"I think the best thing that is available and would be prudent to do would be to take off the table a tax increase at the end of the year and make sure that these [small business] guys can plan on a future without higher taxes," he told MSNBC, adding the Congress will not be able to tax its way out of the current economic downturn.
The debate over the fate of the tax cuts is expected to heat up in the fall.
Holtz-Eakin also blasted the small-business bill currently stalled in the Senate. He deemed its creation of a $30 billion lending pool a "mini-TARP" program that will be politically damaging to those who support it.
"People are going to run from it," he said, adding that the pool is too small to make a dent in the recovery effort.
"It's a $14 trillion economy, and that money will come with all of the stigma that the TARP had," he said.
A vote on the small-business bill is expected to occur shortly after senators return from the August recess.
Senate Republicans have withheld support for the measure because, like Holtz-Eakin, they feel the lending pool would create another TARP-like program.
Aside from extending the Bush tax cuts, McCain's former advisor said providing loans to small business is essential to the recovery.
"There's no question this is key to the recovery," he said. "There are data that are put out each month by ADP, and what those data show is that 87 percent of the jobs that have been created since the [recession began] are in small businesses. ... We need to give them some help."
Aside from the lending pool, the small business bill improves upon loans from the Small Business Administration.