Since Alan Greenspan became chairman of the Federal Reserve Board, the value of the dollar has declined by more than one-third. A dollar in 1985 is worth only 64 cents today. That is a record of colossal failure by the Fed to maintain a constant value of our currency.
Curiously, despite having presided over the failure to maintain a stable unit of account, Greenspan remains a revered figure in Washington. His advice and counsel are sought after by politicians on both sides of the aisle, not only on monetary policy, where the Fed has failed to maintain price stability, but also on tax and fiscal policy for which he has no legal or legislative responsibility.
That's why Greenspan could be so indelicate in telling Congress that either it must raise taxes or reduce spending because future deficits would threaten to slow the economy, which the Fed itself is going to make a self-fulfilling prophecy if it's not careful raising interest rates. The deficit ended up $100 billion smaller than the Congressional Budget Office projected it would be at the beginning of the year.
That's five times more savings than the congressional Joint Committee on Taxation says it would "cost" to maintain dividends and capital gains tax rates at their current levels for the next five years, even using JCT's crackpot static revenue-estimating model. The fact is, the cost of hiking these tax rates would be far greater than leaving them at current levels.
Greenspan said he'd like to see the Bush tax cuts extended but only if they are paid for. The fact is, they've already been paid for by higher investment, increased economic growth and higher revenues. The Treasury Department just reported that total revenues were up $275 billion last year, a 14.6 percent increase over the previous year. Of that revenue increase, $207 billion was accounted for by higher income taxes, 21 percent more than was collected in 2004.
If Congress does nothing and allows the tax rates on dividends, capital gains and investment in plant and equipment to revert to their pre-2003 levels, that's a tax increase. Only in the Alice-in-Wonderland world of Washington can maintaining tax rates at current levels be considered a tax cut.
The most costly thing Congress could do is raise tax rates on dividends, capital gains and capital investment today because the deficit might explode tomorrow. Congress should not allow the Fed chairman's economic night terrors about future deficits to guide the nation's current tax policy.