Tax hikes likely to hit middle class

Middle-class taxpayers likely will face a wide swath of tax increases in the years ahead, according to economists at The Brookings Institution. "We're going to have to raise taxes more broadly" in order to pay for the massive debt the U.S. is taking on to stimulate the economy, said economist Martin Baily, a senior fellow and director at Brookings. Mr. Baily, who was chairman of President Clinton's Council of Economic Advisers, delivered his remarks April 20 at a conference at the Washington-based think tank. Some panelists speaking at the conference, which was attended by about 200 people, suggested that the government may have to resort to a value-added tax to raise revenue. Popular in Europe, a value-added tax is basically a consumption tax that is levied on a product whenever value is added at a stage of production and at its final sale. If a VAT were adopted in the United States, it most likely would be used to keep a lid on income tax hikes, said Robert Litan, a senior fellow at Brookings. Otherwise, taxpayers would likely balk at income taxes used for funding government bailouts on Wall Street, he said. "I think if we ever get a VAT, it will be on a revenue-neutral basis and will reduce the income tax," not be used for supplemental revenue, Mr. Litan said. That said, speakers at the conference generally agreed that the government will need to commit substantially more resources to bailing out troubled U.S. banks. Particularly worrisome is the fact that many adjustable-rate mortgages are about to reset, said Glenn Hutchins, co-chief executive of Silver Lake Partners, a venture capital firm in Menlo Park, Calif. "Economically, there could be real tragedy," said Mr. Hutchins, who was an economic adviser to former President Clinton. During a question-and-answer session, Mr. Hutchins asked whether the political push that began during the Clinton administration to extend mortgages to less creditworthy homebuyers may have contributed to the credit crisis. Franklin Raines, the former chairman and chief executive of Fannie Mae of Washington, disagrees. "The losses aren't happening from somebody who's an auto-worker and who wanted to own a home and bought a $129,000 home in Canton, Ohio," he said. "The crisis is coming from people who were either investors or who essentially were not creditworthy or were not telling the truth in the origination process." E-mail Sara Hansard at [email protected].