Congressional Debate Over Extending the Payroll Tax Cut

MR. TOM GJELTEN

10:06:56
Thanks for joining us. I'm Tom Gjelten of NPR, sitting in for Diane Rehm. Diane's husband is recovering from surgery. We wish him well. Diane hopes to be back early next week. President Obama weighed in yesterday on the issue of extending the payroll tax cut that is scheduled to expire at the end of the year. In a speech in Kansas yesterday, the president called the extension critical to middle class families and the overall economy.

MR. TOM GJELTEN

10:07:23
But tax cuts mean less revenue for the government. Some Republicans say a proposed surtax to cover that lost revenue will make it harder for small businesses to add new jobs. It would be an extra tax on high-income earners. Joining me to separate political drama from economic realities on this issue: Isabel Sawhill of the Brookings Institution, Chris Edwards of the Cato Institute and Naftali Bendavid of The Wall Street Journal.

MR. TOM GJELTEN

10:07:51
We'll be taking your comments and questions throughout the hour. Call us on 1-800-433-8850. Send your emails to drshow@wamu.org, or join us on Facebook or Twitter. Welcome, everyone. Good to see you.

MR. NAFTALI BENDAVID

10:08:08
Thank you.

GJELTEN

10:08:09
Naftali, President Obama really came out swinging on this issue yesterday. Tell us basically what he said.

BENDAVID

10:08:18
Well, he appeared at a location where Teddy Roosevelt, you know, many decades ago, not coincidentally, had also made a very strong populist address in a place called Osawatomie in Kansas. And he used stronger -- he's been moving toward a populist position in general...

GJELTEN

10:08:33
Mm hmm.

BENDAVID

10:08:34
...but used stronger language than he had before, talking about the greed of the few and how that was responsible for a lot of the country's troubles. And exhibit A in this case that he's trying to make as he heads into his re-election campaign is the payroll tax, which is something that's paid by every wage earner in America essentially. And he's in favor of this tax break for that and in favor of a surtax on people who earn $1 million or more. So it's very much a populist framing that he and the Democrats are hoping will resonate.

GJELTEN

10:09:06
But he goes to Kansas, which is a red state. Interesting point there, I mean, he clearly thinks that this is a winning issue for Democrats. Is that really the case, do you think?

BENDAVID

10:09:15
Well, I certainly don't think he thinks he's going to win Kansas. I think there is a symbolism in going to the heartland and, again, symbolism in going to a place where Teddy Roosevelt spoke. I think he's trying to adopt the mantle of both Harry Truman and Teddy Roosevelt. But, yeah, I mean, I think there is a sense among Democrats that after all this time, you know, the populist equity-type issues are starting to resonate in a way that they haven't so far.

GJELTEN

10:09:38
And, Bel, what are the numbers here? How much of a tax cut are we talking about? And how does -- how would it translate to middle income, middle class taxpayers?

MS. ISABEL SAWHILL

10:09:49
The payroll tax cut that was put in place at the end of last year reduced the payroll tax by 2 percentage points, which, for the typical middle class family, would mean that their taxes are lower by about $1,000. The president actually wants to deepen the cut from $1,000 to about $1,500. I don't know that that's going to survive, but he believes that jobs are the biggest issue confronting the nation and middle class families. And so he actually wants to give them a little bit bigger break even than they have now.

MS. ISABEL SAWHILL

10:10:28
He certainly does not want this existing payroll tax cut to expire because that would mean everybody's taxes would go up by about -- or the middle class would, on average, have a tax increase of about $1,000 a year.

GJELTEN

10:10:42
Mm hmm. And the current rate is about 4.2 percent, and it would go up without -- if it expires, it will go up to about 6.2 percent.

SAWHILL

10:10:54
The payroll tax is -- the normal payroll tax is 6.2.

GJELTEN

10:10:58
Right.

SAWHILL

10:10:59
It was reduced to 4.2. And he wants to reduce it even below that.

GJELTEN

10:11:03
Right, right. And, Chris, what's the cost here? What's the cost to the federal treasury? What's the cost to Social Security?

MR. CHRIS EDWARDS

10:11:11
Well, the extension of the current cut would, I think, lose the government about $185 billion next year. That will be on top of a trillion dollar deficit we're already expecting for fiscal 2012. I think the problem here is that, you know, it doesn't make any sense for the economy, and businesses aren't going to go hire someone just for a year then fire them again just because they get a small payroll tax cut.

MR. CHRIS EDWARDS

10:11:36
And, you know, the main way this is being sold is sort of on Keynesian terms that the government deficit spending, putting money in people's pockets will boost the economy. Well, it hasn't worked. In recent years, we've had trillion dollar deficits four years in a row now. Yet we've had the slowest recovery since World War II. So I don't think this kind of basic stimulus or pump-priming idea really works.

GJELTEN

10:11:59
But now, Democrats do say they want to cover the lost revenue. They have proposed a -- as Naftali said, they have proposed a surtax, whether it's on millionaires or whatever, to pay for this. What is the Democrats' proposal to cover this?

EDWARDS

10:12:14
Well, their new proposal is to hike taxes on people at the top end by about 1.9 percentage points. I think that's a really bad idea. You'd be hitting a lot of people who are extremely important to the economy: entrepreneurs, highly skilled business people, brain surgeons. People like that pay the top income tax rates. And, I think, by hitting them with an additional tax, it won't do the economy any good. And so I think it undermines Obama's own agenda of trying to get the economy moving before the election.

GJELTEN

10:12:43
And, Naftali, some Republicans, of course, do support this extension of the payroll tax cut, but they have different ideas for how to pay for it.

BENDAVID

10:12:52
Yeah, the Republicans are actually split somewhat in whether or not to extend it at all. But to the extent that they do want to extend it, they have other ideas, and the prominent one that, I think, is interesting is reducing the federal workforce by 10 percent through attrition. But there's all kinds of other ideas that are included in there, various things like sale of the broadband spectrum and increase in airport fees and so forth. And I think that's probably where we're headed.

BENDAVID

10:13:15
When the Republicans accept that they're not going to get a 10 percent cut in the federal workforce, Democrats accept that they're going to get a millionaire surtax, we're probably going to end up with sort of an amalgamation of other revenues and spending cuts that will be used to fund these things. So it's hard for me to see politically how either party heads into next year with any responsibility for, essentially, $1,000 tax increase on wage earners. So I think one way or another they're going to figure this out.

GJELTEN

10:13:40
Well, how much of a split is there right now among the Republicans, including the leadership?

BENDAVID

10:13:45
It's a pretty big split. It's, to me, one of the most fascinating aspects of all this. You know, the leaders of the party, for the most part, feel like, strategically, politically, they simply can't go into an election year, you know, with -- being seen as having facilitated this tax cut expiring. But a lot of the rank and file don't like this cut. They say it's going to hurt Social Security. They say it's tinkering with the tax code in a bad way.

BENDAVID

10:14:09
They say it hasn't been effective, and so you're seeing this unusual rebellion and revolt both in the Senate and in the House by the rank and file against their leaders. And that's a rift that has to be negotiated before this whole thing can be resolved.

GJELTEN

10:14:22
Now, Bel, Chris points out that this is essentially a Keynesian argument. I take it you have a Keynesian argument, and it would not have the effect that advocates of this say it would have in terms of promoting economic growth and so forth or a recovery. I take it your view is somewhat different.

SAWHILL

10:14:38
It is. But, just to be clear here, we need to distinguish between the payroll tax cut that will affect individuals because it will make their paychecks bigger and a payroll tax cut that would affect businesses. Originally, the president wanted both, and one of the reasons he proposed both in his original jobs program is because Republicans had previously been in favor of a payroll tax cut for employers. Actually, from an economist's prospective, it is the cut for individuals that has the bigger impact on jobs because it puts more money in people's pockets.

SAWHILL

10:15:18
If they spend more of that money -- and particularly if they are middle class or lower, they probably are going to spend a lot of that money -- that helps to create jobs because businesses aren't hiring now because consumers aren't spending. And that's the essential argument here. On the employer side, I think that part has been dropped now even by the president and Democrats and isn't likely to happen.

GJELTEN

10:15:45
And what about the issue of paying forward? I mean, if, really, what we're looking at here is a stimulus measure, you know, is it even necessary in your view to pay for it right now?

SAWHILL

10:15:57
In my view, it would not be a good idea to pay for all of it in 2012 because that would undo the stimulative impact it can otherwise have. But most of the proposals right now are not to pay for it immediately. They are to pay for it over the next 10 years. I think it's very important to get the deficits under control, and we do need fiscal restraint. But we don't need fiscal restraint in -- when we have an unemployment rate of 8.6 percent. And if we let this tax expire, the best economic analysis that we have suggests the unemployment rate would be back up over 9 percent in 2012.

GJELTEN

10:16:41
Do you -- what do you think of that argument, Chris?

EDWARDS

10:16:44
I think we're part too focused here on trying to micromanage the economy in the short run. I don't think economists or policymakers are very good at meddling and mucking around with the economy to try to stimulate in the short run. We've tried everything in recent years -- stimulus bills, cash for clunkers -- and, in my view, none of them have worked.

EDWARDS

10:17:01
I think economists know a lot more about long-term reforms that would make us competitive over the long term, tax reform and control of entitlement spending and that sort of stuff. I wish policymakers would focus more on those sorts of long-term reforms.

GJELTEN

10:17:15
And what about Social Security? What -- how much of a concern do you have about the funding for Social Security right now and what effect this cut -- extending this cut would have on it?

EDWARDS

10:17:25
Well, I think the politics here are kind of weird that Democrats are undercutting the program that they chair, Social Security, by cutting the revenue stream of the Social Security. And that's why I don't think this is kind of a real tax cut because we're not cutting Social Security benefits. I would favor a long-term reform -- reducing payroll taxes, maybe allowing payroll taxes to go into people's private Social Security accounts and reducing Social Security benefits.

EDWARDS

10:17:52
You know, that would reduce the burden on our workers. But as a short-term measure, just cutting the payroll tax doesn't make any sense to me if you're not reforming the program.

GJELTEN

10:18:02
And would it take -- would it really do damage to funding for Social Security?

EDWARDS

10:18:07
On paper, it would, but the key question here for Social Security is the cash flows. If you're not cutting the benefits, then the money for those benefits in future years has to come from somewhere, whether from the payroll tax or the income tax. In my view, it doesn't really matter so much. You need to cut the benefits.

GJELTEN

10:18:27
OK. Coming up, more on the debate over whether to extend the payroll tax cut.

GJELTEN

10:20:04
Welcome back. I'm Tom Gjelten, sitting in for Diane Rehm. You can join our conversation on the payroll tax cut debate today. Call us on 1-800-433-8850, or send us your email at drshow@wamu.org. Join us on Facebook or Twitter. My guests are Isabel Sawhill -- she is a senior fellow at the Brookings Institution in economic studies -- also Chris Edwards, director of tax policy studies at the CATO Institute, and Naftali Bendavid, who's a national correspondent for The Wall Street Journal.

GJELTEN

10:20:39
Folks, I wanted -- raise a question that Dan has sent in to us as an email. He says, "Republicans say that paying for the extension of the payroll tax break by imposing a surtax on those earning $1 million or more would hurt small business owners." But Dan wants to know how many small business owners earn over $1 million a year. Belle?

SAWHILL

10:21:04
About 1 percent.

GJELTEN

10:21:07
So not very many.

SAWHILL

10:21:09
Not very many.

GJELTEN

10:21:10
Yeah. Chris?

EDWARDS

10:21:10
Although...

SAWHILL

10:21:11
That's a Treasury Department official estimate.

GJELTEN

10:21:14
Uh huh.

EDWARDS

10:21:14
It is a very small number of small businesses, but they are big small businesses. They're medium-sized businesses, so a large share of the income in the very top groups is business income. But most small businesses, of course, are just self-employed people who don't earn that much.

GJELTEN

10:21:31
So those -- that 1 percent that does earn more than $1 million presumably creates or would be responsible for creating more than 1 percent of jobs.

EDWARDS

10:21:40
Absolutely. These are entrepreneurs and venture capitals and angel investors, people who are very important to the economy in my view.

GJELTEN

10:21:47
OK. Another note from Mary. She says, "What the news media is not mentioning is that self-employed people do not even get the 2 percent tax break. They have to pay the whole 15 percent Medicare and Social Security self-employment tax. That's most unfair." But that's just self-employed people. Naftali, do you have any idea, or any of you, you know, what percentage of wage earners are actually self-employed? I can't believe there's all that many.

EDWARDS

10:22:16
I think there's about 15 million self-employed people.

GJELTEN

10:22:17
Mm hmm.

EDWARDS

10:22:17
And I don't think that's right. I think...

SAWHILL

10:22:20
I don't think that's right either.

EDWARDS

10:22:21
I think they do get the current payroll tax cut.

GJELTEN

10:22:25
OK. We are going to be joined shortly by David Stocksman (sic) -- Stockman, who's a former director of the Office of Management and Budget. But first, there were some hopes for a quick compromise on this issue, Naftali. That now looks unlikely. So what do you think is going to happen next? You said before that you're pretty sure that still there will be a compromise, but in the short run, we've seen Mitch McConnell reject the Democrats' proposal. So what's going to happen next?

BENDAVID

10:22:56
Well, on Friday, the Senate's going to vote on the latest Democratic proposal. And it will almost assuredly fail to get the 60 votes necessary to move forward. Next week, early next week, the House Republicans are going to -- they hope to, I guess, pass their own version, which will be rejected flatly by the Democrats. And my own sense is that that sort of double rejection is going to pave the way for some real talks on how to get this done.

BENDAVID

10:23:20
But you're right. There were hopes, you know, for a quick resolution, but I think what was underestimated was the depth of feeling on the Republican side that this is just a bad idea, that, while it sounds good -- it's good politics -- this is not something they want to do. I got to say I think part of it is they don't want to give President Obama a win. But for whatever reason, there's a resistance in the Republican Party that was unanticipated.

GJELTEN

10:23:41
And, Chris, how are the Republican candidates handling this hot issue? As we said at the beginning, the Democrats seem to think it's a win-win issue for them. How are the candidates dealing with that?

EDWARDS

10:23:51
I think we've got various responses from the Republican presidential candidates. I think, for example, Mitt Romney sort of flip-flop, like he usually does. Now, he's for it. I think Michele Bachmann is against it. I think Newt Gingrich is for it. So they're kind all over the map. And you can see why it divides Republicans because they're sort of knee-jerk for tax cuts, but then this isn't really a tax cut 'cause it's only temporary.

EDWARDS

10:24:13
And many new Tea Party Republicans in the House, you know, they are very concerned about the high deficits we have, and this would make that problem worse. So you can see why they're divided.

GJELTEN

10:24:23
Mm hmm. And, Belle, of course, the argument for any kind of fiscal stimulative measure is that it produces economic growth which, in turn, produces more revenue for the government. What are the chances in your judgment of the U.S. economy, let's say, with this extension of payroll tax cut actually making a stronger recovery end of the year and bringing in more revenue?

SAWHILL

10:24:50
There's no question in my mind that this would lead to a higher rate of growth than we would otherwise have. Now, you know, growth right now is anemic, and this isn't going to make it suddenly a very prosperous economy. But it could prevent us from falling into another recession. The economist at Goldman Sachs think that this could actually affect the growth rate quite strongly in the beginning of 2012 and that if we let this tax cut expire, it is going to threaten the recovery in a major way.

BENDAVID

10:25:30
But I just want to say I don't think that the argument here, either for or against, is solely on this job creating Keynesian, you know, perspective. I think Democrats who are for this will say, look, it's just a fair thing to do. It's the right to do. People need a break in tough times. You know, they say that it will create jobs, but even if doesn't, you know, giving people an extra $1,000 in their pocket at times like this is a good thing for government to do.

BENDAVID

10:25:52
And Republicans, the truth is creating jobs has never been the reason Republicans are in favor tax cuts. They're in favor of tax cuts because they think that's the right thing to do, that it's your money, the government shouldn't have it. So somehow much of the discussion has been around will it or won't it create jobs. But I think that's -- I think the mistake to limit, you know, our look at the payroll tax cut to only that framework.

EDWARDS

10:26:14
But...

SAWHILL

10:26:15
I think it's really both, and that's why I'm glad that Naftali made that point. On the prospects here, one of the things I want to mention 'cause I think it's quite important is that we now have a bipartisan bill put forward by Susan Collins, Republican of Maine, and Claire McCaskill, Democrat, in the Senate, and they are saying, let's exempt the small businesses, those very few small business that might be affected by a tax cut on the wealthy. And that, I think, could help a lot.

GJELTEN

10:26:49
OK. And we are joined now by David Stockman. He's a former Republican congressman from Michigan and a budget director during the Reagan administration. Good morning, David.

MR. DAVID STOCKMAN

10:26:59
Good morning.

GJELTEN

10:27:00
So what's your position on whether you think the payroll tax cut should be extended?

STOCKMAN

10:27:07
Well, I have no problem with higher taxes on millionaires and billionaires. We desperately need more revenue. But I think it's a complete mistake to extend the payroll tax. We need to take any revenue we can get out of higher taxes and reduce the deficit because this country is totally broke. And if you look at this particular instance, it makes no sense to further raid the Social Security trust fund when we've just completed -- I saw the numbers yesterday that for 2011, Social Security will run $56 billion on red ink on top of an equal amount the prior year. And this is the third year running.

STOCKMAN

10:27:51
So it would be nice if we could give 160 million people a Christmas present, but we can't afford it. The country is broke. And to have a payroll tax holiday on Uncle Sam's credit card for everybody, regardless of need, makes no sense. Anything we do from now on has to be strictly means tested. Yet, if you look at a payroll tax extension, you can take a $500,000 Wall Streeter is going to gain $2,200 from the holiday being extended. A minimum wage employee working a full year will gain $280.

STOCKMAN

10:28:33
Now, what kind of sense does that make? It doesn't make any sense at all. This is just election year politics. We can't afford this holiday, and it's unfortunate that the Congress is, you know, extending it again for another year.

GJELTEN

10:28:48
Well, David, it sounds like you think taxes should not be cut on anybody, not be cut on wealthy people, not be cut on middle class people, not be cut in anyone. Is that what you're...

STOCKMAN

10:28:57
I don't think they should be cut on anybody. I think they have to be raised -- if I could underline that word -- raised on everybody because it's about time we started paying for all this government we seem to want. And I find it, you know, especially difficult to understand how the liberal Democrats in the White House could be for the sweeping across the board $110 billion giveaway to everybody, the bottom, middle and top, when we're in the desperate shape that we're in. It just doesn't make sense.

STOCKMAN

10:29:36
What we really need to do is tell the truth to the American public that everybody is going to have to pay higher taxes, including the middle class, unless we have draconian cuts and spending, which I would favor. But there's no one in Congress that would really support it other than a corporal's guard.

GJELTEN

10:29:54
Yeah. But, David, what about the idea that tax cuts stimulate the economy, that tax increases hurt the economy? I mean, the amount of revenue that comes in depends very much on the performance of the economy, right?

STOCKMAN

10:30:07
Well, in August 1982, Reagan signed a tax bill increasing taxes by the equivalent of 1 percent of GDP. At that moment in time where we were at the bottom of what was then the worst recession in the post-war period, unemployment was 10 percent. It wasn't clear how soon or how strong the recovery would be, and yet the deficit was in such dire shape that he went ahead and signed that.

STOCKMAN

10:30:37
Now, that same tax increase today in today's environment, 1 percent of GDP, would be the equivalent of $150 billion a year. In other words, in 1982, Ronald Reagan, in the same circumstances, raised taxes by $150 billion a year. He didn't cut them by $150 billion as the Congress is attempting to do today. So this is how far we've gone off the deep end.

STOCKMAN

10:31:03
Everybody's looking at the narrow short-term and not asking, where are we going with this? Are we going to end up like Greece, Italy and the rest of Europe in a short period of time? And if we keep this up, I think it's exactly what's going to happen.

GJELTEN

10:31:16
So even if some jobs are lost in the short-term, it's still worth doing.

STOCKMAN

10:31:20
It's worth doing because you're -- sure, you're going to lose jobs because you have to pay the bills of government, and we're running a $1.2, $1.3 trillion deficit, and we just keep snowplowing all these temporary incentives and tax holidays and so forth forward one year at a time and digging ourselves in deeper and deeper.

STOCKMAN

10:31:43
So, yes, there will be unfortunate, negative side effects of raising taxes and reducing the deficit. But I don't know why anyone thinks you can just borrow massive amounts of money year after year and foist that burden on the next generation and all generations to come because it's inconvenient to say so to, you know, your fiscal situation in the current moment.

GJELTEN

10:32:12
OK, David. I know you have to go shortly, but you have, in the last five minutes, criticized both Democrats and Republicans. Congress is certainly a very different place from when you served there. Do you see any way out of this political polarization that seems to be obstructing any progress on this or other issues?

STOCKMAN

10:32:32
Well, unfortunately, I don't. I think both sides have dug in on really unjustifiable positions so deeply. The Democrats in the White House are saying that we're not going to touch Social Security when the top 10 million beneficiaries out of 55 million are affluent enough that they could have their benefits cut. And the Republicans even -- are even worse, saying never to any tax increase on anybody at anytime when we're raising 15 percent of GDP in revenue, the lowest level since 1948.

STOCKMAN

10:33:05
So the idea that we're drastically under-taxed is wrong compared to how much we spend, and I don't see Republicans wanting to really step up to the plate and do anything about it. So, yes, I think it's unlikely that this paralysis will be broken until we have a massive devastating bond crisis like they're having in Europe today.

GJELTEN

10:33:29
OK.

STOCKMAN

10:33:29
Then maybe the parties will wake up, but not until.

GJELTEN

10:33:32
OK. Thank you. David Stockman is a former Republican congressman and budget director during the Reagan administration. I'm Tom Gjelten of NPR. You're listening to "The Diane Rehm Show." If you'd like to join us, call 1-800-433-8850 or send an email to drshow@wamu.org. And, actually, I want to go to a couple of callers right now. We have a lot of people wanting to weigh in on this issue. First, we're going to go to Prem, (sp?) who's calling us from Sugar Land, Texas. Prem, that's an interesting name. I'm not familiar with it.

PREM

10:34:05
No, it's an Indian name.

GJELTEN

10:34:07
OK. Welcome...

PREM

10:34:08
It's -- it means love.

GJELTEN

10:34:10
Welcome to "The Diane Rehm Show."

PREM

10:34:11
Oh, thank you very much. You know, the reason I called, I just want to let -- want to mention that this is all political posturing from both the parties. Unfortunately, we do not have any leadership. I can tell you what's going to happen. Around Christmastime, President Obama is going to come out of White House and declare a deal, but this could have been done two months ago.

PREM

10:34:35
It seems like they are all playing for the 2012 election and class warfare rather than doing the right thing for the American people. I just -- Mr. David that you just had, he had said perfectly we are going bankrupt and we need to start doing best things so that way we don't go bankrupt in a very short or near future. Thank you.

GJELTEN

10:34:58
OK. Thank you very much, Prem. Chris.

EDWARDS

10:35:01
I agree with that caller. It's hard to change the incentives in Congress. They're voted in every couple of years, and this does seem to be all about the election. I agree with Mr. Stockman wholeheartedly. The focus should be on long-term reforms. We're going bankrupt here. And this is just playing around and meddling, which isn't going to do any good. There was a bit of discussion earlier, but this isn't just about economics. It's about the fairness of giving people $1,000 to spend right now.

EDWARDS

10:35:28
But, if you're not cutting the underlying spending, the Social Security benefits, young people in the future are going to have their taxes hiked by $1,000, so any sugar high you're going to get from stimulating the economy now is going to be reversed out down the road when we have to raise taxes.

GJELTEN

10:35:44
Belle, how seriously -- how big of an issue is this for the economy, really? And, you know, why isn't cutting the deficit a more important priority in your judgment?

SAWHILL

10:35:57
Cutting the deficit is an important priority, but we shouldn't be doing it right when the economy is weak. So we should enact laws right now. We should reform Social Security. We should reform Medicare. We should reform the entire tax system in a way that brings in more revenue and grows some of these benefits more slowly over time. But when the economy is in the tank, that is not the right time to do this.

SAWHILL

10:36:24
David Stockman talked about what happened under Ronald Reagan. I think it's very interesting that Ronald Reagan raised taxes many times while he was president, and yet the decade of the '80s was a period of very strong growth. What was going on in 1982, by the way, in addition to tax increases, was a big defense buildup. So, you know, you have to look at the whole picture here.

SAWHILL

10:36:48
I think on the deficit, most people agree that we need a major plan. We probably need savings of about $4 trillion over the next decade. By the way, expiration of the Bush -- so-called Bush tax cuts, if we just let them go away, which they will, by law, at the end of next year, that would produce about $4 trillion of revenue over the next decade.

SAWHILL

10:37:12
So a lot of the debate right now is about fairness, about shared sacrifice, about if we're going to get our fiscal house in order, who should pay the bill, and shouldn't millionaires and other affluent Americans share in the sacrifice? Should we put all of the burden on federal workers and others who are very dependent on government funding?

GJELTEN

10:37:35
OK. Coming up, your calls and questions for our panel on this issue of the payroll tax debate. Stay tuned.

GJELTEN

10:40:04
Welcome back. I'm Tom Gjelten, sitting in for Diane Rehm today with my guests, Isabel Sawhill of the Brookings Institution, Chris Edwards of the Cato Institute and Naftali Bendavid of The Wall Street Journal. And we're discussing whether the payroll tax cut should be extended when it expires at the end of this year. You can join us by calling 1-800-433-8850, or send your emails to drshow@wamu.org. And I want to go now to Mario, who's calling us from Cincinnati, Ohio. Good morning, Mario.

MARIO

10:40:42
...challenge the argument I think the woman from the Brookings Institute made that the tax cut would actually stimulate the economy. There's an article that you will find on the Cleveland Fed website. It's called "Why Are We Saving So Much?" And just as strong an argument can be made that people are spooked, and they'll take any income that they see as a tax holiday, not as a the long-term additional benefit, a short-term benefit and actually just curl it away and save it. I can at least say that this one individual is actually doing that.

GJELTEN

10:41:14
Belle?

SAWHILL

10:41:16
It's a good point. That criticism is often made, and it is true that people are trying to save more now and rebuild their balance sheets after the housing crisis. So we don't know with any precision how much of the money will be spent and how much of it will be saved. But even if more than normal is saved, I don't think there's any good case for saying it won't have any impact at all.

SAWHILL

10:41:43
And, as Naftali said earlier, even if it has a smaller-than-expected impact, it is something that is good for middle-class people who are struggling and don't have jobs. The other thing we need to do on that front is extend unemployment benefits because they will keep the incomes of the unemployed somewhat higher than they would otherwise be and help them to maintain their spending.

GJELTEN

10:42:11
We have a number of emails this morning from people who are concerned about the future of Social Security. And we're discussing, you know, in addition to the concern about the state of the economy right now, I think, excuse me, a long-term concern for many people is the health of Social Security.

GJELTEN

10:42:26
Richard, for example, writes: "At a time when we worry about the financial health of Social Security, it doesn't seem like a good idea to reduce Social Security's revenues. If the payroll tax holiday is continued, smart people will take the cash and put it in their IRAs so they have it when they retire." Chris.

EDWARDS

10:42:47
I think if the democrats keep going after rich people, I think if they want to do that in a productive fashion, they should get together with Republicans and make a deal on Social Security that reduces benefits for those at the high end on Social Security in the future to bring its finances in order. And there's lots of ways you can do that.

EDWARDS

10:43:05
There's a proposal called progressive price indexing where the benefits for people at the top end would rise a lot slower than people in the middle and the bottom, and, over time, that would help balance the program. So that's a way that the Democrats can go after the wealthy but on the spending side of the budget, and I think that there is a deal to be made here between the two parties.

BENDAVID

10:43:26
But I think it's also important to say that nobody's talking about doing this without paying for it and without making this Social Security trust fund whole. A lot of the debate, in fact, is about how exactly to do that. Now, the critics of it say, well, that wouldn't be as reliable as the current Social Security trust fund funding stream we have from the payroll tax, but it's not like the supporters of this payroll tax cut are just saying, well, let's just let the funds go away and be diminished.

GJELTEN

10:43:50
Mm-hmm. All right. Let's go now to Montage. (sp?) He's calling us from St. Louis, Mo. Good morning. Welcome to "The Diane Rehm Show."

MR. MONTAGE SALAMI

10:43:56
Good morning, sir. This is Montage Salami (sp?) from St. Louis.

GJELTEN

10:43:59
OK.

SALAMI

10:44:00
I think this is all about the Republicans don't want Mr. President to succeed. When he came up with a plan that millionaires should pay more taxes, the Republicans were against them. Now, this -- the beneficiary of -- the small business people who's not making $1 million for their benefit and they don't like it. It's all about this game that Obama should not have a second term. That's my opinion.

GJELTEN

10:44:26
What you're saying is the Republicans are all in favor of tax cuts when they're for the wealthy but ambivalent or oppose the tax cuts when they favor the middle class.

SALAMI

10:44:36
Yes, yes.

GJELTEN

10:44:38
Chris, do you have thoughts on that or Belle?

SAWHILL

10:44:40
Well, I think it's interesting. There's been an awful lot of talk about Romney and the fact that he tends to flip-flop. I'm beginning to think the entire Republican Party is one big flip-flopper because they have been totally inconsistent on taxes. How can you be for reducing taxes on the wealthy or keeping them low and yet allowing them to go up on the middle class? I think that's an argument that the public are finally hearing, and I think it is a winning argument for Democrats.

EDWARDS

10:45:15
I agree. The Republicans are hugely inconsistent on fiscal policy. They are always for tax cuts. They should match that with spending cuts. If you don't cut the spending, ultimately, the taxes are going to have to go up. So Republicans, you know, they have been entirely inconsistent on this.

GJELTEN

10:45:31
I want to get a small business perspective in here. Graham writes us, saying: "As a small business person, I believe that a higher corporate tax rate will not reduce jobs or decrease the drive to be successful but will rather require companies who have excessive profits to reinvest their profits before the end of their fiscal year. The reinvestments will turn into jobs and or the expansion of business." Does that make any sense?

EDWARDS

10:45:59
No. It doesn't make any sense. I wrote a book in 2008 on the corporate tax system. We've got one of the highest corporate tax rates in the world. It's hugely unproductive. We're shooting ourselves in the foot. If you're any multinational company these days -- Honda, Toyota, Caterpillar, Intel -- you would look at other countries to invest rather than the United States, unfortunately.

EDWARDS

10:46:21
So -- and that is an opportunity, I think, that President Obama has in front of him. If he really wanted to get the economy moving again, he should get together with the Republicans, do a bipartisan deal to reform our corporate tax code.

SAWHILL

10:46:33
And he, in fact, has talked about doing exactly that. And I agree with Chris on that point.

GJELTEN

10:46:37
OK. Let's go now to Weston, (sic) who's calling us from West Point, Ga. Good morning. Welcome to "The Diane Rehm Show."

WESLEY

10:46:44
Yes. Good morning, sir. And it's Wesley.

GJELTEN

10:46:46
Oh, sorry.

WESLEY

10:46:47
I will -- yes. I would like to ask you very educated and formal panel. Can they please inform the public exactly what cuts were made to fund Bush tax cut and the two wars we've been engaged in? And if none were made, why are they -- the Republicans are so adamant about looking for cuts to fund this payroll tax holiday? I'll take your answers off the air. Thank you.

GJELTEN

10:47:13
'OK. All right. Naftali.

BENDAVID

10:47:15
Well, that's an argument that the Democrats are making is that Republicans were never that concerned with paying for tax cuts when they affected the wealthy or when they involved the Bush tax cuts. But now, they're very concerned about this. And I mean, you know, what the Republicans would say and they have said is that, you know, our financial picture has changed, and the deficit picture is such that we absolutely have to pay for every single thing we do when the deficit was not in that situation back when the Bush tax cuts were enacted.

BENDAVID

10:47:41
But I do think the Republicans face a political problem here, as several of them will tell you openly, you know, they're brand for the past 30 years has been that they're against higher taxes anywhere and always. And now, here's one that they're suddenly reluctant about. And they may have some good explanations for that.

BENDAVID

10:47:56
You know, they don't want to hurt the Social Security trust fund and, sort of, this is a dedicated tax not like other taxes. But the truth is that's a difficult political argument to make. And I think that's why, on this issue, the Democrats are kind of unified and the Republicans are a little bit tied up a notch trying to figure out how to respond.

GJELTEN

10:48:14
Mm hmm. Let's go now to Bonnie, who is calling us from San Antonio, Texas. Good morning, Bonnie. Welcome to "The Diane Rehm Show."

BONNIE

10:48:23
Good morning. Thank you for taking my call.

GJELTEN

10:48:27
And your question? You have a comment?

BONNIE

10:48:29
I want to say two things. Yes, sir. I keep hearing about the argument made that taxing the very wealthy which reduced job creation, and I'm not sure I see how exactly that would happen. It's the pot money in the pocket of consumers that seems that most likely to create jobs. How does allowing the wealthy to keep more in the way of lower taxes makes jobs created?

GJELTEN

10:48:58
OK. That's an interesting economic question because it sort of puts consumption versus investment. Which is the more important driver of economic growth? Belle.

SAWHILL

10:49:09
Well, consumption, first of all, is about 70 percent of all spending. So consumption is, in magnitude, much larger than investment. Investment is important, but businesses don't invest when consumers aren't buying. They don't need additional capacity. They don't have any motivation to invest when their sales are very low. I do think that her point about the wealthy is very important.

SAWHILL

10:49:36
If you gave a tax cut to the wealthy, you -- or increase their taxes, it would come out of their savings. If I have more than $1 million of income and my taxes go up by, say, 2 percent on the income over $1 million, does anybody really believe I'm going to spend a lot less as a result? No. I'm going to take the money out of the stock market or wherever I keep my funds.

GJELTEN

10:50:07
Chris, is this science? I mean, do we really know what creates jobs in an economy, what effect tax cuts have on job creations, what effect, you know, tax increases have? Or are we sort of -- it's just simply a political debate?

EDWARDS

10:50:23
No. There's all kinds of economics research. I mean, Belle and I differ on it. She believes in sort of a demand side sort of theories to stimulate the economy, and I believe more on supply side theories. You got to look at who are the very top -- people at the very top. In my view, they're people like Steve Jobs, formerly, and other people like that and Bill Gates. If you increase taxes on them, they will put less money in, for example, risky startups and venture capital and that sort of stuff.

EDWARDS

10:50:50
They'll put more of their money into tax-free muni bonds, which don't help the economy, in my view. So you got to look at the -- who the people are at the very top end. In my view, they're extremely important people who work very hard. You increase taxes on them. It reduces the productive activity that they engage in.

SAWHILL

10:51:06
Can I just mention that Warren Buffett, who is in the category that Chris is talking about, has been a big advocate for some kind of a millionaire's tax. He understands that the Steve Jobs and the Bill Gates and the Warren Buffetts don't do what they do because of tax rates, especially of the size we're talking about here.

GJELTEN

10:51:25
OK. Let's go quickly to Sibel, (sp?) who is calling us from Baltimore, Md. Welcome to "The Diane Rehm Show," Sibel.

SIBEL

10:51:32
Hi. Thank you. Yes. I know of a good way for the debt reduction on the federal budget. We don't really need to cut in federal or state jobs because that would mean increasing the unemployment rate as well as hurting the economy. All we really need to do is cut the pension plans, which we are paying an enormous amount for. For instance, I know a teacher who makes about $62,000 a year in her pension.

SIBEL

10:51:56
It's been about 20 years, and she's making over -- that's over $1 million. Another guy I know is -- works for Social Security, makes about $100,000 a year. That's going to be 80 percent. Who knows how much the congressmen are making? So I don't think that we need to actually cut the taxes. We're -- we are paying these people from our taxes, and they don't actually pay Social Security, yet they are fully funded in their retirement from the taxes we pay for them.

GJELTEN

10:52:22
OK. So you're talking about the pensions that are paid to government employees. That's an interesting issue. But let's pause for a second. I'm Tom Gjelten. You're listening to "The Diane Rehm Show." And if you'd like to join us, call 1-800-433-8850, or send an email to drshow@wamu.org. What about that, Belle? What about the idea of federal or government pension funds? How big an issue is that in terms of spending?

SAWHILL

10:52:51
I think they need to be looked at. There are some reforms that are probably necessary over the longer term. But I don't think they're a big part of the problem. Keep in mind that over 70 percent of your federal taxes go for just three programs: Social Security, Medicare and Medicaid. So this whole notion that we can somehow rather balance the budget by simply cutting back on what government workers receive, either in pay or in pensions, or by reducing the size of the federal workforce is simply a myth.

GJELTEN

10:53:28
You know, there are just no easy answers here, are there, Naftali? I mean, no matter how you tackle this problem, people are going to be hurt. And when you're talking about pain and sacrifice, there's going to be bitter political debate.

BENDAVID

10:53:38
I think that's definitely true. I want to also just refer to something the last caller said. If she was implying that government employees don't pay Social Security, that's not true. But leaving that issue aside, I think that's right. You know, it's not like it hasn't occurred to anybody that we need to cut our deficit by a lot. And there is, you know, several plans out there that suggested a combination of entitlement reform, spending cuts and tax increases would pretty much get us a lot of the way where we need to go.

BENDAVID

10:54:04
And this is what Congress has been talking about almost this whole year. They've been fighting over it. They've been wrestling it. A lot of people in both parties agree on the basic idea of a plan that would sort of balance those three factors. But the fact is, to oversimplify a little bit, there are factions of both parties that are resistant to that kind of a compromise. And so it hasn't happened.

BENDAVID

10:54:22
And that's why we're here at the end of the year trying to do a few small things before time runs out for this year and sort of do what we can, and Congress is in its final sprint. But, you know, these things have been debated for a long time, and they're not easy.

GJELTEN

10:54:35
Chris, it's sort of unfortunate, I guess you could say, that we're dealing with a really weak economy, a really big deficit in an election year. I mean, that's a pretty bad combination, isn't it?

EDWARDS

10:54:47
Yeah. I think the economy will eventually recover. Frankly, regardless of what Washington does, that's what market economies do. They eventually return to growth. I do think we need to be facing these long-term problems. And, you know, the political battles we've had this year over these long-term issues are all good. I mean, people don't like combat and battle in Washington, but I think it's a -- these are extremely important issues.

EDWARDS

10:55:08
We do need to battle them out, and there are honest differences of opinion on these issues. So -- and we're going to be battling about these issues for many years to come because we're still running trillion dollar deficits.

BENDAVID

10:55:19
I mean, I think combat is good if it leads to some kind of a resolution. If it's just a state of perpetual combat without any real tackling of the country's big problems, then I think that's not so good.

GJELTEN

10:55:29
Belle, to what -- your -- I assume you also agree that there will be a compromise on this particular position -- on this particular issue.

SAWHILL

10:55:39
I believe there will be. Everybody that I've talked to thinks that this is mostly political posturing right now. An earlier caller pointed that out. I think the interesting question is going to be how long Congress stays in session in order to get this done. The president is harping on this proposal every time he gets a chance to speak. And I think it's a winning issue for him. But I believe he's right on this particular set of issues.

GJELTEN

10:56:13
And, Chris, do you see any other issue coming up on which there is actually a prospect for kind of compromise?

EDWARDS

10:56:19
Well, I had thought a good idea, as I mentioned, would be a corporate tax reform. It is something President Obama has talked about. He's Treasury secretary has talked about it. Republicans are holding hearings on this issue. And I actually do think it is something you could do before the election that would help businesses start investing because I think the low business investment, which dropped off the cliff a few years ago, that's the key problem with the economy.

GJELTEN

10:56:42
OK. Chris Edwards is director of tax policy Studies at the Cato Institute. Our other guests have been Isabel Sawhill -- she's a senior fellow in economic studies at the Brookings Institution -- and Naftali Bendavid, the national correspondent for The Wall Street Journal. We were joined earlier by David Stocksman -- Stockman, the former budget director during the Reagan administration. I'm Tom Gjelten, sitting in for Diane Rehm. Thanks for listening.

ANNOUNCER

10:57:05
"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Monique Nazareth, Nikki Jecks, Susan Nabors and Lisa Dunn. And the engineer is Tobey Schreiner. A.C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.
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