WASHINGTON – Treasury Secretary Timothy Geithner said Wednesday that extending the Bush-era tax cuts for the wealthy would be a $700 billion mistake. He also rejected a compromise proposal that would extend the cuts for one or two years.
Geithner said cuts for families making more than $250,000 annually should be allowed to expire on schedule at the end of the year. But the administration believes tax cuts for the 95 percent of taxpayers making less than $250,000 should be extended, he said.
Geithner's comments came during a speech at the Center for American Progress and focused on what is likely to be a key economic battle leading up to the November midterm elections. Unless Congress acts, all of the tax cuts approved in 2001 and 2003 will expire at the end of December.
Republicans have argued that all of the tax cuts should be extended. They contend that raising taxes on any group at the current moment would be harmful to the economy.
Geithner said extending the tax cuts for the top 2 percent of taxpayers would cost $700 billion over a decade and $30 billion for a single year. He said wealthy families are more likely to save the money, which doesn't help the economy in the short run.
Geithner said allowing the tax cuts on the wealthy to expire would also help get the soaring deficits under control.
"Borrowing to finance tax cuts for the top 2 percent would be a $700 billion fiscal mistake," Geithner said. "It's not the prescription that the economy needs right now and the country can't afford it."
Geithner rejected the argument that all of the tax cuts, including those for the wealthy, should be extended for a couple of years.
He said the money spent on extending the tax cuts for the top 2 percent of taxpayers would not do that much to boost the economy because the wealthy would save a greater proportion of these savings than lower income households who would spend more of their tax savings, giving a boost to the economy.
He said the economy would get more of a boost by taking the $30 billion that extending tax cuts for the wealthy would cost for one year and providing increased aid to state and local governments or expanded help for small businesses.
He also said extending tax cuts for the wealthy could burden future administrations with a difficult decision.
"The world is likely to view any temporary extension of the income tax cuts for the top 2 percent as a prelude to a long-term or permanent extension," Geithner said. "That would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits."
In response to a question on China's currency, Geithner said what mattered was how far and how fast China allows its currency to rise against the dollar. He called the step the Chinese made in June of beginning to allow their currency to rise in value against the dollar as significant.
American manufacturers contend that the Chinese currency is undervalued by as much as 40 percent against the dollar and is a major factor in the large trade gap between the two nations. A weaker yuan makes American goods more expensive in China and Chinese goods cheaper in the United States.
Geithner noted that when China last allowed its currency to adjust in value, the yuan rose by about 20 percent against the dollar over a two-year period. Critics have complained that since the June announcement, the yuan has appreciated by less than 1 percent against the dollar.
"It's very hard to judge from the initial movement how far and how fast they're going to let it go," Geithner said. "What's important to us and I think to all of China's trading partners is they actually let it appreciate significantly in response to market forces."