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President Obama unveiled a new long-term deficit reduction plan yesterday. It calls for new taxes on the wealthiest Americans. And it seeks to eliminate tax loopholes for the biggest corporations. The president said it will cut the deficit by more than $3 trillion over the next decade. Republicans – opposed to any new taxes – immediately attacked the proposal. Analysts say the president’s sharply drawn battle lines could make it harder for the congressional super-committee. The bipartisan group is tasked with reaching a deficit-cutting deal by Thanksgiving. Diane and her guests will talk about what’s in the plan and how it’s being received in Congress and the country.
- Norman Ornstein resident scholar at the American Enterprise Institute and coauthor of "The Broken Branch: How Congress Is Failing America and How to Get It Back on Track."
- Isabel Sawhill senior fellow, Economic Studies, The Brookings Institution.
- Naftali Bendavid national correspondent, The Wall Street Journal.
- Congressman Phil Gingrey Republican, 11th District, Georgia.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Yesterday, President Obama laid out his new deficit reduction plan. It called for a tax on millionaires. The president vowed to veto any bill that hurts vulnerable Americans but does not ask for more from the nation's wealthiest. Republican leaders came out strongly opposed. We'll talk about what's in the plan, how it's being received in Congress and the country.
MS. DIANE REHMJoining me in the studio: Norman Ornstein of the American Enterprise Institute, Isabel of Sawhill of The Brookings Institution and Naftali Bendavid of The Wall Street Journal. First, joining us by phone from Marietta, Ga., Republican Congressman Phil Gingrey. Good morning to you, sir.
REP. PHIL GINGREYGood morning, Diane. Glad to be with you.
REHMI'm glad to have you on. Give us your impressions of the president's deficit reduction plan.
GINGREYWell, Diane, I'm absolutely opposed to raising taxes on anybody during a deep recession, double-dip recession near Depression. And I've been opposed to that. And the president was opposed to it less than two years ago in a direct quote. And I just -- it seems to me that this is not a serious proposal as he knows it is very unlikely to go anywhere, and it seems more, to me, like a campaign tactic than a true policy strategy.
REHMWhat about your opinion of the plan as it relates to Medicare and Medicaid?
GINGREYWell, you know, I'm disappointed that he backed away from doing some reforms in regard to entitlement, particularly Social Security and Medicare, in regard to things like age and means testing. We have that, of course, in our Republican passed House budget. The president has cut Medicare, something like, $540 billion in the creation of Obamacare. That money obviously is not going to strengthen and enhance Medicare.
GINGREYIt's going to pay for -- partially pay for Obamacare. And now, to come along and say that there's going to be an additional cut to Medicare and Medicaid, I think, is a little disingenuous.
REHMTell me, if you can, Congressman, give me your philosophical opposition and that of Republicans to making wealthier Americans pay more taxes and cutting subsidies to oil companies.
GINGREYWell, Diane, yes, philosophically, the people that are most affected by that, the so-called rich, wealthy, individuals making more than 200 -- or families making more than $250,000 a year, these are the job creators. These are the small businessmen and women. And I don't think anybody disagrees with the fact that they create upwards of 75 percent of the jobs in this country, and many of them file as individuals.
GINGREYThey don't file as a chapter S, Subchapter S, whatever. And so this would just be on the backs of them, and it's just not right. They're not rich, and I think it's wrong to do that. The president has been trying and pushing for that. And he, of course, in this plan, wants to let the Bush tax cuts expire only for that group. Obviously, he's not going to recommend that the lower tax marginal rates for those making less go up at the same time.
GINGREYAnd I think that, in fact, the rates that were put in, in 2001 and 2003, should be made permanent. People want to know that there is some permanency, and this is not just a year-to-year, jump from here, jump to there and a confusing mess. So there is no security at all in this plan.
REHMAs I understand it, the president's plan would be raising taxes on those earning a million and beyond, not $250,000. But I do wonder what the president's prospects are for gaining Republican support for his plan.
GINGREYWell, of course, it includes both of those things. It -- he's got this so-called Buffett plan for those making a million and more, Diane, that would say that they would have to pay at least the same rate as the middle class.
GINGREYBut, you know, we already have that in regard to the alternative minimal tax. We messed it up by not indexing it for inflation. But that can be corrected. But we already have it. So I know it sounds good, this so-called Warren Buffett plan. But, you know, I was looking at something, an article, this morning, Diane, from the nonpartisan Tax Policy Center.
GINGREYIn that article, it said -- or the Tax Policy Center said that people making a million dollars or more are paying a 29.1 percent tax rate, federal tax rate, after taking all of their deductions and loopholes or whatever. But people making between $50- and $75,000 adjusted gross income every year are only paying 15 percent after taking all of their deductions.
GINGREYSo, you know, it's kind of -- like I said, it sounds good, and, you know, if you phrase that question to the general public, they're going to say, oh, well, sure, I think that sounds like a good idea. But the fact is it's a hammer looking for a nail.
REHMCongressman Phil Gingrey, Republican from Georgia, thank you so much for joining us, sir.
GINGREYDiane, thank you for having me.
REHMAnd turning to you, Naftali Bendavid, lay out for us the main elements of this plan.
MR. NAFTALI BENDAVIDWell, this is a plan that's intended to cut $3.6 trillion from the federal deficit over the next 10 years. About $1.5 trillion of that is in tax increases of one kind or another. About half of that, a little more than half, is letting the Bush tax cuts expire for those making $250,000 or more, but there's a sort of an assortment of other tax increases in there. There's also this principle that came up, this Buffet rule idea.
MR. NAFTALI BENDAVIDBut at this point, that's more of a principle than anything that's in any kind of a legislative proposal form, and that's just this concept that millionaires and billionaires should be paying the same rates as people in the middle class. And it's something that President Obama hit pretty hard in his speech yesterday.
MR. NAFTALI BENDAVIDBut, you know, there's also a lot spending cuts. One of the big ones is counting the savings from winding down the wars in Iraq and Afghanistan. That's about a trillion dollars. And there are people who argue, well, those savings would have materialized anyway. So should we count that, should we not count that? And there are some cuts to Medicare and Medicaid in there as well.
REHMIsabel Sawhill, what does the plan say about the so-called entitlement programs?
MS. ISABEL SAWHILLIt does make some cuts in entitlement programs, but it does fence off Social Security. The president is making a commitment to do nothing at all to Social Security. He believes it should be on a separate track and should be made solvent for future generations, but that that shouldn't be part of what the deficit reduction committee does this year.
MS. ISABEL SAWHILLThere are, certainly, a number of spending cuts to Medicare and Medicaid, which will be controversial, and then there are a number of other spending cuts in the plan.
REHMIn your view, does the math really add up to reducing the deficit by $3 trillion?
SAWHILLThe math gets very complicated because, as Naftali suggested, it depends on what you include. Do you include the interest savings? Do you include the savings for the two wars we're fighting now? Do you include the $1.2 trillion that's already been agreed to, but not yet enacted as part of the debt ceiling deal? So there is more or less here than meets the eye, depending upon how you count up the spending cuts.
REHMNorman Ornstein, has the president simply given up on trying to negotiate with the Republicans?
MR. NORMAN ORNSTEINI don't think I would put it that way, Diane. I think what I would say is he's adopted a different negotiating style. Certainly, if you talk to people in the White House, there was bit of an epiphany with the fandango over the debt limit. And I think that the president at least believes that every time he has tried to start with a moderate, middle ground and reach an agreement with Republican leaders that would require each of them going back and taking a lot of flack from their troops, that they've backed off. That doesn't work.
MR. NORMAN ORNSTEINThis is a different negotiating position. It's not saying, to heck with you. It's saying, I'm going to start out with a strong position on one side and then let's see if that works in a different way. It's not at all clear whether that's going to actually be effective.
REHMBut, Naftali, does the president have room to negotiate with the Republicans?
BENDAVIDWell, you know, that's, I think, something that's going to be clear in the next few weeks. You know, one thing we need to remember is that, last week, Speaker Boehner got up and made a big speech also aimed at this deficit committee. And he said, absolutely no tax increases. He said, we have one option, and that option is spending cuts and entitlement reform.
BENDAVIDSo now, we got President Obama standing up and saying, you know, I'm going to veto anything if it has Medicare changes and doesn't increase taxes, and we can't do this without increasing revenue. And so you have the two sides establishing fairly strong positions on either end of the playing field. And the thing we need to see is, are these unshakable propositions, or are these opening-bargaining positions?
ORNSTEINYou know, Diane, one of the things that Congressman Gingrey said that struck me as he talked about the Bush tax cuts, he didn't say the tax cut should be made permanent. He said the rate should be made permanent. And if you look at what Boehner said, Boehner said, no taxes, but closing loopholes would be okay. There's still just a little bit of turf here on which you could reach a deal on taxes
REHMNorman Ornstein of the American Enterprise Institute. I look forward to hearing from you.
REHMAnd welcome back as we talk about reducing spending, raising taxes on millionaires, the president's plan, which he presented yesterday. Here in the studio: Isabel Sawhill of The Brookings Institution, Norman Ornstein of the American Enterprise Institute and Naftali Bendavid of The Wall Street Journal. Do join us, 800-433-8850. Send your email to firstname.lastname@example.org. Send us your postings on Facebook or Twitter.
REHMI'd like to go back, Isabel Sawhill, to what Congressman Gingrey said about the fact that he believes now is the time we cannot raise taxes.
SAWHILLWell, he's right that now is not the time to raise taxes. I couldn't agree more. But what needs to be pointed out is that the president is not proposing to raise taxes now. He's proposing to raise them later. What he's proposing right now is to actually reduce payroll taxes, including payroll taxes for businesses, including small businesses that do a lot of the hiring. And the president laid that out about a week ago and summarized the jobs proposals yesterday.
SAWHILLBut the focus now is on how to pay for that. So this plan is balanced in two ways, in my view. It's balanced between the need for job-creating measures in the short run combined with fiscal restraint over the longer run. And that's the right balance for the economy. And, secondly, it's balanced between spending and revenues as the way to get fiscal restraint in the longer run.
REHMNaftali, the New York Times had an editorial this morning titled "A Call for Fairness." The president challenges Congress to balance cuts with taxes on those who can afford more. The Wall Street Journal had a very different outlook in its editorial page titled "The Buffett Alternative Tax," subtitled "The rich don't pay lower average tax rates." Give us a sense of how these two opposing views are somehow playing out or interpreted by the public.
BENDAVIDWell, I think this is a fight that the president is trying to engage right now. I mean, I think we can underestimate the extent to which this is a switch in strategy for the president, not just in terms of legislative maneuvering, but also in terms of public message. He's positioned himself as the reasonable guy, the guy in the middle, the guy who can put his arm around John Boehner, and reasonable people can come to a deal.
BENDAVIDAnd I think that, by the way, it's part of who he is. That's part of his temperament and where he naturally goes. And the White House has concluded that that's absolutely not working. They have to make this a fight. Maybe, eventually, they can compromise, but, first, they have to stake out their position in fairly aggressive terms. And the fight you're referring to, I think, is at the center of that.
BENDAVIDAnd he wants to talk about fairness so that, if the Republicans are talking about tax burdens and how we can't add more burdens to people, he's going to say, we have to do it in a fair way. And there are a few pretty telling things in that speech, one is this Buffett Rule that everybody is talking about, but also his response to the class warfare line, which he specifically went out and responded to.
BENDAVIDAnd he said, it's not tax warfare. It's math. And it'll surprise me if you don't hear that line repeated over and over again, not just by him, but by other Democrats.
ORNSTEINI think you're going to hear another line repeated. There's a Republican congressman from Louisiana yesterday who said that the burden on small businesses and wealthy individuals would be too great. And he said -- and this is pretty close to a quote -- after I feed my family each year, I only have $400,000 left.
ORNSTEINWhen you hear lines like that, I think it resonates with a public where we know public opinion is basically in favor of increasing taxes on the rich. You know, class warfare, as the line traditionally goes, it doesn't generally play well in this country because we're not like a Britain with a class-stratified society. Most people aspire to be rich. They don't hate the rich.
ORNSTEINBut in this case, where you really are talking about a contrast over who's going to bear the burden, I think he probably, now that he's seized the bully pulpit in a much more aggressive way than he has before, may gain some traction on this.
REHMBut what kind of leverage does John Boehner have, Isabel?
SAWHILLWell, I think that, as both Norm and Naftali have said, there has been an attempt by the president in the past to be above the fray, to try to compromise, to offer an olive branch to the other side. And that just hasn't worked, and so he's getting tougher now. And I think the polls suggest that the public may be with him. The majority of the public is in favor of what we call a balanced package, both revenues and spending cuts.
SAWHILLYou can't do it with just one alone. It's both a matter of math and fairness. And they are also in favor of taxing the wealthy more. That is getting quite high public approval. So I think the president is going to go out and fight for these ideas now, and it's the right thing for him to do. If it works as a negotiating strategy, great.
SAWHILLBut if it doesn't, he's got an election coming up that -- where the public will decide which of these views of the world they prefer.
BENDAVIDBut, you know, the Republican message has been very strong and very successful, and it's not going away. And so I think this will, perhaps, be a fight. I don't think, just because the president has become more aggressive, he automatically wins the fight. I think Democrats would say he's at least engaging it now.
BENDAVIDBut the Republican message that the government has too much of your money, and the problem is that we spend too much, not that we tax too little, and all we need in a recession is for struggling Americans to have more taxes -- I mean, those messages, whether you agree with them or not, are forceful. They're resonant.
BENDAVIDThey make sense to a lot of people. And I think now what we're going to have is a real fight between that argument and the fairness argument.
REHMBut, you know, it's interesting that President Obama said the details are supported by both parties. What did he mean, Norm?
ORNSTEINThese details are not supported by both parties. But the general structure has been supported by every bipartisan group from the Simpson-Bowles commission, to the Rivlin-Domenici commission of the Bipartisan Policy Center, to the Gang of Six. And what we have to remember here is we're talking about Obama, Boehner, McConnell at one level duking it out.
ORNSTEINAt another level, we have this super committee of 12 individuals with unprecedented power. And the real question there is not even whether they do the $1.2 to $1.5 trillion in deficit reduction, which is harder than doing the grand deal of$4 trillion.
ORNSTEINAnd a real question here is whether the president's bargaining position, along with Boehner's position, leaves them in a place where they can do things that neither side at the top wants and say, see, we're bringing pain to both. That means including Social Security, maybe extending the retirement age for Medicare. It means reducing tax rates while also raising revenue.
ORNSTEINThe path is there. And one could make a case that, with each of them laying out these markers, it's made it harder. But, on another level, it may have made it easier for them to be able to fend off both of their sides by saying, look how I'm sticking it to, respectively, Obama and Boehner.
REHMDo you agree with that, Bel?
SAWHILLI do, although I'm not optimistic that they're going to get there. I'm afraid that the super committee, being six Republicans and six Democrats, is going to stalemate. There have been all kinds of groups that have tried to come to an agreement on this. We saw, over the summer, the speaker and the president getting together, playing golf, trying to achieve a grand compromise. It failed not just once but several times. So I'm not optimistic.
SAWHILLOn the other hand, it would be very good if we could not only have an agreement, but have it be bigger than the $1.5 trillion. And one of the notable things about the president's plan yesterday is that he did go big. In other words, he challenged the super committee to do even more than they're required to do by current law.
REHMNaftali, here's an email from Mark in Birmingham, Ala. He says, "I'm a small business owner. I have never had $250,000 in personal income. At this point, paying taxes is not the problem. It's customers and revenue."
BENDAVIDWell, you know, that argument, and that Congressman Gingrey outlined, that when you raise taxes on individuals, you're also raising them on small businesses -- that's been this argument going back and forth between Democrats and Republicans for years. And Democrats say it's really a miniscule number of small businesses...
BENDAVIDTwo percent is the figure you usually hear. And conservatives, of course, saying, look, the last thing you want to do is tax small businesses. So, I mean, that is a big part of the debate. As far as the super committee and what it's doing, I do think there's a few things that's sort of pushing in the direction of accomplishing something, even though, of course, as Isabel said, it's a rough road.
BENDAVIDAnd one of them is simply that there's an alternative, that is to say, if they don't reach a deal, there's these across-the-board cuts that kick in that are pretty onerous, particularly on the defense community. But there's also a political imperative, I think. I think both sides saw what happened at the end of the debt debate, which was widespread. I think disgust isn't too strong of a word on the part of the public.
BENDAVIDAnd I think both of them feel, to some degree, if they can't pull something out here, it's really going to be bad for them politically. So, while there's a lot working against them, I also think there's a certain amount of political pressures working for them reaching a deal.
ORNSTEINYou know, let me mention one point that Mark made that, I think, is a telling one. What he's saying is it's not taxes that's the problem. It's getting people to spend. It's getting consumer confidence back. And we know that in this very deep economic hole that we're in, a large part of which -- the vast majority is because of the financial crisis and the need to deleverage, and it takes a long time. But there is a psychological component.
ORNSTEINAnd one reason for making a bigger deal is that if anything could change the psychology, it would be going against what most of us think as a very tiny chance in this utterly dysfunctional system of reaching a big deal. And, you know, I'm looking at Rob Portman as the potential savior here, the one guy who I hope will put country first and understand that we are close to a depression, given what's happening in Europe. And you better do something bold, even if it's not something your party wants.
REHMAs George McGovern said on this program recently, where are those who put nation before party? Here's an email from Tom in Raleigh, N.C., who says, "Why is the higher tax rate for the wealthy fair? Do they use more government resources? It seems more government money is spent on the poor, and they pay no tax. I understand why the rich can afford higher tax rates, but why is it called fair?" Bel.
SAWHILLWell, I think, first of all, we shouldn't forget about payroll taxes. Anybody who has a job, even if it's a minimum-wage job, pays payroll taxes and pays at a rate that is similar to someone in the middle class and even similar to someone who's wealthy if most of their income comes from investments.
SAWHILLSo the figures for the effective tax rates paid by the wealthy depend a lot on whether they're getting their income through earnings, in which case they will be taxed a high rate, or whether, as is often the case, they're getting their income from capital gains and dividends, where the tax rate is only 15 percent.
SAWHILLSo there is a -- an inequity, I think, in the fact that working Americans are paying as much as the wealthy who get all of their income from investments.
REHMAll right. And you're listening to "The Diane Rehm Show." We're going to open the phones now. First to Annapolis, Md. Good morning, Scott. You're on the air.
SCOTTHi, Diane. I just wanted to, I guess, raise two points. One was, you know, when Buffett talked about he pays 17 percent taxes and his secretary pays 33 percent, why did not anyone say, hey, why don't we move the secretary's tax rate down to 17 percent? And that hasn't been discussed at all. And I know that that doesn't accomplish our fiscal goals, but that's some of the disparity from a working person's point of view.
SCOTTThe other point would be if we have 153 million labor pool available -- last year, the IRS recorded only 98 million people filed taxes, and, of those, roughly 50 million actually paid taxes. So we have, I don't know -- maybe it's less than 20 percent actually paying taxes to support a system for 300 million people. And why can't they focus on getting all of the people that work to pay some equitable amount of tax?
REHMScott, I'd be interested in where you got your figures.
SCOTTOh, I got my numbers from bls.gov, the Bureau of Labor Statistics.
REHMIs that accurate, Naftali?
BENDAVIDI mean, it's -- I don't know if those exact numbers are accurate, but it's certainly a case to be made that there's a relatively small number of people who are sharing in the tax burden, particularly at this moment where we're in a recession and a lot of people either aren't making much or they're not making anything at all.
BENDAVIDYou know, the other argument that the caller made about why don't we lower the rates for people at the bottom of the income level, that's, you know -- it's a case that people make, but, you know, we have to speak deficit problem. And so to sort of lower rates, I mean, it would cause a lot of other problems for people.
ORNSTEINYou know, I do think we have to make some distinctions here. If you really do begin to parse it out and look at those who are not paying income taxes, it includes a substantial number of elderly people, retirees who are on Social Security. It includes a lot of people who are at incomes of $15- or $20- or $25,000. And it's important to realize that when you start to look at tax burdens, if you only look at income taxes, you're not getting a fair picture.
ORNSTEINBel mentioned payroll taxes. There are also sales taxes, which are deeply regressive. And if you look at the payroll tax, of course, wealthy people pay it on only a tiny sliver of their income, where poor people pay it on all of their income. And the sales tax has become a substantial additional burden. So if you look at the overall tax burden, it's actually shared much more widely than we would have otherwise.
ORNSTEINAnd I suspect that many Americans, if they looked at whether you want to add to the tax burden of people making $20,000 and trying to support a family or retirees, their parents and grandparents, they might say, well, that's not who we meant.
REHMAll right. To Ann Arbor, Mich. Good morning, Richard.
RICHARDGood morning. I'm kind of pessimistic about this business. The trajectory we're on right now is to put the total debt in the $28- to $30 trillion range over the next 10 years. And $1.5-, $1-, $2-, even $4 trillion and say barely a down payment on that increase. Now, my other -- my question -- and maybe one of your guests can answer it -- is, what voodoo accounting do they use such that every year the debt grows by more than the claimed deficit?
RICHARDSuch that -- even in the so-called surplus years of the late Clinton administration, the debt increased every one of those years.
REHMNorm or Bel.
SAWHILLWhen the deficit is -- doesn't exist -- in other words, when we have actual annual surpluses, that does reduce the debt. So I don't know why you think it doesn't. It is true that there is a lagged effect here. It's going to take many years of getting our deficits down to more reasonable levels before we can stabilize debt to GDP. But the president's plan does at least stabilize that ratio.
REHMIsabel Sawhill, she is a senior fellow on economic studies at the Brookings Institution. When we come back, more of your calls, comments. Stay with us.
REHMWelcome back. As we talk about the president's plan to increase taxes on millionaires and to reduce the deficit, many emails are similar to this. From Kelly in Baltimore, Md., she says, "My question is did the Bush tax cuts create jobs? If the case for no tax cuts is that it impedes creation of jobs, show me that the original cuts created jobs while taking into account the state of the economy then and now." Naftali.
BENDAVIDWell, that's one of these perennial arguments. And one of the things that Democrats say is that when the tax rate is what it was during the Clinton years, when the tax burden was higher, a huge number of jobs were created in this country and that during the Bush years, when taxes were cut, fewer jobs were created. In fact, jobs were lost.
BENDAVIDBut, you know, it's one of these things that's a little bit hard to prove because there are so many different factors going into whether or not the economy creates jobs, and I think that's a little bit of a difficult thing to pinpoint. But certainly that's a rhetorical argument the Democrats make.
REHMAll right. To Eddie in St. Louis, Mo., good morning to you.
EDDIEGood morning. Very simply, I'm wondering if the Buffett rule is designed to eliminate capital gains taxes. If that's the case, wouldn't it have a pretty dramatic impact on planning that baby boomers must do as it relates to their retirement accounts, their investment accounts? Because that money, once it is redeemed, is coming -- is being paid out now or is being taxed as capital gains, not as ordinary incomes.
SAWHILLThe answer is we don't know what the Buffett rule is all about. It's just a principle at this stage. And the president and his team have not laid out how it would work specifically. It could be done through changing the capital gains tax rate, but it could be done in various other ways as well.
SAWHILLAnd I do think that they should have been more specific about this because it is going to create some uncertainty and create difficulties for people who are trying to plan their retirement.
REHMAll right. And to Andy in Alexandria, Va., good morning to you.
REHMHi. Go right ahead, sir.
ANDYHi. I'm a small business owner in Alexandria, Va. And I started my business five years ago. And when I heard the congressman earlier talking about lowering payroll taxes in spurring the economy, I have a totally different opinion. For my opinion, my business will grow, and I will hire people when people have money to spend and things to spend it on. I would love to have a reason to pay more payroll taxes.
ANDYBut that doesn't mean I'm going to go out and hire somebody right now just to hire them. There's no demand. And I've talked to other small business owners who feel the same way. Restaurant owners don't hire people because they have lower payroll taxes. They had more people in their restaurants wanting their services.
ANDYAnd I'm just so frustrated with hearing the Republican message about this. I don't share it. I am proud to pay taxes. I'm a proud American. And, you know, I would like to have a reason to pay more taxes, meaning more business.
ORNSTEINBoy, there's a lot of truth to that. And, you know, it gets back to what Mark had said earlier as well. We really need to do a series of things to spur consumers to spend. Everybody is uncertain right now, and frankly, the dysfunction in Washington only makes it harder to get to that point. The cut in payroll taxes for individuals, one could argue, as working people have money, they're going to spend it.
ORNSTEINThe cut in payroll taxes for the employers -- I think what Ed has said resonates, that it's not going to be a big spur. Now, there are some other things that the president has proposed and some other ideas out there. The Germans, for example, have a plan where there are major tax breaks to companies who do job sharing so that you can keep from laying off people and keep people employed. That has worked very successfully.
ORNSTEINThe president adopted, in his earlier plan, something from Georgia to try and spur jobs. There are ways to create those incentives. Payroll tax cuts on employers probably are not very effective.
REHMTo Rindge, N.H., good morning, Frederick.
FREDERICKYes, hi. Thanks for having me. This is really good opportunity and really important discussion. I am self-taught machinist who runs his own machine shop, and I'm a small business owner. And Congressman Gingrey and the Republicans are really out of touch with the reality, economic realities. And I can't hire anybody because I have not enough money to expand my business. I'm just struggling to survive.
FREDERICKAnd, you know, I would -- your previous caller said something really important. Patriotism, that's the reason why we should pay more taxes. I mean, if I made $50,000, I would cut a $10,000 check to the government right now and -- to help out my fellow Americans.
REHMWell, that's a grand plan. And I would hope that before long, there will be the demand that all of these small business owners need. Let's hear another perspective from Rochester, NY. Good morning, Nicky.
NICKYI was a poor boy. Now, I'm a rich man. I'm willing to pay 2 percent, 5 percent, 10 percent more on taxes, only if they could -- if the government would let me keep the money after I pay the taxes. Under present tax law, I can't. I can't give it away without gift taxes. And when I die, they get 50 percent on my tax. And nobody talks about the tax on the rich when they die. Nobody.
NICKYAnd Congress will never eliminate the estate tax because 50 percent of the people in Congress are lawyers, and lawyers all make their money on estates and keeping the estate taxes enforced.
REHMSo, Nicky, may I ask a question to you?
REHMHow much do you pay in taxes as a millionaire? What percentage of your income do you pay in taxes?
NICKYThe top rate. I take no deductions, except my property taxes. I'm -- I have a business. I pay taxes, on a maximum, over $300,000 on payroll tax. I employ 160 people. And then I have Subchapter S corporation that I have to pay regular tax rate on all net income. I pay top tax rate completely. And I resent not being able to do what I want with my money, to give my children things that they want, unless I gave it. I'm filing gift tax returns every year.
REHMAll right. Thanks for your call. Isabel, I know that an awful lot of people have talked about this so-called death tax. I don't know whether it's part of the president's plan to either eliminate it or to specify that it's only over a certain amount.
SAWHILLI believe what the president and the administration favors is a -- an estate tax law in which you get an exception of $7 million for a couple, $3.5- for a single individual so that unless you have more wealth than that, you will not pay any estate tax, whatsoever. And, of course, if you have a surviving spouse, you also pay no estate tax.
ORNSTEINIt's important to realize that part of the tax deal worked out after the last election raised the exemption to $5 million for an individual and $10 million for a couple, lowered the tax rate to 35 percent from 45 percent. And at the moment, there has been a substantial increase in the gift exemption to $1 million. And there are ways in which people can actually give up to $5 million without paying a gift tax.
ORNSTEINSo we've actually seen a very substantial cut in estate taxes for people like Nicky.
REHMNicky, how does that sound to you?
NICKYHow does that sound? I'm a CPA, and they should eliminate the estate tax and let everybody pay tax on all their income. On their final tax return, they should file and pay tax on all income that they have on capital gains, and let everybody pay taxes on any profit they made until death. At death, they file a final tax return and pay a tax. It should be equal to all people.
REHMAll right, sir. Thanks for your call. I think that that question, if indeed it does come up with Republicans in the discussion over the Obama plan, is going to get a lot of attention. Let's go now to Elkhart, Ind. Good morning, Judy. Thanks for joining us.
JUDYThank you for having me. I would like to differ with the man who said that the poor do not pay taxes. I am a senior citizen living on Social Security, and I have a job, I'm happy to say. I pay 23 percent in income tax on payroll, on my earnings. Anyway, another problem, I think, why many of us are so afraid and maybe some people do not understand about being worried about cuts to our Social Security -- when I first went to work, I had a union job at $1.87 per hour.
JUDYI could work 40 hours, but that amount of Social Security tax that was taken out is, naturally, much less. I'm making $9 an hour now, and I do, naturally, have a larger percentage of Social Security money taken out. And I think that's something that many of us don't understand when we older women, went to work, we certainly didn't make very much in wages. And that was just the way it was.
JUDYAlso, I would think that it -- I voted for John McCain, but I do think that President Obama really, when he became president, he got a few challenges handed to him that were very difficult. And that is actually about all I have to say.
REHMAll right. Thank you so much for calling. Naftali.
BENDAVIDOne of the themes that I think has run through the last few calls is, who should pay taxes, how much and how should we feel about paying taxes to this country? And, you know, on the conservative Republican side, I think there's a real feeling that the American thing to do is to get government off our backs. People should pay fewer taxes.
BENDAVIDOne of the things President Obama tried to say yesterday is that he thinks that millionaires want to pay taxes. He thinks that they want to do their share, that the patriotic thing is, in fact, to pay taxes, so we heard a few people saying they'd be happy to pay more taxes. Other people took the opposite.
BENDAVIDBut I think this has opened the conversation about what our relationship is to the government in a country and how much in taxes we should want to or should be obligated to pay.
SAWHILLI agree with that, but I think one of the problems is the public is not very well-informed about what their money goes for. Right now, 70 percent of all of the revenues collected by the federal government goes for just three programs: Social Security, Medicare and Medicaid.
SAWHILLNow, you know, the other 30 percent is for defense, for education, for the environment, for infrastructure, for research, for a variety of things, and there are some savings that can be made there. But the basic trade-off here, to follow up on the last point, is that if you don't want to pay taxes, then you're going to have to give up some of these benefits that people like for health care and for retirement.
REHMAnd you're listening to "The Diane Rehm Show." To Dallas, Texas, and to James. Good morning to you.
JAMESHi. I was wondering why, you know, historically, just outside of U.S. history, too, anytime there's a war going on, taxes, you know, have to be raised. But this time, you know, it just seems like we're special or something and we didn't have to, and we actually had tax cuts. Why is that?
REHMAnd, in fact, the cost of the wars was off the books.
ORNSTEINIt was. And if you go back and try to parse out why we went from projected surpluses in 2001 to where we now are with $14 trillion in debt, the Bush tax cuts, combined with two wars unpaid for, combined with the Medicare prescription drug bill that didn't have a dime to pay for it either are the single largest drivers. And it is true that in years past we paid for wars.
ORNSTEINWhen we didn't with Lyndon Johnson, trying to have guns and butter at the same time, we hit a terrible economic patch, and that's one of the lessons or one of the sad and sorry lessons that come out of this.
BENDAVIDI mean, it's also, too, that those wars were complicated in a way. I mean, they were wars that -- there wasn't a draft. Not all Americans felt invested in them. The war in Iraq, in particular, was very controversial. And, I think, if there had been a proposal for a tax increase to pay for those wars, it would have been difficult.
BENDAVIDSo the way we proceeded was, instead of making some tough decisions, we had the war, and then we had tax cuts. And it did put us in a pretty difficult fiscal situation.
REHMSo the question, the main question, where does each of you see this argument going between Republicans, Democrats, the White House, the Congress on the president's plan? Isabel.
SAWHILLWell, I think that this plan, even though it's very much in our minds right now, is not going to be what's going to determine the future of the country. I think the future of the country is going to be very much affected by what happens to the economy. Most economic forecasters, right now, believe that the unemployment rate is going to hang high. We're going to continue to have very sluggish growth. We may even have a double-dip.
SAWHILLIt's very hard to be reelected as a sitting president with an unemployment rate of 9 percent. So I do think that if people buy into the Democratic argument as opposed to the Republican argument about the issues we've been talking about, they are going to -- they should worry about how this economy is going to affect the president's reelection prospects. I think it's quite likely we could have an entirely Republican government by 2013.
BENDAVIDWell, I do think what the president tried to do is frame an argument not just for the super committee, which is ostensibly what this was for, but an argument that he's going to take to the next election. And I think, for the first time, really, you saw him articulating the Democratic argument in a fairly forceful, uncompromising, aggressive terms. And I think that's where this is going to be fought out.
BENDAVIDAnd it's true that it's very difficult during an economy like this for a president to get reelected. But I think what you saw yesterday was the president doing his best to formulate the message he's going to take to November.
ORNSTEINDiane, I think we're in the midst of a great American tragedy. The fact is we've had all kinds of bipartisan groups who've come up with common ground.
ORNSTEINThe common ground is roughly $4 trillion in debt reduction through significant tax reform that lowers rates and limits deductions, broadens the base, raises enough revenue, either, you know, $1 out every $3 or $1 out of every $4 are doing so, make significant changes in these programs that are the big ones -- Social Security, Medicare and Medicaid -- and restrain spending in other areas.
ORNSTEINEverybody has agreed with that. And yet we have such dysfunction in the political process that we can't seem to get from here to there. And I end with something I said earlier about Rob Portman, Obi-Wan Kenobi, you're our only hope. And that is true of the members of the super committee. If not, given where Europe is heading and our exposure to European bank debt, we could be talking about not just a recession but something with the big D word, Depression, in it.
REHMNorman Ornstein of the American Enterprise Institute, Isabel Sawhill of the Brookings Institution, Naftali Bendavid of The Wall Street Journal, I hate to end on such a negative note, but let's hope for wisdom coming out of our leaders. Thanks for listening, all. I'm Diane Rehm.
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