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A new report by panel of Democrats, Republicans, economists and other experts calls for a complete overhaul of the U.S. tax code. It comes on the heels of another proposal by the leaders of a bipartisan commission. We compare recommendations from two deficit-reduction panels and other ways to cut the nation’s debt.
- Jim Horney director of federal fiscal policy, Center on Budget and Policy Priorities
- Daniel Glickman senior fellow, Bipartisan Policy Center; former secretary of agriculture.
- Vin Weber Republican consultant, former member of Congress representing Minnesota's 2nd district (1981-93)
- Damian Paletta reporter, The Wall Street Journal.
MS. KATTY KAYThanks for joining us, I'm Katty Kay of the BBC sitting in for Diane Rehm. The Bi-Partisan Policy Center Debt Reduction Task Force held a press briefing this morning presenting recommendations for reducing the nation's debt. The plan follows proposals from the leaders of the president's commission on fiscal responsibility and reform earlier this month.
MS. KATTY KAYJoining me to talk the plans, how they differ and how they might be received by Congress and by taxpayers, Daniel Glickman, senior fellow at the Bi-Partisan Policy Center and former Secretary of Agriculture, Damian Paletta is a reporter with The Wall Street Journal, Jim Horney of the Center on Budget and Policy Priorities and Vin Weber, Republican consultant and former member of Congress are all here in the studio. Gentlemen, thank you very much for joining me.
MR. DANIEL GLICKMANThank you.
MR. DAMIAN PALETTAIt's nice to be here.
MR. JIM HORNEYIt's nice to be with you.
MR. VIN WEBERThank you.
KAYThe phone number's 1-800-433-8850, The e-mail address is email@example.com, you can also send us questions and comments on Twitter, of course, and on Facebook. We will be opening those phones later on in the program. Dan Glickman, if I can start with you. First of all, anyone that can say Bi-Partisan Policy Center Debt Reduction Task Force without stumbling deserves an A in my book.
GLICKMANWell, and if we can say it enough, maybe we can get it and, you know, that's the idea.
KAYIn which case, there's hope for us all. You were at the press conference and you're, of course, from the Policy Center. Give us the outline of this report.
GLICKMANOverall, the purpose of this is to reduce debt and deficit over a period of years. Right now, the national debt is running at a figure of about 60 percent of our gross national product, which is considerably higher than it even was 15, 20 years ago when Ross Perot made this a big issue in the last presidential election. And the general feeling is this country can't sustain its leadership politically, economically, socially, if it's essentially bankrupt.
GLICKMANSo the president's group prepared a plan, but it was more skeletal, so this group today, led by former Senator Pete Domenici, chairman of the Senate Budget Committee during the last Congress and Alice Rivlin, who was the director of OMB and a group of governors, former policy makers, bi-partisan came up with a plan that basically does four or five things.
GLICKMANReduces the growth of entitlement programs like Medicare, Medicaid, farm programs and the like, freezes discretionary spending and defense spending, simplifies the tax code, but also adds a national value added tax and perhaps most significantly, at least initially, calls for a payroll tax holiday next year, which means Social Security payroll taxes that employers and employees pay will basically be extinguished for one year. The reason for that is we think the economy needs a real jump start, a kind of a focus on getting it moving again, getting some confidence together before we can even really start a massive debt reduction program, but this will get us largely into much -- into a much more balanced situation.
GLICKMANAnd in the process, America will be prepared to deal with the rest of the world. Right now, our debt is owned in large part, or at least in big part, by foreign owners.
KAYOkay. Jim Horney, am I allowed to be a little bit confused here, because this is not the only plan and we've already referred to one that was released last week. There are others in the works as well. Why are there so many different plans and how do they differ?
HORNEYI think there's so many different plans because it is a really serious problem and we've not seen a real serious approach to dealing with the problem in the Congress in recent years, so I think the hope is you can get these people together and they can at least start educating the public and put a plan out there that can serve as a basis for debate. And I think they deserve great credit for that. The other plan that has come out, an initial plan, it's not a final one, is a proposal by the co-chairs of the President's Commission on Fiscal Responsibility and Reform, a commission the president appointed last January. And that came out last Wednesday.
HORNEYCo-chairs Erskine Bowles, Alan Simpson all came out with a plan and then the Bi-Partisan Policy Center today. They both deserve enormous credit for addressing a very serious problem in a serious way. For recognizing that it's going to take, you know, both raising revenues and reducing spending and making it clear that you can't get the cuts in spending just by eliminating earmarks and waste, fraud and abuse, it's going to take a real consideration. I think both plans have elements that I'm unhappy with, but they deserve a lot of credit for at least starting the conversation.
KAYDamian Paletta, the riff often in Washington, of course, is if you get a commission, especially if you get a bi-partisan commission, sure as eggs is eggs, nothing's gonna happen.
PALETTAThat's right. And I think, this is one of those things that's, to put it in context, we came out of the financial crisis, we had the Stimulus Bill. There was a lot of government spending that kind of caught up to the public quickly. We saw situations in Europe with Greece and England moving towards more austerity because of their government spending was out of control. There's a lot of focus in Washington about, you know, maybe we need to do more here because, especially over the medium term horizon with healthcare costs and aging population, you know, we're really going to start drowning in debt.
PALETTASo there's no easy answer. The reason these things have gotten so out of control is because it's just easier for Congress to spend more money and to cut taxes, but not easy to raise taxes or cut spending. So that's why some of these proposals we've seen from both of these groups, they really go at some sacrosanct things that Americans really, you know, have come to get used to. You know, a lot of public benefits and a lot of tax breaks, you know, the mortgage interest deduction, that sort of thing. That folks -- when they read these proposals and see these things might be on the cutting room floor they're saying, wait a second, what are you guys trying to do?
KAYWe say we want you to cut spending, but...
PALETTANot my spending, right (laugh). So that's what they're dealing with, but they think the only way to get this is to have people that are really serious. And I went to one of these commission meetings that Erskine Bowles and Alan Simpson hosted and they're not in public office, but a lot of the folks on the commission are and they told the lawmakers, they said, listen, you guys are gonna have to be willing to take some real heat from all directions. And we've seen the Social Security advocates come down really hard. Nancy Pelosi even said that they're plan was, you know, totally unacceptable, so there's gonna be a lot of that noise and I think this process is going to take a long time for them to work through, but the conversation has definitely begun in earnest.
KAYOkay. Vin Weber, as a former member of Congress, how much heat are they prepared to take to really tackle the difficult things that need to be done in this country? To actually cut spending on some of these areas that the American public might say they want spending cuts on, but when it comes to their particular areas, they perhaps aren't as keen as they might say they are.
WEBERWell, I prefer to be an optimist about this. I think that the last campaign, although it didn't talk about a lot of these issues specifically, did talk largely, almost exclusively, about spending and debt in general terms, granted. Nobody talked specifically about raising taxes and cutting Social Security, but they talked about the problem, so I think the country is conditioned to want to see Congress respond. I also, choosing to be an optimist, think that divided government is the best time to try to accomplish something like this. One party can't do it or they would take all the heat. And I've been cautiously optimistic about the reception and response to Erskine Bowles and Alan Simpson from Republicans in Congress and from the president.
WEBERLess so from Speaker Pelosi, but I think that there's a chance that this could happen. I also think that there is a fortuitous timing issue here, which is one of the first votes this new Congress is gonna have to cast. It's gonna be very unpleasant for them and that's to raise the debt ceiling. It has to happen 'cause we've already spent the money, but it's not an easy vote, either for Republicans, who have run against the debt and spending, or for the Democrats, who are now probably going to say, it's not our jobs, Republicans are in control of the House now. So you're gonna have to do something in the context of that vote to raise the debt ceiling, which as I said, has to happen or the country defaults.
WEBERAnd perhaps a serious approach to the deficit, such as we've been discussing here this morning, can get some -- a push behind it because it's linked to it, even if it's only indirectly, this vote on the debt ceiling.
GLICKMANCan I -- can I just make a comment?
GLICKMAN'Cause I also served in the House with Vin, partly. I think most people recognize the seriousness of the problem. It's a little bit like if you have Type 2 diabetes, if you don't go to the doctor, it gets worse and worse and worse and ultimately the doctor says, gotta cut your foot off because you didn't take care of this problem before. I mean, in a sense, it's this problem, the debt is a little bit like that. I think people recognize the fact it's not good to have a half of our debt owned by foreign countries, it's not good for the Chinese to have such a big investment stake in America and those kinds of things.
GLICKMANThe question is, Vin talked about, is our political system as we know it resilient enough to solve problems of this magnitude. And that is the real test here. I think people intuitively know these are monumental problems. And by the way, they're gonna be addressed fairly. Nobody's gonna be decimated by this. I mean, that's something that, you know, the poor are not gonna be decimated, the tax system will probably be made more fair, the cuts will not go to the heart of America, I don't believe, although quite honestly, people may not get exactly what they've had before as well, but the test is, can this democracy -- is it flexible enough, is it nimble enough to solve a problem like this.
KAYWell, Damian Paletta, I mean, is it just the political system -- and I -- you know, I totally accept that, you know, that's -- whether this political system is resilient enough to take on something of this magnitude is a very big question, but there are also very big ideological differences and you can talk to economists on the right who will tell you, this is the way to do it and you can talk to economists on the left who equally, fervently will tell you, this is the way to do it and they don't agree.
PALETTAThat's right and that's the reason that things have gotten...
KAYAnd I'm not an economist. I'm stuck in the middle not knowing which one to believe.
PALETTAThat's right and one of the things, the proposal today from Alice Rivlin and former Senator Pete Domenici -- I mean, what both these proposals do, what they have in common, is they both push down the income tax brackets. They actually reduce the number of income tax brackets and they have folks paying less in income tax and actually less in corporate taxes as well.
PALETTABut one thing that this plan from Rivlin and Domenici does today is it imposes something they call a debt reduction sales tax, sort of like a European-style VAT tax and they also have a tax on soda products, that sort of thing and so those are the sort of things -- folks might like the idea of having lower income taxes, but they may not like the idea of paying higher taxes elsewhere. And there's some groups out there that are opposed to any sort of tax increase whatsoever and they're very powerful politically. And there's some groups that...
KAYAre very opposed to spending cuts.
PALETTAExactly and keep your hands off Social Security, so these are the sorts of things that they're gonna have to sort of figure out how to deal with that noise especially going into an election in less than two years, presidential election, where this is probably an issue that's gonna be, you know, on the top of the ticket. Folks are gonna have to be able to convince voters that these sorts of tough decisions are necessary.
KAYOkay. We are talking about plans to reduce the deficit. There are two of them out there. I think there are others in the works as well. With me in the studio, Daniel Glickman from the Bi-Partisan Policy Center, he's a former Secretary of Agriculture, Damian Paletta from The Wall Street Journal is also here, Jim Horney, director of Federal Fiscal Policy at the Center on Budget and Policy Priorities, Vin Weber, former Congressman is also with me in the studio. We'll be taking your calls with your questions and comments, 1-800-433-8850 is the phone number. We're gonna take a quick break. Stay listening.
KAYWelcome back, I'm Katty Kay of the BBC. You've joined our conversation on a new plan to reduce America's debt. It has been brought out by the Bi-Partisan Policy Center and we are joined in the studio by Daniel Glickman from the Policy Center. Daniel, just quickly, to remind our viewers about the main difference between this plan, if you had to point to one big departure with this plan and the plan that we all heard about last week, what would the biggest difference be?
GLICKMANI -- it does not raise the retirement age as the president's plan did on social security, it keeps it the way it is. It calls for a national debt reduction tax, which the president's plan does not and -- but it also calls on the front end for a payroll tax holiday for one year so that people won't have to pay their social security payroll taxes, either employers or employees. There are other issues that are different, but those would probably be the big ones.
KAYJim Horney, give us some budget basics, Budget 101, largely for my benefit. But how does our current spending divide between entitlements, interest payments, defense and other discretionary items?
HORNEYWell, first of all, let me note one other thing that I think is a big difference between the two plans. While they both talk about increasing revenues and making reductions in spending, which I think is gonna have to be true of any plan that actually works, the Bi-Partisan Policy Center is a more balanced plan, a better ratio, as far as I'm concerned, of taxes to spending cut. And it's in part because I think they were much more realistic about the spending that's going to be required this decade and in decades after to meet the real needs of the American public and I think the president's commission, in part because they have elected members who are really reluctant to talk about raising revenues very much, assume that we could get by at the level of spending that we had in past decades.
HORNEYWell, that doesn't take account of the aging of the population, the rising healthcare costs, the cost of homeland security, which didn't exist more than 10 years ago, greater commitment to education. And I give the Bi-Partisan Policy Committee credit for recognizing that and that allowed them to have a more balanced plan. They're aspects of the plan I think are unfortunate, but I think those could be fixed and basically, it's a good step. Back to the budget basics, we spend -- roughly 60 percent of our spending is for so-called entitlements. That's programs like social security, Medicare, farm programs, other things and including the interest on the national debt, that are governed by permanent law -- or more or less permanent law.
HORNEYWe spend about 40 percent on what are called discretionary programs, which is an unfortunate name, makes it sound like they're -- you know, we could do them or not, but in fact, it's everything else. It includes virtually all of the defense department, it includes the operations of government and so on. That's the annually appropriated funds.
KAYYou talked, Vin Weber, earlier about divided government being perhaps the opportunity to enact and to take some of these tough decisions, particularly...
KAY...on the entitlements, perhaps, that Jim was just talking about, but there's also an argument, isn't there, that the next two years are going to see gridlock in Washington and actually no decisions are going to be taken on these very difficult questions.
GLICKMANExactly. And I believe that both of those things are true to a certain extent. I think we do face the prospect of gridlock over a whole range of issues 'cause the House Republican majority -- it's gonna be quite a conservative majority and the administration is, from our standpoint, a quite liberal administration. I'm simply saying in terms of this specific problem, which is the biggest problem we face, I can't imagine one party being willing to do what is necessary, being able politically to take the heat to do what is necessary on taxes, social security, Medicare and everything else we're talking about here. And so paradoxically, it may be the case that divided government, when you have to have both parties signing on, is the only condition under which we could accomplish this.
KAYAnd actually, it's interesting that in Britain, of course, it is a coalition government...
KAY...between the conservatives and the liberal Democrats that's been able to make the biggest budget cuts in a generation because the conservatives had the liberal Democrats, I think, backing them politically.
WEBERRight. I just wanna make sure your listeners don't think I'm totally naive.
WEBERI don't -- I don't think this is easy.
KAYNo one would ever say that, Vin.
WEBERI don't think it's easy, I don't think it's assured. I'm just trying to lay out a possible scenario. It may be that these conditions are better for accomplishing this than one party controlled government.
GLICKMANAnd it also, if I may say, requires exquisite and important Executive Branch leadership.
GLICKMANThe president has really got to engage in ways that probably he hasn't done to date on a lot of the issues and I think his heart is in the right place, the question is, will the politics allow him to do it.
KAYI just want to refer to David Leonhardt's piece on the front page of The New York Times today because talking about both of these commissions that have been looking at this. Last week's one and, of course, your one today, Dan. And he says that perhaps we're missing the point here and the issue is not to be focusing on cutting the deficit so much as to be focusing on growth. And that neither of these proposals are looking sufficiently at that. And he, you know, points out the argument that if you raise taxes at the moment and if you cut spending too dramatically at the moment, do either of those ones at the moment you're going to kill growth and actually what we should all be focusing on is boosting growth.
KAYDamian, what did you make of David's piece? I don't like to ask one reporter what they make of another reporter's piece, but I'm sure you're generous enough to point out where he was right.
PALETTAQuite funny. I just got back from Korea for the G20 and this is a question that the Americans are really struggling with when you're seeing a lot of other countries go towards this more sort of contractionary budget, you know, philosophy. The Obama administration has thrown the kitchen sink at this economy. You know, they've tried everything to get jobless numbers to improve. And we heard from Treasury Secretary Geithner yesterday that they -- they're gonna support, you know, long term debt -- you know, tackling the debt, but in the short term, they really need to keep pursuing policies that will, you know, stimulate growth.
PALETTAAnd, you know, there's this argument that if you stimulate growth, it brings in more tax revenue and you sort of grow your way out of this, but I think a lot of Americans feel like they've been hearing that for years and it's not working and we need to, you know, be more aggressive. So I mean, the administration's really kind of caught in this difficult position because they have to -- I mean, they have to be able to convince their foreign investors that we're really serious about this and we're not gonna go the direction of some of these European countries.
WEBERBut there are growth features in both of these plans to be fair in the Bi-Partisan Commission's recommendations. They bring down the top marginal rate, they bring down the corporate rate in the context of an overall revenue-raising exercise. But those are both growth features, at least in the minds of particularly the Republicans, you know, in that way. Dan's organization talks about the payroll tax holiday. That's a growth enhancing feature.
KAYIn both of these, are we agreed that it's the tax elements of these plans that is the most significant growth feature? Would you all agree with that?
WEBERWell, I would say it's the one in which there might be some agreement. There's a philosophical disagreement, obviously...
WEBER...on how spending affects the economy. Republicans simply don't think that...
WEBER...more spending is stimulative, Democrats do, But on the tax side, there might be some agreement.
HORNEYActually, I think the key point here is you've got to distinguish between short-term growth and long-term growth. The problem with growth right now is we have inadequate demand, we have an economy that is operating far below potential and we have very high unemployment. I think the Bi-Partisan Policy Center, as Dan Glickman said, served a very useful purpose in saying, look, the economy's really sluggish now. The first thing we've gotta do is get the economy going now. And that's why we think we ought to use payroll tax holiday. I'm not sure that's the best way to stimulate the economy. Vin Weber and I may disagree about that, but the recognition that a significant boost to the economy is needed now to bring down unemployment and get us back on the path is important.
HORNEYIn the long run, it becomes a somewhat different issue. Part of it is getting the deficit down is good for the economy. The reason that we talk about the problem with the deficit and the debt is not that deficits and debts are, you know, just awful in and of themselves. We think they're bad because in the long run, they do harm the economy and we need to get it down.
HORNEYThe important thing is doing it in a balanced way, raising the revenues to meet the -- to pay for the programs we need, including programs that invest in education infrastructure and so on, which also help economy growth and to do it in an economically efficient way. And both commissions, I think, are starting the right approach there, which is cleaning out a lot of the special tax breaks in the tax code and that would allow us to make the tax code more efficient, not having people doing business just to gain the tax system...
HORNEY...and to raise more revenues in an efficient way.
KAYLet's just talk about one of those special tax deductions. John writes to us from Mooresville, N.C. "How can anyone suggest cutting the mortgage interest rate tax deduction at a time when the housing industry is floundering? If you need to stimulate the market, particularly new home starts, isn't this counterproductive? Won't it make new home buyers reluctant?" Jim, this seems to be getting to what you were saying.
HORNEYI think again, you've got to make the distinction between short and long term. I wouldn't get rid of that deduction right now. We're in a fragile economy. All of these deductions, people can point to them and say, oh, but this helps a particular industry and we need that. In fact, widespread agreement among the economists, right and left, that the economy will work better if we don't have all of these special things that force investments into particular areas. And people make a decision based on what's the most productive use of the resources and so on. So in the long run, I think we're going to have to get rid of a lot of these things that right now look like sacred cows.
KAYOkay. I love a conversation where everyone wants to jump in, but I'm going to put a bit of order into this. Vin, old on one second. Dan, over to you.
GLICKMANFirst of all, I would say that in the Bi-Partisan Policy Center, we don't actually totally eliminate the mortgage deduction. We replace it with a refundable tax credit. And the impact of that is, is that the value is basically up to about a $500,000 home, so most Americans will get the benefit of it. It may not be exactly the same benefit, but it's not totally gone. And just to repeat what you just said is, is that all these tax preferences are either going to be minimized or eliminated, but the other side of the coin is that tax rates will be brought down significantly and under our plan, about half of the American taxpayers will not even have to file a tax return anymore. So it's not all bad news. It's -- for most Americans, actually, they fare a little bit better under this plan.
WEBERThe person who sent the message in about mortgage deduction is right. I mean, in the short-term, I think this would be very problematic. But over the longer term, what really matters is that in terms of the housing market and everything else, is that Americans' incomes start rising again, which they haven't been doing, that the equities market moves up because a lot of people use their down payment out of the money they've put into the stock market. And if those two things are accomplished by an overall reform of our budget and our tax structure, that's gonna be ultimately good for the housing market in the long-term. But in the short-term, there's no question. We can't get rid of the mortgage interest deduction in this economy right now.
PALETTAI think this is a great example, though, of, you know, so these proposals are very long and you could pick any one thing and someone could look at it and say, what are you guys talking about? Get -- you know, get your hands off of my...
KAYAnd Secretary of Defense Robert Gates has already said that the Simpson-Bowles proposal would have a catastrophic impact...
KAY...on national security.
PALETTAAnd this is a Defense Secretary who's very popular with both parties and he's seen as pretty, you know, fiscally prudent in his proposed major reforms to the defense department and he's saying that what they're proposing, you know, would have a major -- would be -- cause major problems for our national security. I mean, that's gonna send shockwaves through members of both parties.
KAYRight. If you're a newly elected Republican congressman going back to your district, you can see the ads running already. They've put up, Robert Gates says your vote has a catastrophic impact on national security.
WEBERWith all due respect to Secretary Gates, who's from my hometown and I have great fondness for him, I -- the fact of the matter is that the cuts are -- in the case of our proposal, are basically a freeze. They take place starting next year, 2012. We're spending a fortune every month on two wars, particularly the war in Afghanistan, that theoretically, we're going to begin to draw down with, so I think that there may be a genuine debate, here, but I would say it's a little bit of hyperbole to call this catastrophic right now.
KAYI'm Katty Kay, you're listening to "The Diane Rehm Show." And if you'd like to join us, do call 1-800-433-8850, you can also send us an e-mail to firstname.lastname@example.org with your questions and comments, find us on Twitter and Facebook as well. And we will go to the phones now to Jimmy who joins us from southeast Arkansas. Jimmy, thank you for joining "The Diane Rehm Show."
JIMMYYes, ma'am. I'm just concerned about them talking about cutting out entitlements and stuff. I've been working for the public for about 35 years, so -- and the only thing that's kept me going is knowing one day I might be able to settle back. But all the people that talks about cutting this thing, you know, these guys are all up over 55 and 70 years old, they've been enjoying life pretty good, but us people that work for a living -- I mean, I'm working a government job.
JIMMYI grade roads and I don't make but $10 an hour and they tell me 'cause I don't like this, I'm not really going to like next year, either. And the only thing I've got to look forward is social security. And if they cut it out, I mean -- or cut my -- the money I get -- the money I get to live on, I mean, it would hurt me really bad, so I would have to stop what I'm doing now and look for a way to make more money.
KAYJimmy, forgive me. How old are you?
JIMMYI'm 47 years old.
KAYAnd how old -- how -- what age do you intend to carry on working until?
JIMMYWell, I planning on working 'til I'm about 65 to 68.
KAYAnd if that age -- if that age was raised to 68 or 69, how would you feel about that, before you could stop working?
JIMMYWell, I don't really feel like I can go that far now, but I don't really have a choice. I've got a new kid, I got a two-year-old baby and I'm gonna be in pretty good up in age when he gets old enough to go to college, if I can afford to send him there. And it's -- it's just a bad outlook for a working man. I mean, you know, if you don't work very much and sit around and just talk, you could probably live 'til you're 100 years old, but a person that works for a living is not going to live that long, you know, not a hard worker.
KAYWell, Jimmy, thank you so much for joining "The Diane Rehm Show" and I think you've highlighted really a lot of concerns of so many Americans. And I -- you know, we all sympathize with the position you're in and congratulations on your new two-year-old. I know that's also another responsibility for you as well as your own working life. Damian, you wanted to jump in there.
PALETTAI think he's -- the issues he's raising are issues folks across the country are gonna raise and one of the things, I think both of these groups have been very sensitive to changes in social security and anything that they wanna do, they're going to phase in over many, many years. Some of the stuff wouldn't kick in 'til 2075, right, so this would be a generation, two generations of people that would grow up knowing that social security's much different than folks now who've been counting on it. And another thing is that I think both groups have also tailored the social security changes so that folks that are lower income might not, you know, feel the pinch and in some cases, actually be able to benefit more, be able to get more of an inflation adjusted-type increase.
KAYAnd I was interested to hear Jimmy say that he was prepared to go on working until he was 68 or -- it was not so much the age that worried him, it was the prospect of not getting what he had paid into then.
WEBERYeah, I think that -- I'm sympathetic to his point of view and I think we do have to have some accommodation on the social security issue for people who have spent their lives in physical labor. That's very important, but I wanna go back to a point that Dan Glickman made...
KAYJimmy said he had a government job.
WEBERBut he was working on a road grader, he was talking about.
PALETTAState -- state government, probably.
WEBERI wanna go back to a point that Dan made. We can accomplish this with minimum negative impact on most Americans only if we make the solution much, much larger. In other words, if we start taking things off the table then, yes, indeed, it's gonna be very hard to get down the road in solving these problems without really, really inflicting pain on people.
WEBERBut paradoxically, again, if you try to deal with all of this at once, you don't really have to hurt people a lot. The person we -- Jimmy that was just on the line, we're not talking about cutting his social security. We may not increase it quite as much as it would've been otherwise. We don't need to take Medicare away from people, we just need to put in some cost controls in place. But the more you narrow the field of options, the more likely you are to do some real harm to people, so it's an argument for allowing the full solution to proceed.
HORNEYThe Center on Budget where I work is probably a little unusual among progressive groups in that we're willing to consider some reductions in social security benefits relative to what's currently scheduled, but I do think you have to be very careful about how you do it. Both of the commissions have been good about worrying about people at the bottom and making sure they're not hurt. And in fact, having some increases -- needed increases, but I think that they cut a little too much in the middle because I think people don't realize how modest social security benefits are for middle income people. Right now, middle earner gets about $16,764 a year.
KAYJim Horney. We're gonna take a quick break and he'll join us for more of our conversation on plans to reduce the U.S. deficit.
KAYWelcome back. I'm Katty Kay of the BBC sitting in for Diane Rehm. You've joined our conversation on different proposals and we are comparing them and looking at the different plans to reduce America's debt. I'm joined in the studio by Daniel Glickman, he is from the Bi-Partisan Policy Center, Damian Paletta of The Wall Street Journal is also here, Jim Horney is with me from the Center on Budget and Policy Priorities and former Congressman -- Republican Congressman Vin Weber is also with us in the studio. I want to go straight to the phones to Marcus in Greenville, N.C. Marcus, you've joined the program.
MARCUSThank you for taking for my call. My question, it seemed like we got to -- you say you got the president's one and then you've got the new one and it sounded like you were talking about there were cost controls for healthcare in the new one. I was wondering what those cost controls were. And I had a broader question, which was if healthcare prices just keep going up, healthcare costs, will that eliminate all the things that we're trying to make as far as cuts and growing income? Because, you know, at some point, if they just keep doubling and doubling and doubling, it doesn't matter what you do if you don't get those controlled right or those costs in order, so that was my question. I'll take it off the air.
KAYMarcus, extremely good question. Dan Glickman.
GLICKMANWell, this is complicated and I don't wanna get into the weeds too much.
KAYRight, but broadly Marcus' question about American healthcare costs soaring...
KAY...there is a real danger that however many cuts you make in other areas, if we don't get those costs under control, balancing the budget is almost always gonna be a fantasy.
GLICKMANYeah, I mean, you know, a big part of the Bi-Partisan Policy Center plan, it has to do with capping the exclusion of employer provided healthcare benefits in 2018, which is controversial, but it -- what it does do is it incentivizes employers and employees to look for more competitive and lower priced healthcare policies which focus a lot more on cost control.
GLICKMANYou know, look, we just went through this enormous debate on this healthcare benefit plan, the president's healthcare proposal, and it's just in the process of being implemented right now and it's gonna take awhile. So our plan, well, we have some controlling costs in terms of the Medicare premiums, in terms of Medicare payments and preserving Medicare for the long-term, doesn't frontally take on a lot of the big cost cutting issues which were taken on in the president's healthcare bill saying that a lot of that has to run its course as well.
KAYOkay. Let's go to Jerry in St. Louis, Mo. Jerry, you've joined the program.
GERIHi, Katty, and hi, to your guests. You know, these -- my issue is actually the cuts in the defense budget. You know, our tax dollars are being used to build up Pakistan's military and Somalia's government, the pirates out there and yet they're our tax dollars. And our government thinks that that will be to our benefit, but the Islamic goal to take over the world with Islam is in there Quran, it's in their book and, you know, it does not change. So it's not to our benefit. We're just appeasing them. They're using us. These tax dollars could go to Americans, to Americans for the entitlements, for the healthcare programs, for all kinds of things and yet we're giving it away and we're even cutting our defense budget to build up the Muslim's government (unintelligible).
KAYOkay. Geri, I think -- you know, Geri has -- the broader point there is gonna be, Vin, what we were talking about before, that there is gonna be an almighty debate about how much to cut defense spending and Robert Gates has already weighed in on it and you can dispute some of what Geri was saying about Muslim intentions, very certainly, but I think that a lot of Americans are saying, you know, why are we spending on foreign aid, for example, and aid programs and we had just had an hour on Afghanistan and some of the aid programs that are going on there, when we're even talking about cutting entitlements.
WEBERI think you're exactly right. I think the defense piece of this probably could end up being more controversial than any of the other things that we're talking about and everything we're talking about is controversial. A couple points, first of all, if the Secretary of Defense says it's catastrophic, it's gonna be very hard to get Republicans or most Republicans to go along with it and I think many Democrats as well. There's a real threat in the world and we're relying on our Department of Defense and Homeland Security to protect us from it. And if they say they simply don't have adequate resources under these plans, that's gonna carry a lot of weight.
WEBERI wanna make a second point, though. Long-term, and we're talking here about long-term programs, it's very difficult to project out 10 and 20 year savings from defense because the defense budget, we know from history, is driven by people's perceptions of the threat, something happening in the world. Iran detonating a nuclear weapon and you'll see changes in whatever projections we have for defense spending, so it's an unreliable piece of a long-term deficit reduction program, but it's indispensable to those on the left.
KAYJim, just basically remind us of the percentages in terms of defense spending versus entitlements as a portion of the budget.
HORNEYDefense spending accounts for somewhere around 20 percent of the total budget. Overall entitlements, including interest on the debt's about 60 percent. The -- I wanna go back to the question earlier about healthcare, which the point is absolutely right, that in the long run, healthcare costs are really the driving force in this. The Center does -- periodically does...
KAYEspecially with an aging population.
HORNEYWith an aging population. We periodically do long-term budget projections, Congressional Budget Office does, Government Accountability Office, several other groups. Everyone who does those long run projections agrees the big thing driving the long-term deficits and debt and healthcare costs. But there are a couple of things to keep in mind there.
HORNEYFirst of all, it's not just the government programs, it is overall healthcare costs that pose the real threat. Medicare and Medicaid, the big government programs, have been growing per person at about the same rate as private insurance over the last 30 years. They will continue to. If we just slash Medicare and Medicaid, then -- and we don't do anything about overall cost, it's gonna mean that the elderly and the poor don't have adequate care compared to other people. So the key here is slowing the rate of growth overall.
HORNEYAnd as Dan Glickman said, the Health Reform Act at least contains some really important things getting started on that and their plan to cap the exclusion, it's something the Center has supported, it makes it more efficient. So we really need to try to do all of the research projects, the pilot projects in health reform and then when we get better information about how to deal with the healthcare costs, really implement them. We have to be careful not to in advance try to put caps on Medicare and Medicaid spending because we don't know how much we can bring that spending down until we know how much we can bring overall healthcare costs down.
KAYDaniel Glickman and then Damian.
GLICKMANOkay. I wanna go back to the defense spending. First of all, the Secretary of Defense has proposed a variety of savings on major weapon systems. And for efficiency purposes, he's actually been out in the forefront more than about anybody else on this point, so I do give him great credit for that. I would have to say, however, in terms of cutting defense spending, what this does, at least what the Bi-Partisan Policy Center does, is to freeze defense spending at next year's baseline level probably for five years.
GLICKMANNow, we're not talking about -- granted, there aren't any inflationary cuts, but if everybody else is suffering these major freezes, the question is, can our defense budget cope with that. Obviously national security and preserving it is critically important, but are we gonna have 100 -- over 100,000 troops in Afghanistan for the rest of our lives? I doubt it. I hope not. I mean, this presumes that you can't get some savings out of that budget and anybody who's lived with a defense budget knows that, in fact, you can get some savings without jeopardizing national security.
KAYAlthough Vin's point is that you might be able to get savings today. Something happens...
GLICKMANWell, that's true.
KAY...that means you'd have to jack up spending again.
GLICKMANAbsolutely and we recognize that national security is the prime responsibility of federal government, so if you get a new threat, you're just gonna have to spend to defend on that.
KAYOkay. Damian wanted to jump in there.
PALETTAOne of the interesting things back on the healthcare issue for a second, in this Bi-Partisan Policy Center is they proposed this tax on things like sodas and sugary drinks and it's not -- the way they describe it is this is not gonna -- the money they're bringing from this is not gonna balance the budget. The idea is that they're gonna discourage people if they have to pay more for a soda, maybe they'll be healthier, you know, and maybe in 20 years, we'll all be five pounds lighter 'cause we're not drinking soda. I mean, that's the kinda sorta creative ideas that probably gonna come forward as more and more groups, you know, push these different plans.
KAYWill there be enough support for that proposal, do you think?
PALETTAThat's been floated before and it's been shot down pretty quickly because then what's next? Is there a potato chip tax, is there a fast food tax? I mean, there's all...
KAYBut these are things that seem to make, I mean, you know, from a point of view of somebody with four children, I would love there to be a bit of a tax on soda, frankly. I mean, in all seriousness, you know, it would help the health of the country, it would help the health of our children, it would cut down on dentist bills.
KAYAnd it would raise a little bit more revenue. Why is this something that is shot down so quickly?
PALETTAWell, I think it's on the table and I think, you know, as we see in Washington, you know, that five cent bag tax, that does change behavior. And so, you know, it's definitely something that's gonna get debate and if a lot of these ideas that had been, you know, shot down pretty quickly before are getting consideration, I think it's something that might get a good...
GLICKMANMy old role in the Agriculture Department, I can tell you this is an issue which certainly people in various industries will be very much...
GLICKMAN...opposed to on the theory that the government is deciding which things are good for you and which things aren't good for you and then let's go and tax them. On the other hand, I don't think there's any question the consumption of sugar -- large amounts of sugar is not good for you. But this will be a contentious issue. It's a creative approach and -- but it will be subject to a lot of intense lobbying.
HORNEYThe Center -- the Center on...
WEBERWell, if we don't find creative solutions that reduce healthcare costs by changing people's behavior and through competition, then there's really only one alternative left and that is really government rationing of healthcare. So it's imperative that we look at all these other solutions because nobody's gonna like government rationing of healthcare.
KAYBut why is it that it's so hard, then, to do something which all of us probably would agree makes both health and economic sense?
WEBERI think you get into an argument about how much of a nanny state do you wanna have, people telling you what you should eat, what you should drink, how you should behave. It's a philosophical argument. I'm not saying we shouldn't do it, I'm just saying that you hear that argument pretty quickly.
HORNEYThe Center on Budget was among the groups that proposed an increase -- a sugar tax, a soda tax during the healthcare debate as a way to pay for healthcare reform when they were desperately looking at ways to pay for it. And what we and the members of Congress who were supporting it ran into was a combination of the special interest, the companies that make sodas and the people who said, how dare you think about raising the cost of sodas for poor people. And so you've gotta be able to answer that question and say overall, poor people as well as other people are gonna be better off in the long run.
GLICKMANAnd it's a really complex issue because quite frankly, the lack of physical activity and exercise is probably even a greater factor than this one is.
KAYRight, but maybe a little -- I mean, I think the risk is -- has been with people today is to step into a nanny state, but actually it's not a clear line of a nanny state. This is not a black or a white issue and there are cases where moving that line just a little bit might be overall for the benefit of the country. Let's go to Ann who joins us from Lincoln. Ann, thank you so much for joining "The Diane Rehm Show."
ANNYes, hi. Did you say Ann?
KAYYes, I did.
ANNOh, yes, hi. On the revenue raising side of things, I've been wondering for the longest time, because I'm so tired of hearing a Republican chant that we can't raise taxes on those making 250,000 and over because it hurts small businesses, why on earth don't we separate in the tax code business income taxes from individuals and when small business owners take money for themselves out of their business, it's noted as such and if they take a lot, they pay taxes on it, whereas the business side of the tax return might, you know, be taxed at a lower rate, so...
KAYOkay. Jim Horney, I know that there are a lot of discussions about simplifying or reforming the tax code. Is this something that's being look at, what Ann is talking about?
HORNEYIt's very complicated about the small -- when they talk about small businesses being hurt, it's because many small businesses are organized as sole proprietorships, partnerships and so they don't have a separate corporate structure and their tax -- that income tax is personal tax. I think one of the key things that would happen in a tax reform, and I know that Bi-Partisan Policy Center does it, I think maybe the President of Commission does, is say that we should try to make a simpler system in which income -- all income is more or less taxed at the same rate.
HORNEYSo you get corporate rates -- you get rid of all the corporate -- a lot of the corporate tax breaks, get those rates down, similar to what people are paying on the individual and you get rid of preferential treatment for capital gains and dividends so that you eliminate a lot of the machinations that people take to try to identify income as capital gains or dividends or as business income and you put everything on a more equal footing. I think that -- something like that's a positive step.
WEBERBut that's a very controversial point, too.
KAYI'm Katty Kay. You're listening to "The Diane Rehm Show." And if you'd like to join us, please do call 1-800-433-8850. I wanna get back onto this tax issue. You were talking about this earlier, Damian. The equivalent of what they have in Europe, a Value Added Tax, a VAT, the proposition for a national sales tax at 6.5 percent. Is there a risk there, though, that consumers in this time when we need people to consume more and spend more, just stop spending?
PALETTAAbsolutely. And actually, when I talked to former Senator Domenici yesterday about this, he said, listen, the only way this will work is if we throw out the entire tax code and build a new one from scratch and this is part of it and folks are paying lower income taxes so they have more money to spend. So I think, I mean, the idea of putting a VAT into the tax code now without other major changes would probably be dead on arrival from, you know, both parties would probably knock it down immediately.
PALETTABut, you know, just -- this is just another example of the types of thing that maybe a year or two ago folks would've said, forget it, we're not even gonna have it be part of the discussion, but now because, you know, folks are looking at this so seriously, it's getting, you know, a major recommendation from folks with a lot of credibility.
KAYI wanted to read an e-mail here from Dan who writes to us, "I think compromise might be reached if they can first agree that in their post compromise press conferences, Democrats may only address which benefits they must cut and Republicans may only address which taxes they agree must be raised." (laugh) Vin, that has you chuckling.
WEBERWell, I understand the point. He's an astute observer of what goes on. I do think though that you have to allow for the normal workings of the political process. I hear a lot of criticism. Well, nobody was out there in the campaign saying raise taxes and cut Social Security. You can't ask people that are running for office to put a gun to their heads in the course of a campaign or in-between elections. You have to allow the political process to work. It doesn't mean that people will never make difficult decisions, but you can't ask them to purposely self-emulate politically.
KAYOkay. We have just a couple of minutes left on the program and I want to ask each of you how highly you rate the chances that one or other of these proposals will be enacted by Congress and real steps will be taken towards cutting America's deficit. Dan, let's start with you.
GLICKMANIt's an uphill battle, but there is a growing national fear that if we don't act, that America will slip and slip and China and India and other nations will grow and grow and we will no longer be able to produce jobs and be an economic and political powerhouse, so the motivation is there to get it done.
KAYDamian Paletta, the chances?
PALETTAI would just say the White House Commission is supposed to vote by December 1. If they can get a 14 or even 12 of the 18 folks to vote for it, I think we'll have a sense that this might go somewhere. If they don't get very many votes, then I think it's gonna be a pretty long process.
KAYJim Horney, do you think we have the political will to do something about America's deficit now? Is there -- is there really, as Daniel's suggesting, the recognition that we have to act?
HORNEYI think right now there's little chance that in the next year or two years a plan like these two would be adopted, but I think they will form the basis for serious discussion. I hope we have that discussion. I hope we don't, when we do the debt and limit debate, fall back on, you know, constitutional balance, budget amendments and caps and things that really get away from the serious discussion we need to have.
WEBERI'm more optimistic than Jim. (laugh) I think that there's a chance that this can happen I think and there's a probably a better chance that it can happen in the short-term than in the long-term because people do feel a sense of urgency about it. The Deficit Commission, however, should seek not for 14 votes, they should seek 17 or 18 votes.
KAYI love an optimist on the panel. Vin, come back anytime you like. Vin Weber, Jim Horney, Damian Paletta, Daniel Glickman. Gentlemen, thank you so much for joining me.
KAYI'm Katty Kay of the BBC. I've been sitting in for Diane Rehm. Thank you all so much for listening.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information.
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