Larry Summers on Corporate Taxes, Obamacare, and Long-Term Deficits

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Larry Summers, a former Treasury secretary, Harvard president, and front-runner to take over the Federal Reserve before bowing out this fall, was interviewed at The Wall Street Journal CEO Council in Washington, D.C., this week. 

Here's my partial transcript of his remarks, lighted edited for clarity.  

On getting rid of the corporate repatriation tax: Say you have a library with lots of overdue books. There are a few things you can do. One, have an amnesty, where you wave all fines. That could make sense. Or you could say, we'll never have amnesty, and tell people to bring back your books because you're not going to get amnesty, ever. That's harsh, but it could also make sense. The idiotic thing to do is put sign on door saying, no amnesty now, but stay tuned, maybe we'll have one next month. That's the dumbest thing to do.

But our tax debate for the last five years has been exactly that. There's a constant hope of a repatriation tax holiday in the future. Why would any company bring back money in the face of that? We should have a territorial tax system, eliminating the distinction of repatriated profits and non-repatriated profits, and establish a minimum tax on global income. Fifteen percent, say. You pay that whether you bring it back or left it in Ireland, so there's no longer an incentive to keep money offshore.

The biggest business growth of the last decades has been in China and places like that. But the biggest income growth has been in Ireland and the Cayman Islands. It shouldn't be that way. It doesn't make anyone more competitive to have it that way. 

Asked if we should focus on deficits or growth: We've been told the deficit is the defining problem of the country. But the debt forecast shows debt to GDP will decline over the next 10 years. So for 10 years, the problem is at hand.

Second, basic policy of these forecasts is that focusing on longer than 10 years is a crazy thing to do. The 90% confidence interval of deficit forecast five years out is plus or minus 5% of GDP. Forecasts were wrong by 5% of GDP in 1990s, wrong by 5% of GDP in the 2000s -- they're wrong all the time. We do not know what the deficit is going to be more than 10 years from now.

But if you take the official forecast of debt more than 10 years out, an increase in growth of 0.2% of GDP solves the entire fiscal deficit problem. All of it. All it takes is increasing GDP growth by 0.2%.

In a country that is stifling entrepreneurship and starving investment, in a country that is missing a huge opportunity on immigration reform, maintaining this regulatory and tax environment, increasing the growth rate by 0.2% is easily obtainable. The truth is that in getting the growth rate up, our debt problem will stay in control. But if we continue to be a country that doesn't catch up with GDP potential, one that grows at 2% or less, we can have all the deficit reduction summits in the world, but debt will keep growing. We are focusing on the wrong thing. Growth creates a virtuous circle that creates more growth. In a growing economy, there are more profits to reinvest in R&D and in productive capacity. That's where our priority should be. We have, in my view, lost track of it as a country. 

On rollout's impact on public trust: It can't be good. This is an unhappy tale. Many of you know from your own experiences that a general rule on large IT projects is, take what they say, double it, and move to next highest unit of time -- days become weeks, weeks months, months become years. That's true in the private sector, where there is no organized constituency for failure. In the public sector, there's massive organization for failure. It's an extraordinary difficult task whose difficulty was massively underestimated, and I don't think there's any legitimate excuse for how badly it was underestimated. There's a huge imperative to do something that will give confidence. I wrote a few days ago that there's now a great danger of this being like a football game where you're down by two touchdowns deep in the fourth quarter. In that situation, you're likely to abandon your game plan and thrown a Hail Mary, which is a good way to end up down by three touchdowns.

There's a risk of jury rigging, which is very difficult. It's difficult to do the right thing in the first place, and it's even more difficult to fix. But I think it is hugely important that it be fixed. At the same time, I do think that we do need a kind of compact in this country where we debate and come to conclusions. If they don't work we draw lessons from that. But those who try to bring about failure, say "Look, we saw failure and therefore we can't rely on government," they are not performing in a way they should be proud of. No one is emerging as a winner in Washington in terms of how this appears.

No Pitch

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