But certainly a secondary, you would have to admit, is tax policy.

MR. ORSZAG: The rate of return and the after-tax rate of return also does affect saving, yes.

REP. MCHENRY: Okay.

MR. ORSZAG: The question is just the magnitude, but yes.

REP. MCHENRY: The magnitude is the question.

MR. ORSZAG: Right.

REP. MCHENRY: Okay. Well, is there a such thing as raising taxes so much that federal revenue will go down? For instance if we raise taxes in such a large way that the economy stagnates and thereby more people are on unemployment and not working and thereby not paying taxes, is that a prospect that we have to be concerned about?

MR. ORSZAG: That is a theoretical possibility. I think all of the available evidence and analysis suggests we're not currently anywhere close to that threshold.

REP. MCHENRY: Well, we're not currently, but you would have to say if we increase taxes in a massive way that is one of the possibilities.

MR. ORSZAG: Again, I would say it is a theoretical possibility, but it doesn't seem that we're --

REP. MCHENRY: Theoretical possibility.

MR. ORSZAG: We're not close to that in reality currently.

REP. MCHENRY: Currently. But then again, we have not raised taxes currently, and the tax code is set in place for another two years.

MR. ORSZAG: That's correct.

REP. MCHENRY: Thank you.

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