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Sat, Feb 19, 2005 - Page 12 News List

Greenspan may propose raising taxes

DEFICIT The Federal Reserve chairman's change of heart on tax hikes indicates a growing uneasiness with US President George W. Bush's fiscal policies, analysts said

BLOOMBERG

US Federal Reserve Chairman Alan Greenspan said rising US deficits may have to be addressed with a move he hasn't favored in the past: tax increases.

Greenspan, in testimony before the House Financial Services Committee on Thursday, said he didn't rule out raising taxes to rein in a deficit the Bush administration says will reach US$427 billion in the fiscal year ending Sept. 30, topping a record US$412 billion last year.

"You're going to have to increase taxes or reduce spending somewhere if we're going to keep the deficit under control," Greenspan said.

In past appearances before congressional panels, Greenspan has expressed a preference for spending cuts to balance the budget. His willingness to consider tax increases indicates a growing uneasiness with US President George W. Bush's fiscal policies, said Barry Bosworth, senior fellow at the Brookings Institution, a Washington-based policy research group.

"Since Bush has come in there is just a complete breakdown in the budget process," Bosworth said. Greenspan has "got to be getting alarmed."

Bush's plan to set up private Social Security accounts by borrowing as much as US$2 trillion is adding to the chairman's concern, Bosworth said.

"What I think has really got Greenspan nervous is that you will just borrow the money to make up for the privatization of Social Security," he said.

In testimony on Thursday and Wednesday before House and Senate panels, Greenspan praised private accounts while cautioning they should be phased in gradually to gauge the reaction of financial markets to the increased borrowing that would be required.

Greenspan's libertarian roots orient him toward spending cuts and smaller government, said Mickey Levy, chief economist at Bank of America Corp.

"He is saying, `If you have to adjust the tax structure somewhat to get the necessary adjustments, then, OK, do it now,"' Levy said. "But when push comes to shove, he would avoid relying heavily on tax hikes."

Greenspan aired his views on tax increases in discussing Bush's proposal to extend the US$1.85 trillion in tax cuts that were approved in 2001 and 2003. Greenspan said on Thursday that he would support making the 10-year cuts permanent on a "pay-go" basis, which requires Congress to offset spending increases or tax cuts with new revenue. He previously stressed a preference for spending cuts.

"I argued a year ago that my support for the tax cuts is in the context of a pay-go rule," Greenspan said during his semiannual testimony to the House committee. "Looking out beyond, say 2008, the problems we have with the budget deficit are huge, and therefore, we need very significant changes to come to grips with those issues."

Greenspan said the US needs to cut the deficit to prepare for the anticipated retirement of 30 million baby boomers who will receive Social Security and Medicare benefits.

Cutting the deficit would help boost national savings, or the total savings of individuals, companies and the government.

That money can be used in turn for capital investment to help a smaller workforce provide for the growing number of retirees.

Democrats on the committee unsuccessfully pressured Greenspan to oppose the tax cuts because the Bush administration and congressional Republican leaders have resisted the pay-go rules.

"I would think that you as a fiscal conservative would be sounding the alarm," said Representative Maxine Waters of California.

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