Politics Behind the Tax Code

MS. DIANE REHM

10:06:54
Thanks for joining us. I'm Diane Rehm. With economies stalling around the world and job creation at a standstill, calls by groups, like the Occupy Wall Street movement, for the rich to pay more are gaining traction.

MS. DIANE REHM

10:07:13
To look at how tensions over economic fairness are fueling the tax debate, Kevin Hassett of the American Enterprise Institute is with me, also, Roberton Williams of the Tax Policy Center, Michael Dorning of Bloomberg News and Jared Bernstein of the Center for Policy -- on Budget and Policy Priorities. But first, joining us from Rome is Sylvia Poggioli. She's NPR senior European correspondent. Good morning, Sylvia.

MS. SYLVIA POGGIOLI

10:07:53
Good morning, Diane.

REHM

10:07:55
Talk about what's happened over the weekend as the Occupy Wall Street protest spread to Africa, Asia and Europe. What's happening in Rome where, I gather, they took a fairly violent turn?

POGGIOLI

10:08:13
It took a very ugly turn in Rome, and it was really not the majority of the demonstrators. It was a small group of very, very well-organized -- they call themselves, sometimes, the Black Bloc or Anarchal Hooligans, a motley crew, very, very violent. The large majority of the demonstrators were very peaceful, and they were furious. I'd never seen this is in a rally where the peaceful protesters really shouted down the violent ones and tried to hand the -- tried to even report to the police.

POGGIOLI

10:08:45
But, of course, they were very well-organized, and it was a very ugly scene. But it's interesting that this whole movement was definitely stimulated by the recent Occupy Wall Street in -- movement in the United States. But it really started in Madrid this past summer. The name they've taken, all of them, the Indignant Ones, comes from the Spanish group the Indignados, who started setting up these base camps in the central square in Madrid.

POGGIOLI

10:09:12
And Spain is the country in Europe that has absolutely the largest unemployment, youth unemployment, some 45 percent. It's similar here in Italy, 40 percent. Greece is similar, too. It's very bad. And these movements now, inspired by Spain, have gone to Greece, to Italy, to other countries, and it's very interesting that it really is the part of the euro crisis. And one of the most crucial issues is the problem of youth unemployment, and that's what they are really complaining about.

REHM

10:09:41
So in your view, then, the demands being made here in the United States are pretty much the same demands being made around the world?

POGGIOLI

10:09:54
Absolutely. They are very much, you know, very critical of the -- what they see as the world of the financial speculation. They are very much critical also of the European Central Bank, the austerity measures that are being imposed on so many countries here in the euro crisis. There's a great loss of faith in politics and government. There's a demand for accountability.

POGGIOLI

10:10:21
And what's interesting is that the man who's going to become the new European Central Bank president, Mario Draghi, currently the chief of Italy Central Bank, he said just the other day, before the violence -- he said he understands these young people. He understands this global protest. He says they're blaming their lack of prospects on the world financial speculation, the world of financial speculation that has no rules.

POGGIOLI

10:10:46
So he was very, in a sense, understanding, which was quite a different turn than anybody would have expected from somebody in that position.

REHM

10:10:54
And what about Silvio Berlusconi? He had barely survived a no-confidence vote in parliament over his failure to address Italy's mounting debt crisis.

POGGIOLI

10:11:07
Absolutely. And he was certainly one of the main targets of the criticism of these protesters in Rome the other day. And -- but, you know, when it turned violent, unfortunately, it kind of, like, shifted the emphasis on violence and away from, let's say, the government's poor handling of the economic crisis.

REHM

10:11:28
So, Sylvia, where do you see this going? Do you see it continuing to expand? Do you see any signs -- I gather the violence in Rome has died down. But do you see all of this continuing to grow?

POGGIOLI

10:11:47
We certainly hope the violence will not repeat itself, but I think it's going to be -- it's -- again, because here, the police was also very, very seriously -- very strongly criticized for not having prevented it, and this was a very well-organized group. There was nothing spontaneous about it at all. In more general terms, I think this movement will grow, definitely. I -- in most places, as I said, it was peaceful, and I think it will continue that way.

POGGIOLI

10:12:12
In some of these -- but in some countries, like in Greece also, where there is a similar violent anarchist movement, as the crisis gets worse, there's a lot of concern that this could lead to more and more -- even a new kind of domestic terrorism. Unfortunately, in Italy, there's a memory of this in the late '60s or early '70s. There was a lot of domestic terrorism both on the ultra left and ultra right. And there are some commentators who fear this could be sort of a beginning of that horrible period again.

REHM

10:12:48
You know, I left Athens on Thursday morning, and the garbage was already piling up. I understand they've called out the military this morning to begin collecting it.

POGGIOLI

10:13:04
I was in Greece up until just 10 days ago. And it's getting tougher and tougher there. The people don't understand they've been really imposing these very, very tough austerity measures. People are reacting with all these rather deep, paralyzing general strikes, transportation strikes. But the people are wondering, we're belt tightening, but nothing is getting better.

POGGIOLI

10:13:27
The debt is getting bigger, and they just wonder whether these measures are the right ones. And there just seems to be a very -- a kind of a political paralysis throughout Southern Europe, parts of Europe, about, really, how to deal with this crisis.

REHM

10:13:43
Sylvia Poggioli, she is senior European correspondent for NPR. Thank you so much for joining us.

POGGIOLI

10:13:53
Thank you, Diane.

REHM

10:13:54
And turning to you, Mike Dorning, how much notice do you think the political establishment here in Washington is taking notice of these protests?

MR. MIKE DORNING

10:14:09
Clearly, they've taken real notice of it. You can see President Obama yesterday in the dedication to the Martin Luther King Memorial kind of making a nod to the aspirations of the protesters. Even when in a presidential press conference, he was saying that he had some sympathy for their frustration.

MR. MIKE DORNING

10:14:27
But I think what politicians here in Washington are responding to even more is the general frustration in society that's driving these protests and the Tea Party and the general frustration, even from people who don't go out on the street. There was a figure I saw about a week or two ago that really, really drove it home for me. Someone did a study of median income monthly in the United States.

MR. MIKE DORNING

10:14:52
And they found that, since the beginning of the recession, it's dropped by one-tenth, and two-thirds of that drop has come since the end of the official recession. So there, you see, for regular middle-income Americans, things have been getting worse, even when we say the recession is coming to an end.

REHM

10:15:12
Mike Dorning is White House correspondent for Bloomberg News. Do you think that the idea of a millionaire's tax coming at the same time is going to fuel even more debate?

DORNING

10:15:31
Oh, certainly. Certainly, the idea of taxing the wealthy polls very well. Bloomberg does polls on this. And we did one just before the Republican presidential debate that we sponsored last week. And even among self-identified Republicans, 51 percent support the idea of taxing the wealthy to bring down the budget deficit.

DORNING

10:15:49
And you can see the Democrats and President Obama really driving this home as a choice where we face these deficit problems. And the Republicans brought up the idea of reducing Medicare benefits. And then they sort of play that off as a choice. Either the rich pay more, or your Medicare benefits get cut. And most of the people who aren't rich would rather the rich pay.

REHM

10:16:16
Bob Williams, how would this work, this so-called millionaire's tax?

MR. ROBERTON WILLIAMS

10:16:22
Well, the way that it's proposed by the Senate is a 5.6 percent tax on all income over a million dollars. That's a pretty healthy tax on a very small number of people. There are only a few hundred thousand people with incomes at that level. It would bring in a fair bit of money, but it's not the way to solve our budget problems. It would pay for one program now, but in the long run it's not going to be the solution to our long-run deficit problem.

REHM

10:16:44
Why not?

WILLIAMS

10:16:45
There just isn't enough money up there. There are too few people with that much money. You have to dig much deeper down the income distribution, hit the middle class to some degree because they've got the money. The problem is...

REHM

10:16:55
But isn't it a step in the right direction?

WILLIAMS

10:17:00
It's moving the right direction to get more taxes. These are the people who've done best over the last 25 years. Their incomes have gone up much, much faster than anybody else's. The bottom of the distribution, the poor have seen essentially no change in their income over the last 25 years. People in the middle of the distribution have seen some gains. People at the top have seen their incomes grow very, very much, and they're the ones who can most afford more taxes.

REHM

10:17:18
So as an indication of the Washington political establishment listening to these protesters around the country, doesn't it at least make symbolic sense?

WILLIAMS

10:17:34
Well, I can't speak to the politics of it. I'm an economist, and I'm always happy not to say I'm a political scientist. But, certainly, the politics are pushing in the direction of saying tax the rich, they've got the money, and the rest of us are going to be hit by any other changes being made in the budgets.

REHM

10:17:49
And what about, Jared Bernstein, the idea of so-called class warfare at work here?

MR. JARED BERNSTEIN

10:17:58
Class warfare is kind of the cry that you hear from a lot of folks on the conservative side of the aisle when they don't like the kind of measures that you and Bob were just talking about. And it's -- doesn't resonate at all with me and, I think, with lots of the folks who are out there on the street because, in a sense, as you heard Bob say, the one group that's done really well -- and not just in the past few years, but over the past few decades -- has been those at the top of the income scale.

MR. JARED BERNSTEIN

10:18:27
Now, we're in a position where we're talking about taking significant chunks out of, say, social insurance -- talking about Medicare, Medicaid -- and somehow the idea of going to those folks at the top and asking for a shared sacrifice, instead of being fair, it becomes class warfare. It's just wrong, Diane.

REHM

10:18:45
Jared Bernstein of the Center on Budget and Policy Priorities. Short break, we'll be right back.

REHM

10:20:04
Welcome back as we talk about what's happening around the county, indeed around the world, as people protest the gaps between the wealthy and the not so wealthy, and proposals out there to deal with questions about taxation. Here in the studio, Roberton, who prefers to be called Bob Williams, he's at the Tax Policy Center. That's a joint venture of the Urban Institute and the Brookings Institution.

REHM

10:20:42
Mike Dorning is White House correspondent for Bloomberg News. Jared Bernstein of the Center for Budget and Policy Priorities. And Kevin Hassett, he's with the American Enterprise Institute. We do invite your calls, 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or send us a tweet. I want to turn to you now, Kevin Hassett. Do the rich pay their fair share of taxes?

MR. KEVIN HASSETT

10:21:24
Yes, I think they do. And, in fact, I think that, in terms of the income tax, the income tax in the U.S. is, you know, more redistributive than most income taxes around the OECD. We rely less on things like value-added taxes in the U.S. than they do in Europe. So, in fact, we have a pretty top-heavy tax code already. But don't forget that the academic literature is pretty decisive that a consumption tax, one that excludes capital income from taxation, is a much more efficient tax.

MR. KEVIN HASSETT

10:21:52
And so the right way to have the debate is to say, well, you know, we understand that we'll have, you know, higher growth and more jobs if we don't tax capital income. And, you know, but if we do that, then that means that Warren Buffett will pay less tax than the people in his office because he gets a lot of capital income and they don't.

MR. KEVIN HASSETT

10:22:10
But you -- if you're going to say that we need to tax Warren more, then you have to also concede that you're willing to accept less economic efficiency, that you want -- you're willing to take lower growth and less job creation because it strikes you as unfair that Warren pays less than his secretary. But I can say that the literature is really decisive, that it's not in dispute at all that taxing capital income is really harmful for the economy.

REHM

10:22:32
None dispute at all, Jared Bernstein?

BERNSTEIN

10:22:35
Well, I would dispute it.

HASSETT

10:22:35
Talk about it.

REHM

10:22:36
I figured.

BERNSTEIN

10:22:37
Well, look, I mean, one thing to do is put aside the literature where it tends to be very theoretical. And Kevin has some points. He knows literature well. In fact, he's contributed to it. And look at what's actually happened. If you look at the tax structure, for example, that presided over the 1990s, that was slightly more progressive than the one we're talking about today. And, in fact, what President Obama is talking about is basically going back to the kind of tax structure that prevailed in those years.

BERNSTEIN

10:23:04
We -- the economy created over 20 million jobs. Investment was very strong. So that capital investment point doesn't really hold. Investment was extremely strong, and growth, by the way, was very broad-based. Those at the top did great, in fact, in a quality group. But those in the middle and the bottom did very well, too. Now, switch to the 2000s, we actually had this kind of unique experiment, kind of testing part of Kevin's hypothesis, where you really took a whack out of tax rates.

BERNSTEIN

10:23:30
You know, you had all these big tax cuts for the upper end trickle down and so on. And, in fact, we had something like 5 million jobs. Jobs grew at less than one-fourth the rate than they did in the 90s. So I would argue that this notion that somehow taking a whack at the tax code for giving capital, giving the rich a break, has been proved to be extremely ineffective. The one thing it does do -- you can count on it doing -- is exacerbating economic inequality.

REHM

10:23:56
Now, President Obama initially started out with the $250,000 tax rate above which he would tax -- propose taxing. What happened to that, Mike Dorning?

DORNING

10:24:11
Well, there is a couple of changes. His also was the Buffett rule, where you basically make sure that the wealthy people don't pay less in taxes. So, probably, we would've had an ultimately tax capital gains a little bit more. But the problem is people like Chuck Schumer, who represent New York -- and I'm sure some of the folks in California are less interested in people taxing at a quarter million above, and they prefer the $1 million -- because there are people in New York City who at least wouldn't consider themselves wealthy, although others might, who make a quarter of a million dollars a year.

DORNING

10:24:44
Also, his original package had things like taxing oil companies more. That's not something that oil state senators love, some of whom are Democrats. So there -- what the Senate wanted to do is get something that worked to keep all the Democrats unified, and this worked. It even -- they even wound up having to bump it up from 5 percent to 5.6 percent and put it off a year to make everyone happy.

REHM

10:25:10
Now, just in terms of sheer fairness, does it seem reasonable to tax millionaires more than those making, say, $40,000 a year, Bob?

WILLIAMS

10:25:30
The problem with fairness is it's all in the mind of the holder. What Kevin thinks is fair, Jared will think isn't fair. What Dave thinks is fair, I might not think it's fair.

REHM

10:25:37
But, no, I mean, really...

WILLIAMS

10:25:37
It's told that fair -- there is no measure of fairs.

BERNSTEIN

10:25:39
What do you think most people would think is fair?

WILLIAMS

10:25:41
Most people, I think, think that millionaires can afford to pay a lot more. They'll never expect to see $1 million. But, for them, that's just unimaginable and most people can pay a lot more tax than they're doing. What they don't understand is how much tax they're already paying. We estimate that millionaires are paying about 30 percent of their income every year in taxes. That's a substantial amount of money.

REHM

10:25:59
Don't they seem to find more ways to pay less in taxes?

WILLIAMS

10:26:07
If you're at the top of the income distribution, you have more ability to shift your income to different forms that have faced lower tax rates. So you move your wage income into capital gains and stocks to a lower rate.

REHM

10:26:17
And pay a 13 percent rate.

WILLIAMS

10:26:20
Or you defer things.

BERNSTEIN

10:26:20
Well, I mean, I'm actually -- I thought something Bob said earlier makes a lot of sense. On the fairness point, I think I'm right with -- this is Jared. I think I'm right with most people, which is that when you have a middle class that's been really taking it on the chin for decades now in their pre-tax income, the idea of raising their taxes to get the revenue we need just doesn't make any sense.

BERNSTEIN

10:26:38
When at the top, you actually have the effective tax rates, the share of their tax that they're paying out of their income, going down, going down significantly for those at the top, so while they're doing much better, they're actually paying a smaller share of their income in taxes. But, that said, this millionaire thing has a lot of symbolism. I think it has some fairness to make it's point. But we're going to have to have a broader tax base. There's no question about that.

REHM

10:27:03
You're shaking your head, Kevin Hassett. But here's what I want to understand a little better. What about Herman Cain's 999 proposal?

HASSETT

10:27:17
Yeah, Herman Cain's 999 proposal is actually just a slightly mutated flat tax, the old Hall-Rabushka flat tax that people have talked about in the academic community and in the political arena as well. It's something that, you know, I think that there's been a lot of study of because it so close to the flat tax.

REHM

10:27:36
What would it do?

HASSETT

10:27:37
It would increase the taxes paid by people in the middle, lower taxes -- the share of taxes paid by people in the top, significantly increase economic growth, maybe about 10 percent higher GDP over a decade. That's about the midpoint of a bunch of models.

REHM

10:27:53
Now that's arguable, is it not?

HASSETT

10:27:55
Well, but there's a big joint tax committee symposium, where things like the flat tax were simulated at a whole wide variety of models. And there were some models that got about double that effect. Some got an effect a lot smaller. There are things about, well, if you have transition relief, then you don't get as big an effect.

HASSETT

10:28:11
But I think the, you know, my read of the table -- and again, if you want to -- people at home, just Google joint tax committee symposium on fundamental tax reform. You'll find a big report on it, is that you get about 10 percent GDP out of something like Herman Cain's plan, and that would cut the unemployment rate maybe 2 or 3 percentage, but that's a big deal.

REHM

10:28:27
What happens to Social Security in that 999 plan? What happens, Jared Bernstein?

BERNSTEIN

10:28:37
Social Security has a big problem in this plan. He gets rid of the payroll tax, and he replaces that with a sales tax that everyone would have to pay.

REHM

10:28:47
Everybody?

BERNSTEIN

10:28:47
Also -- that's right. Also, there were would be no taxation of Social Security income, I understand.

REHM

10:28:52
And, of course, those in the lower income level spend more of their income on things they buy.

BERNSTEIN

10:28:58
Here's the thing -- let me stipulate. I think Kevin exaggerates the positive economic effects, but let me stipulate that there are some -- there is, in tax policy, a trade-off sometimes between efficiency and equity fairness. The amount of unfairness in this 999 plan is mind-blowing. Middle class...

REHM

10:29:20
I think Bob actually agrees with you, Jared.

BERNSTEIN

10:29:22
Middle class families, $50,000 of earnings -- middle class families would end up paying 5,000 bucks more a year under this plan compared to their current tax burden. Poor families' tax burden would go way up, and as Kevin correctly pointed out, since you're exempting income from wealth, those at the top would get a big tax break. So as soon as people start to learn about this, I presume it's dead in the water -- at least I hope so -- just based on pure fairness and who's been winning and who's been losing.

REHM

10:29:47
Well, I'm going to have a chance to talk with Herman Cain directly about this in a few days. So what do you think about this, Bob?

WILLIAMS

10:29:59
Well, there are only two issues that really matter. One is, do we get enough revenue? And the second is, who's going to pay the tax? As Jared just pointed out, the tax is going to be shifted a lot towards the middle class and towards the bottom of the distribution.

WILLIAMS

10:30:09
There will be 30 million people, who currently pay neither income nor payroll tax, who will see their taxes go up substantially because they'll pay -- start paying tax on their income. And they'll start paying tax on everything they buy, and they spend all their money on what they're buying. About 18 million of those are retirees. Another 11 million of them are people with incomes below $20,000, who are struggling to get by.

WILLIAMS

10:30:31
But they would see their taxes go from zero to something much, much larger. The people on the other end would see big tax cuts of those at the top of the distribution who get lots of income from capital gains that no longer will be subject to tax. Kevin's right. We need to see some economic growth. Is that enough to offset this?

WILLIAMS

10:30:45
Certainly not enough, unless you're one of the people who's currently unemployed who now gets a job -- and, of course, you're immensely better off in that situation. But, on average, we won't see enough to offset the increase in taxes for people towards the bottom.

REHM

10:30:58
Mike Dorning, what's been the public's response to this now that they are beginning to learn about it?

DORNING

10:31:07
Well, we haven't polled specifically on the 999 plan. But, in general, my sense is, at the moment, people sort of distrust what's going on in government and economic policy enough, that something that seems straightforward and, like, can't...

REHM

10:31:22
Simple.

DORNING

10:31:22
...simple and can't be gamed has a lot of appeal.

REHM

10:31:26
Can't be gamed? You got to be kidding.

DORNING

10:31:29
Well, I'm talking about the way it seems, that it cannot -- that it looks like it's not being gamed as much as the current situation. I think, at the moment, there's a lot of feeling in the public that people are getting ahead through tricks and through gaming the system. So -- and you could see in the debate Herman Cain's probably picked up on this because he was emphasizing again and again that this was transparent and that it can't be gamed. And I think that that's what he's picked up on.

REHM

10:31:59
Mike Dorning, he is White House correspondent for Bloomberg News, and you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. First to Panama City, Fla. Good morning, Paul. You're on the air.

PAUL

10:32:23
Good morning, Diane.

REHM

10:32:25
Hi.

PAUL

10:32:26
I am a Blue Dog Democrat. I'm a member of my local Occupy movement. I don't think much of the 999 plan, but I am an avid fan of the Fair Tax amendment, House Resolution 25. And there's three main reasons. Once you get rid of -- get out of the weeds, get out of the politics and actually can sit down, study it and work through the logical conclusions, you'll see that the Fair Tax eliminates the tax on the poor and gets money out of politics, and it stops tax evasion, especially by the rich.

REHM

10:32:58
What do you think of the Fair Tax amendment?

BERNSTEIN

10:33:03
Well, I don't know that it's all that different from 999, as I understand it. It's -- maybe it had some -- a few improvements. Basically, you have some of the same not benefits that Kevin talked about, but, also, I think you have the same kind of fairness concerns with this. I mean, basically, the minute you move to a flat tax, especially one that purports to collect the same amount of revenues as we collect now, some people are going to win, and some people are going to lose.

BERNSTEIN

10:33:28
And the people who tend to lose are the people who depend on their earnings, and the people who tend to win big-time, in terms of their tax, are the people who depend on their wealth. And I think that's problematic.

REHM

10:33:37
All right. To Grand Rapids, Mich. Good morning, Jim.

JIM

10:33:42
Thank you. Real quick, the -- this debate that Obama and the Democrats have started is just unbelievably dishonest. There is not enough money and people earning over $1 million to solve any of this stuff. Look at The Wall Street Journal. Last week, it had a nice little editorial about the revenue that's available from income earners over $1 million as far as the tax goes. They have no certainty whatsoever that it'll even reach $450 billion. The range is 200 to 600. These income ranges vary from 40 to 50 percent on any given year. That's the first point.

JIM

10:34:23
So it is purely an Obama election campaign. The second point is that the language we use about fairness -- again, if you believe that the government is entitled to every single penny that every single person produces, okay, you can talk about fairness. So a tax cut is "giving something to somebody." However, if you believe in personal property, there is nothing unfair about taxing every single person the same amount -- rich, poor, medium or whatever.

REHM

10:34:57
Jared.

BERNSTEIN

10:34:57
Jim makes a great point and a terrible point. He's absolutely right that there's simply not enough in the base if you're going over $1 million. I get the symbolism. I understand that these are the folks who've gotten ahead, and I think they should pay a more fair share. To cast things in terms of every single penny of every single dollar versus private property casts such a broad stroke and is really, with respect to Jim, deeply misleading in terms of the debate. Nobody is talking about that on either side.

REHM

10:35:23
Bob.

WILLIAMS

10:35:24
At the Tax Policy Center, we did an analysis saying, how much could you raise or how much do you have to raise taxes to bring in enough not just to close the budget deficit but close it by half? We said if you only focus at the top end -- the Obama rich, over $250,000 -- you'd have to raise the top tax rate to 90 percent to bring in enough money to get half of our budget deficit. That's a nonstarter, politically, to raise it that high. We clearly have to go below the $250,000 limit. And starting at the millionaires, we're not getting as much as we would get with the Obama plan.

REHM

10:35:54
What about that, Jared?

BERNSTEIN

10:35:56
I think it's true. I mean, I think that -- I'll tell you a good way to think about this. Think of the Bush tax cuts. They are the biggest contributor to the growth in the deficit right now. If you were to make them all go bye-bye the way they were legislated, you'd collect about $3.6 trillion over 10 years, and your budget deficit would go to what's called primary balance, which means pretty much where we want to go.

REHM

10:36:18
Just letting the Bush tax cuts go.

BERNSTEIN

10:36:22
Letting them go, but not just the high end -- the whole thing, and that does imply higher tax from middle class families. Now, as you've heard in my discussion so far, I'd like to hold the middle class harmless for now because there's such a struggle in the current economy. But I think that Bob and others are right that, eventually, we're going to have to expand the tax base down below 250. I think it's a matter of timing as to when families get back on their feet.

REHM

10:36:43
Kevin.

HASSETT

10:36:44
Yeah, I just want to weigh in on the fairness, that even if we cut, say, the economic effect that I think that you get out of the literature of the 999 plan in half, and say that over the next decade only 2 or 3 million people are going to get jobs because of the 999 plan that otherwise would be unemployed, I think you have to weigh that in your fairness.

HASSETT

10:37:00
And so, really, what you guys are doing is saying, well, I want the middle class to pay a lower share of the tax and the wealthy to pay a higher share of the tax, and I'm willing to have 3 million people not get jobs in order to do that. That's the fairness tradeoff you're willing to take. What I'm saying is I care a lot more about those 3 million people that are unemployed right now. And the fairness debate is a lot more complex than you're making it out to be if you just ignore all economic effects of what you're doing.

HASSETT

10:37:23
That's how -- people are rioting because we keep adopting these big social welfare programs without thinking through the economic effects.

REHM

10:37:29
All right. We got to take a short break. And when we come back, more of your calls, your comments. Stay with us.

REHM

10:40:04
And we're back. Here's an email from Carlos, who says, "In a tax code, the first thing that has to be taken into account is how much does a person need left over after taxes: food, education, health, a residence and peace. With this in mind, you can now restart the debate about what is fair." Kevin.

HASSETT

10:40:33
I think that he's right. And, in fact, many proposals, the fair tax for example, and probably the version of the Herman Cain plan, when we see it in its full glory, will do this, too, that they exempt a certain amount of consumption at the beginning. And that's another thing to weight into the fairness debate. So suppose that we had a sales tax, a national sales tax that paid for everything but we exempted the first $50,000 in consumption every year. And then we'd have to have a really high rate to get all the revenue we need.

HASSETT

10:40:58
But then that would be something that you could argue might even be more fair than the current system. And so the fact that you have a national sales tax or a 999-type plan doesn't necessarily determine the fairness, even if we're looking at it the way you guys do, ignoring the economic effects because you could have a big enough exemption, which Carlos mentioned, so that people would be made whole at the bottom.

REHM

10:41:17
Jared.

BERNSTEIN

10:41:17
Just small point, he may change his mind, and these things do more for a round, but Cain has explicitly said that he didn't want to do any of those exemptions. So while we can sit around and craft a better plan than the Hermanators, I'm not sure that that's where he is.

REHM

10:41:31
Now, here's an email from Jay, who says, "The very wealthy are already the main beneficiaries, both of our democracy and of our tax loopholes and break, not the least being their historic 15 percent rate on capital gains while reporting only about a third of the income." And Rob on Facebook says, "Class warfare. Mr. Buffet himself said there is definitely a class war going on. And he said his side is winning. Bless him for being honest and for wanting to change things for the better." Is that how you see it, Mike?

DORNING

10:42:23
That's certainly the way that Democrats want you to see it at the moment. When the Republican congressional leaders were raising this cry of class warfare, you had Barack Obama travel to a bridge between states represented by two Republican congressional leaders. And he says, well, if people are crying class warfare, I'm the warrior for the middle class. Let the war begin.

DORNING

10:42:48
I mean, it's a far cry from Franklin Roosevelt standing up at Madison Square Garden when he was running for reelection and saying, I welcome their hatred. But it's still more subtly and a more Barack Obama, soft, not-so-combative way saying, okay, if you want to call it class warfare, let's frame it this way.

REHM

10:43:09
And David on Facebook says, "Look at what's happened to wealth distribution over the past 30 years. You'll find class warfare has been going on the entire time. And now, when anyone questions that, the right screams class warfare." Kevin.

HASSETT

10:43:33
You know, I think, actually, one of the most interesting discussions of these forces that we're talking about was written up, just before he went into the White House, by Larry Summers along with Jim Hines. There's a National Bureau of Economic Research paper about this, and they talked about the impact of the sort of flattening earth and the global economy on the welfare of people that have fewer skills, and also on the welfare of the wealthy.

HASSETT

10:43:55
And one of the things they notice is that because, you know, low-wage people all around the world are competing with low wage people here putting downward pressure on their wages, there might be more of a need to redistribute than there used to be. But at the same time, since capital is so mobile, you're less able to do it. And so they talked, really, I think, in that paper, quite rationally about the problem.

HASSETT

10:44:17
And so then if we actually really try to chase down the capital income with big corporate taxes or something, then what happens is we find that the big multinationals locate their plants in low-tax places overseas, and the jobs just don't happen here anymore. And so we are in a world -- I absolutely agree -- where the need for redistribution must -- one must concede as higher because of the flattening earth. But the ability to do it is basically almost nonexistent now, given the mobility of capital.

HASSETT

10:44:43
You'd really have to go to a world where we became an island economy again, and we shut our borders to be able to have positive effects from things. I mean -- and just look at -- when's the last time you saw a new plant being built in the U.S.? I mean, the fact is we're chasing capital overseas already with our high rates, and it would be worse if we lifted them more.

REHM

10:44:56
Jared.

BERNSTEIN

10:44:58
You know, I mean, I think where I disagree with Kevin has to do with kind of the facts of the case. I think his points make a lot of sense, kind of, on theory. But if you go back to, again, to the 1990s, we had a tax system that is more progressive, collected more (word?). We had a surplus by the end of that decade than the current one. Our corporate tax, if anything, was more binding and more progressive. And then we had this experiment in the 2000s with many of kinds of measures that Kevin is advocating.

BERNSTEIN

10:45:30
Or, for that matter, if you want to go to Europe and look at their value-added tax, they've actually consistently had much slower job growth than we have. So over the course of American history, we've actually had a much better, more equitable economy than we have before we started getting into these ideas that try to make life better for those at the top of the income scale based on the idea of trickle down.

BERNSTEIN

10:45:51
I mean, ultimately where -- I think where I disagree most with Kevin is that it really comes down to if you give a break to kind of producers and those at the high end, the benefits of that will trickle down to everybody else, and the evidence is that it just doesn't work.

REHM

10:46:04
Bob.

WILLIAMS

10:46:05
Now, what we've seen if you look at the distribution of wealth, we saw a great narrowing of the maldistribution from the end of the Depression through about 1970. Since the 1970s, the increase in wealth is all going to the top end. We have about the same degree of inequality now as we had 60, 70 years ago -- 80 years ago. So things are clearly getting worse. It's hard to figure out how to reverse that because, as Kevin points out, there's a lot of mobility in this world. You can move elsewhere.

WILLIAMS

10:46:34
And your competition is not the same as it was 50, 60, 70 years ago. So it's a real hard problem to solve. But what we can do is educate our workers at home, make them more able to take these higher skill jobs, the things that will keep the jobs here in the United States because those are not the jobs that foreigners compete with. They just don't have the education. They don't have the intellectual capital to compete with that.

REHM

10:46:55
But that doesn't really deal with the tax question.

WILLIAMS

10:47:01
No, it doesn't. We have to have some way of funding the kind of educational schemes. We need to build up that human capital here at home. We need to get that. We go to where the wealth is. That's at the top end. But there's not enough money, as we pointed out over and over again, so we've got to move down and redistribute across the entire industry.

REHM

10:47:20
You know, as I hear all this, I get very, very distraught and confused because I think so many people are looking at this in such extraordinarily different ways. What's going to be good for corporations? What's going to be good for individuals? What's going to be good for families? How do we resolve this? I don't understand where we go from here, Jared.

BERNSTEIN

10:47:52
You know, it's a great point, Diane, but I don't think it's ultimately all that complicated. I mean, right now, we're collecting 15 percent of GDP and revenue, and we're spending something like 24. So, you know, the difference of 9 percent is the budget deficit, and that's unsustainable. We all agree on that.

BERNSTEIN

10:48:09
If you believe, as I think Bob just kind of said -- and I certainly feel strongly that we're going to need a government that's able to meet the kinds of problems that you and I think the folks out there on Wall Street are concerned about: retirement security, opportunity, education, infrastructure investment, innovation in our industries, protecting against climate change -- we're going to need a government that is robust and amply funded, that means we have to raise more money to do so.

BERNSTEIN

10:48:39
There are different ways. We're having good arguments about how you can best do that. But, I think, given the way wealth has been concentrated, we have to make sure we do that in a way that's fair, and it doesn't exacerbate the inequality.

REHM

10:48:50
Okay. So you, if you could, would take away the Bush-era tax cuts for only the wealthy.

BERNSTEIN

10:49:00
I'd start by taking away the Bush-era taxes for the wealthy. I think, probably down the road, you're going to have phase-in tax cuts that go below that, below the magic 250 level, and I think everyone on the panel's agreed with that. But the other thing I would do is probably try to get some of the distortions out of the tax code. I'd tax capital and dividends at the same rate as income. I don't want to make them special. I probably would agree with Kevin that you bring down the corporate and broaden the base.

BERNSTEIN

10:49:26
So I think there are things you can do that would help you get you there, but I would be guided by the principle that we need an amply-funded government, and that we can't exacerbate our inequality when we go to the tax cut.

REHM

10:49:37
How does that sound to you, Kevin?

HASSETT

10:49:39
Well, in fact, Jared and I have been asked to come up with our own bipartisan plan by CNN. We're -- we've been arguing...

REHM

10:49:45
Good.

HASSETT

10:49:46
...about it for a few weeks now. But one of the things that, I think, that we reached at the coffee shop just a minute ago is that we should try to have falsifiable assertions in our policies that we can test a year or two from now. And so I believe one thing. Jared believes another, you know. And so I said, Jared, why not cut the corporate rate 2 percentage point, from 35 to 33? I bet you we get more revenue.

BERNSTEIN

10:50:05
I thought we agreed on one?

HASSETT

10:50:05
Yeah, well, one -- well, I said two. You said one.

REHM

10:50:07
What? You see, you can't even agree on it now.

HASSETT

10:50:08
But -- no. But the point is that if we get the revenue, then we agree it worked. If we don't, then I have to come up with something else.

REHM

10:50:13
Kevin Hassett of the American Enterprise Institute, and you're listening to "The Diane Rehm Show." All right. Let's go back to the phones, to Tim in Baltimore, Md. Good morning to you.

TIM

10:50:32
Good morning, Diane. You have actually articulated my points very well. There are so many people with so many opinions coming of this, it's just so confusing. And as 99 percenter, which I consider myself to be, I certainly contributed in producing the wealth, yet the 1 percent slapped themselves on the back and congratulated themselves for producing higher profits for the stock market and dividends and gave themselves huge bonuses that I didn't get to participate in. That's where my frustration lies.

REHM

10:51:16
What about that, Mike Dorning?

DORNING

10:51:18
Well, it's definitely a strong current of public opinion out there. I remember I was writing during the congressional midterms and looking at people in Lehigh Valley, Pa., and you heard this again and again, even about the program of Barack Obama, who's now taking a populous town that they felt like, hey, the corporations and the banks are getting the benefit from his economic policies. We're not.

DORNING

10:51:43
In fact, I think, it was National Journal or Pew who did polling shortly before the midterm election asking, who's benefiting from Obama's economic policies? And people would answer: corporations, banks, the wealthy, but not the middle class. And it comes down to -- and that was before the conflict with the Republicans, before they took over the House -- and what it comes down to, again, is you look at the middle class in America, and they've had their incomes cut by one-tenth over the last four years.

DORNING

10:52:13
Two-thirds of that cut has come since the end of the recession. People see the stock market that did very well when the recession first ended. They see the bonuses that the bankers got shortly after they got the bailout, and then they also look and see record corporate profits while their wages go down. That's something that stirs up resentment.

REHM

10:52:36
So where do you think the Congress will go or might go on any of these proposals to reform the tax code?

DORNING

10:52:50
Well, the House Republicans have made it very clear that the millionaires' tax is a non-starter, and they've called the Buffett rule class warfare. The Buffett rule and Obama's original proposals couldn't even get through the Democratic caucus completely, couldn't get unanimous support from the Democratic caucus in the Senate, and they haven't even been able to get through the Democratic-controlled Senate because of Republican opposition. So it's dead in the water (word?).

REHM

10:53:17
Okay. Dead in the water, you say, because the Republicans are saying that, but look at these protests around the country. They're not going away. They're going to grow. What kind of impact could they -- might they have?

DORNING

10:53:35
They definitely have an impact because they reflect something broader in society, and there's that -- to use Kevin's word -- a kind of a dynamic process between the political debate, the in-the-streets protest theater and general public opinion. And even these proposals that we say are dead in the water now, the Buffett rule, the millionaire tax, you have to remember, just before Bush was elected, the House that was controlled by Republicans passed the tax reform agenda that was dead with the Democrats in Clinton that looked quite a bit like the 2001 tax cuts that got passed eventually.

DORNING

10:54:11
So the way Congress works, ideas can get meted about, and something that's dead, this Congress can, over the next few years, take shape as the public opinion changes.

REHM

10:54:21
But you -- it's so interesting that, as Sylvia Poggioli said earlier, all this began in Madrid. And now it's here and spreading around the world. Surely, it's got to have some impact on the thinking of these legislators.

BERNSTEIN

10:54:40
So here's the thing, Diane. I mean, Congress right now has an approval rating of something like 12 percent. I mean, this was...

REHM

10:54:46
And the president's is, what, 13 percent?

BERNSTEIN

10:54:49
No. No.

HASSETT

10:54:50
It's well above Congress as is almost always the case.

REHM

10:54:52
Okay.

BERNSTEIN

10:54:53
But in any rate -- I mean, I take your point. I mean -- and I think one of the real motivators of this movement is lack of accountability, and Congress has, as far as I can see, no interest in being accountable to the kinds of issues that not only the Occupy Wall Street folks, I mean, but well before them to what the 14 million unemployed folks are upset about. And so that's a dynamic that is, I would argue, politically dysfunctional. I mean, the Congress is way out of step with the people and what this country needs.

REHM

10:55:26
Bob.

WILLIAMS

10:55:27
Let me bring this back to the tax side where people take a look at our very complex tax system, and they figure, the other is getting a break that I'm not getting. There are some reasons why these millionaires are paying less than I'm paying. In fact, most of the millionaires are paying a higher percentage than the middle income people, but there are some at the top who are doing very, very well.

WILLIAMS

10:55:42
It's because we have lots and lots of provisions in the tax code that cuts your taxes. $1.2 trillion a year total cuts in taxes because of all the bits and pieces there.

REHM

10:55:49
And too many loopholes.

WILLIAMS

10:55:50
Well, too many for -- I mean...

HASSETT

10:55:53
On real estate.

REHM

10:55:53
That's my...

WILLIAMS

10:55:54
It depends on what the real -- what the loophole is...

REHM

10:55:55
Yeah. Yeah.

WILLIAMS

10:55:56
...but the bulk of those benefits go to people at the top of the administration. They're the ones paying a lot of tax. They're the ones who got a lot of tax breaks that save them a lot of money. It complicates things when people look and say, this guy is getting something I'm not getting. Somehow, we got to change it.

REHM

10:56:10
Okay. So what I want to know is who is moderating the discussion between you, Jared, and you, Kevin?

HASSETT

10:56:19
I think it's Johnny Walker.

BERNSTEIN

10:56:22
This morning it was Starbucks (unintelligible) coffee.

REHM

10:56:24
Really? Really?

BERNSTEIN

10:56:26
Yeah. No. I mean, Kevin and I have worked together for years, and I think the idea that -- I'm sure we're going to find some common ground. I mean, you've heard some disagreements today.

HASSETT

10:56:34
We both like infrastructure spending.

BERNSTEIN

10:56:35
We both -- yeah, there's a great example.

REHM

10:56:36
I'd like to see that infrastructure spending begin soon.

BERNSTEIN

10:56:41
Agree.

REHM

10:56:42
Kevin Hassett, Jared Bernstein, Bob Williams, Mike Dorning, thank you all so much.

HASSETT

10:56:49
Thank you.

BERNSTEIN

10:56:49
Thank you.

REHM

10:56:50
Thanks for listening, all. I'm Diane Rehm.

ANNOUNCER

10:56:52
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