Economists see higher taxes as way to cut deficit

March 26, 2012 - 6:25 AM

NEW YORK (AP) — Economists say a combination of higher taxes and lower spending is the best way to reduce the federal budget deficit.

A survey on economic policies conducted by the National Association for Business Economists released Monday also forecast that short-term interest rates would remain at current levels for at least another year.

The economists say the Federal Reserve should not buy more bonds to support and stimulate the economy, as it has in the last few years, even though the policy has been effective. With the economic recovery strengthening, the economists say the Fed doesn't need to buy more bonds this year. The Fed began buying Treasury bonds during the recession after the 2008 financial crisis to try to lower long-term interest rates and help jump-start the economy.

In an election year, the growing U.S. federal deficit has drawn heightened partisan debate in Congress over spending and taxes with not much resolution in sight. The deficit is on pace to exceed $1 trillion for the fourth straight year. The gap worsened during the Great Recession when tax revenues plummeted after millions of people lost their jobs and corporate profits fell.

An overwhelming majority in the NABE poll — 87 percent — said higher taxes should be considered along with less spending to reduce the federal budget deficit.

Over 70 percent want tax reform. The economists were evenly split between those who oppose or support the so-called "Buffett rule," named for billionaire Warren Buffett, under which the average tax rate for families earning over $1 million would be set at a minimum of 30 percent. More than two-thirds favored the extension of payroll tax cuts through 2012.

The economists were also polled on other hot-button topics, including the Keystone oil pipeline and new regulations like the Volcker rule that affects banks.

An overwhelming majority of economists, or 83 percent, believe the Keystone pipeline should be built. The State Department, backed by President Barack Obama, rejected one proposal to build the pipeline that would carry tar sands oil from Canada to refineries in Texas. The project drew opposition from environmentalists, while supporters say it will create over 1,000 jobs.

About two-thirds of the economists in the NABE survey think that banks should not be allowed to trade with their own money to bet on financial markets. The new rule, named after former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act in an effort to restrict risky trading by banks. Such trading was a source of large profits for the banks prior to the financial crisis. Critics like Volcker have said that kind of trading could lead to spectacular losses that jeopardize the nation's financial system.

The NABE survey was conducted between Feb. 15 and Mar. 6. A panel of 259 members of the National Association for Business Economics participated.