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Last week in his State of the Union address President Obama called for tax reform to ensure fair play. He proposed what he called a Buffett Rule: a minimum federal income tax of 30% for people making over $1 million. Republicans say he’s pushing class warfare and stifling economic growth in a period of weak growth. GOP presidential hopeful Mitt Romney is facing criticism for both how he made his enormous fortune and for his seemingly low tax rate, but, as many analysts point out, most households pay at an even lower rate. Please join us to discuss the tax rates and he economy.
- Jared Bernstein senior fellow, Center on Budget and Policy Priorities; former chief economist and economic policy adviser for Vice President Biden.
- David Leonhardt Washington bureau chief, The New York Times.
- Alice Rivlin senior fellow, Brookings Institution, vice chair, Board of Governors, Federal Reserve System (1996-99); director, White House Office of Management and Budget (1994-96); and founding director, Congressional Budget Office (1975-83).
- Stephen Moore member of the Wall Street Journal's editorial board.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. President Obama's called for a new tax rule. Anyone who earns more than $1 million yearly must pay an income tax rate of at least 30 percent. The proposal known as the Buffett rule is adding new fuel to the debate over fairness in our tax code and the need to encourage private investment.
MS. DIANE REHMJoining me to talk about these issues: Alice Rivlin of the Brookings Institution, Steven Moore of The Wall Street Journal's editorial board, Jared Bernstein of the Center on Budget and Policy Priorities and David Leonhardt of The New York Times. Do join us, 800-433-8850. Send us email to email@example.com. Join us on Facebook or Twitter. Good morning to all of you.
MS. ALICE RIVLINGood morning.
MR. STEPHEN MOOREGood morning.
MR. JARED BERNSTEINGood morning.
MR. DAVID LEONHARDTGood morning.
REHMGood to have you here. Jared, explain to us the background of this so-called Buffett rule briefly and what you believe it could do.
BERNSTEINSure. Over the past few decades, Diane, a number of -- well, you can call them loopholes or you can call them incentives -- have crept into the tax code, particularly affecting the income sources of the richest among us -- things like the money you make from capital gains, selling a stock that's appreciative. These kinds of income sources are now very favorably treated in the tax code.
BERNSTEINAnd that's why a guy like Warren Buffett, who's name -- this rule is named after, or, more recently, we hear Mitt Romney in this context are paying tax rates -- about 17 percent in Buffett's case, about 14 percent in Romney's case, even though their incomes are in the hundreds of millions. Meanwhile, people who earn what's called ordinary income, wage-based income are taxed at what's called ordinary income rates, which get up to 35 percent for folks in the top of the scale.
BERNSTEINAnd so, as you mentioned in your introduction, this is a basic fairness issue. It turns out, actually, that the average tax rate among millionaires and billionaires is around 30 percent. It's just that this group of people whose incomes are coming from all these assets with all these loopholes get very special and favorable treatment. Now, you asked, what does it do? Well, one thing is it injects a big dose of fairness into a tax code that's grown terribly unfair.
BERNSTEINI think most people would agree with Mr. Buffett that the idea that his secretary pays a tax rate twice the rate of his is unfair. It also helps deal with our fiscal situation, which, of course, is pretty dire. The newspaper this morning, good op-ed by Robert Samuelson, pointed out that the Buffett rule would raise something like 40 to $50 billion a year.
BERNSTEINSo, you know, multiply that by 10, and you have the kind of budget numbers, you know, 400, $500 billion against the deficit. That would help a lot. It wouldn't solve everything by any stretch of the imagination, but let's not let the best be the enemy of the good here. So I think it's a good idea.
REHMAlice Rivlin, a good idea?
RIVLINI think it's a good idea. And, as Jared says, it's mainly a fairness idea. It makes clear that everybody has to contribute to this society, especially people who have benefited enormously from being part of the American economy. I don't think it goes nearly far enough. I would like to reform the whole tax code to make it fairer, a broader base and lower rates. But it's a first step, and I am for it.
REHMStephen Moore, how do you see it?
MOOREI think it's probably about the worst thing we could possibly do for the economy. I think the idea of raising the capital gains tax to 30 percent and the dividend tax to 30 percent would make America a very unfavorable place to invest, and I think it would really have a devastating impact on jobs and investment in this country. And, you know, my major issue is, how do we make America more competitive in a global economy, Diane, where we're competing with China and Japan and Germany and France and India for capital and jobs?
MOOREAnd if you -- there's an old saying, if you tax something, you get less of it. If you -- this would be the biggest increase in tax on investment in the history of this country, and I think it would be really devastating. The other thing I want to just point out is this ruse that Warren Buffett pays a lower tax rate than his secretary is simply, flatly untrue. Everyone knows it's untrue.
MOOREThe reason that it appears that Warren Buffett pays a lower tax than his secretary is because we're not counting the corporate income tax. And the company that Warren Buffett owns, Berkshire Hathaway, paid over $2 billion in taxes in 2009. I just looked up this data. He owns 30 percent of that company, so that was tax that was paid by him. If we did something like the Buffett rule, Jared, I'd say the only way it would even make any sense is to eliminate the corporate income tax entirely.
REHMAll right. David Leonhardt, how you do see the broader picture?
LEONHARDTI'd say the broader picture is that, over the last 30, 50 years, whatever long timeframe you want to look at, we'd had two different developments at the very top of the income distribution: One, the pre-tax incomes of people at the very top have gone up far more than they have for anyone else, far more than they have for the middle, far more than they have for the bottom.
REHMExplain those pre-tax income taxes.
LEONHARDTSo that's how much your employer is actually paying you before the government gets involved and starts taking your taxes. And the pre-tax earnings of people in the middle have gone up faster than inflation over the last 30 years but not much faster than inflation, whereas, at the top, they've gone up hugely. They've doubled. They've tripled. And there are a lot of reasons for that.
LEONHARDTThere's this notion of superstar economics in which we pay the very best people the things more than we used to, in part, because there's a global marketplace. There's the fact that finance is a bigger part of the economy than it used to be. There's an argument that deregulation plays a role in all of this. Now, those trends, those pre-tax trends have been exacerbated by the tax rates. The tax rates on people at the top have gone down a lot. The tax rates of everyone else have gone down a little.
LEONHARDTAnd so you used to have people, the very richest people paying 50, 60 percent of their total income. I'm not now talking about marginal tax rates. I'm talking about how much you actually pay in federal -- all federal taxes, including the corporate taxes that Steve was just talking about, and that's now down to something like a third of their income. And so that doesn't immediately answer what we should do here because there's a philosophical argument that everyone should pay the exact same tax rates.
LEONHARDTBut the fact is that if you look at which direction we've gone in, we've gone in the direction of people at the top making vastly more than they used to and paying much less of every dollar in tax than they used to.
REHMAlice Rivlin, explain that marginal tax rate question.
RIVLINThe marginal tax is what you pay on the last few dollars that you earn. Everybody gets some exemptions, and then they begin paying at lower rates on their income. But people who make more money pay higher rates on the additional income, and that's called a marginal rate. And a progressive tax is one where the marginal rate goes up. As you earn more money or have more money coming in, you pay more.
REHMHow do you respond to Stephen Moore's argument that this would be the worst thing you could do to install the Buffett rule?
RIVLINOh, I think it is, with all due respect to Steve, pretty much nonsense. There isn't much evidence for it. We have had much higher taxes in the past on upper-income people and on capital gains without any demonstrable bad effect. In the couple of decades after World War II, our taxes were much, much higher, up into the 90 to -- 70 to 90 percent on the -- on top incomes. Those were high growth years. And more recently, in the 1990s, before the Bush tax cuts, we also had high growth years.
RIVLINSo I don't see any connection here within a reasonable range. I mean, nobody wants to go back to 90 percent tax rates. But, within the reasonable range, I don't see a connection with growth.
MOOREWell, look, I think the most important lesson of the last 30 years, in terms of economics, is that tax rates matter a lot, you know? Reagan came in when those rates were as high as Alice was talking about, 70 percent marginal tax rate at income. Reagan lowered the rates from 70 to 28 percent. We had a 25-year boom, almost unprecedented in the history of this country. That's what my book, "The End of Prosperity," is about.
MOOREOne interesting issue is that if you look at -- let's just take this idea of having a 30 percent capital gains tax, which, essentially, is what the Buffett rule would do. The data is almost 100 percent true on this that you're actually above what we call the revenue maximizing rates.
MOORESo if you have a capital gains tax rate of 30 percent, the federal government will actually lose revenue that, in fact, the Congressional Budget Office, which Alice used to run, the joint tax committee all say that revenue maximizing rate at capital gains is probably somewhere between 20 and 25 percent. So it doesn't make any sense to have a tax rate that actually loses revenue for the government.
LEONHARDTThe problem with this argument is there is certainly a tax rate at which we would be discouraging economic activity, and that would be hurting growth. And I don't think we know exactly what that tax rate is. I don't think there's any scientific way to know exactly what the number is. But the problem with the argument, that this will be terrible for growth, is the last few decades. George W. Bush cut taxes and promised a big boom, and, instead, we had a decade of the slowest economic growth since World War II.
LEONHARDTBill Clinton raised taxes on the rich, and there are all these great forecasts of doom from Larry Kudlow and Newt Gingrich. And, instead, we had the fastest growth since the 1960s. You can even go back to the 1980s. The great Reagan boom began actually after Reagan increased taxes and took away some of his tax cuts.
LEONHARDTSo that -- the tax increase obviously didn't cause those booms, but the -- but within this relatively narrow band where we are in this country -- we're not talking about 90 percent marginal tax rates anymore -- the evidence that these kind of tax movements are the dominant or even a large force driving growth, the problem is the last 30 years don't really support that.
REHMAt the same time, Jared Bernstein, you talked about raising 40 to $50 billion in revenues. We're not talking about reducing the deficit, are we? Aren't we talking simply about fairness?
BERNSTEINI think we're talking about both. The fact is that we simply cannot achieve a sustainable fiscal path without more revenues in the mix. I mean, this is widely accepted. We can't get there through spending cuts alone.
REHMJared Bernstein, he's former economic policy adviser for Vice President Biden. Stay with us.
REHMAnd our first emailer, Anne, in Fleming Island, Fla., asked that we, please, address the alternative minimum tax, how it affects taxpayers with very high incomes from investments. Alice.
RIVLINThe alternative minimum tax is something we actually put in our tax code for similar reasons that we're talking about now because some very high-income people, a very small number actually, were paying no tax at all, and that seemed outrageous. So the alternative minimum tax was put in to make sure that everybody, even people who have large deductions, exemptions, et cetera, pays a minimum tax.
RIVLINUnfortunately, over the years, it wasn't indexed. It didn't -- the thresholds didn't go up with inflation, and so it now catches quite a lot of people, and it needs reform. But it would be expensive to reform it, so we have just kicked it down the road each year and let it be.
MOOREWell, this is one reason why I think the middle class might want to be afraid of this idea of the super -- what we've called the Buffett rule as super alternative minimum tax -- because, you know, you're right, Alice, that this came in -- it was '68 or '69, I think, it was, and it was to impose a tax on a few hundred of the richest Americans that were not paying very much tax. And what that -- what it turned into is a tax that could soon affect 25 to 30 million people.
MOORESo every time we impose these taxes on the super rich, they hit people who are not always rich. I want to get one statistic out if I can that, I think, is so important. If you look at the tax distribution today -- and you all know this -- the richest 1 percent pay about 40 percent of the income tax so that one out of 100 pay 40 percent. The richest 10 percent pay about 70 percent of the income tax, and the bottom 50 percent pay about 2.5 percent of the income tax.
MOORESo it is a highly, highly progressive tax system as it is, and the question I'd ask, for example, Jared, who's one of the instigators of this idea is, do you want the top 1 percent to pay all the tax? I mean, it's such a highly progressive system already.
BERNSTEINI don't want them to pay all the tax. I think it's important to recognize that they're actually not paying 40 or 70 percent of all the tax. They're paying...
BERNSTEIN...federal income tax. So if you actually look at the full system of taxation, you find that the bottom 50 percent are paying a lot more in payroll taxes, for example, than they are in income tax.
REHMBut we're talking about tax rates, not percentages.
BERNSTEINRight. So that's the other thing. It's very -- there are a lot of numbers floating around here. I'm glad you brought that up, Diane. What Steve is saying, it's not that the top 1 percent pay a 70 or a 40 percent tax rate. He's saying that's the share of all federal income taxes they pay.
BERNSTEINTheir actual federal tax rate, the share of their income that the top 1 percent pays in taxes is 30 percent, according to the CBO. Now, the problem is that you've got a lot of people out there who aren't paying that 30 percent. They're paying 15 for it, and that's because their income is coming from these other sources. And I very much disagree with Steve's point that somehow that you can just tack on the corporate tax rate because I guarantee you Mitt Romney is not paying that corporate tax rate.
RIVLINWell, the thing to remember about people with very high incomes, yes, they pay a higher percentage of the tax, but they have a very high percentage of the total income. That's what we're talking about. And the percentage for the highest group, the top 1 percent, if you will, has gone up very, very fast and very much faster than the rest of us.
LEONHARDTThe brief summary is the tax rates for the rich have fallen very rapidly over the last 30 years, but their pre-tax income has increased even more rapidly than their tax rates has fallen. So they're making more dollars. They're paying less of each dollar in taxes. When you combine the two, the total amount of federal income tax they pay has gone up because their income has gone up so rapid.
MOORECan I just say one thing about that?
MOOREI mean, that's the whole idea, you know, to supply-side economics. If you lower tax rates, you'll get higher taxable income. And so you'll -- one of the things we did in 1986, which a bill that passed with 97 votes in the Senate, we got rid of loopholes, we lowered the rate, and, yeah, taxable income went up. But I think, David, that was partly a result of the fact that rates came down, so people have an incentive not to invest in loopholes, but to report their income.
LEONHARDTThere's an interesting sort of...
BERNSTEINSo let me just say that -- so that's a great point that Stephen just made. But my view, and, I think, the view of most people listening to this show, most people who want the economy to work better for them, that is not what supply-side economics is about. What supply-side economics is about is if you do this, if you lower the tax rates on the richest people, you will create more jobs, more income, more earning opportunities for the broad middle class. And that's the part, as David Leonhardt said earlier, hasn't happened.
LEONHARDTI mean, I think it's -- with this tax history, it's important to remember that we can't prove a general rule with one anecdote, right? So it is true that top incomes went up a lot after taxes were cut in the '80s. It's also true that top incomes soared after tax rates went up in '90s. So if you were to look just at the'90s, you can say, wow, the best thing we could do to increase incomes at the top is to raise the tax rates of the rich because Bill Clinton did that, and their income went up. That's, of course, not true, right? It's just -- it's sort of one data point, and it's important to look at the whole picture here.
RIVLINThe big thing is incomes have gone up very rapidly at the very top. But I'm glad that Steve brought up the tax reform of 1986 because that was basically a good thing. It broadened the base. It got rid of not all, but many of the loopholes and exemptions. We ought to do that again. We need a thorough reform of our income tax that makes it fairer and can keep the progressivity.
BERNSTEINI think, I mean, one thing to keep in mind here about the Buffett rule is you can make a very good critique of it, that it makes the tax code even more complicated. We're talking about layers upon layers upon layers, and I understand people who support it would say, yeah, but we can't go out and just remake the whole tax code. But I do think if we're talking about a tax code that from an economist perspective, both liberal and conservative economists, you would want a tax code that doesn't have a Buffett rule, but instead is vastly simpler than the one we have.
MOORESee, this is my problem with -- in my opinion, what Alice said is a contradiction. On the one hand, she said we should go back the 1986 kind of rule of lowering tax rates from the base. I completely agree with that, Alice. But you and I can sit down, and we can come up with something a lot better than we have right now. But that's completely inconsistent with the Buffett rule, which may -- raises marginal tax rates and makes the tax system, I think, less pro-growth.
MOOREI just don't think -- this is what -- the problem I have with what the president said, we want a tax reform, but we want these higher tax rates. Well, that's contradiction.
LEONHARDTLook, everybody wants tax reform. We can all sit around a room and very quickly agree on it. But the problem is that tax reform creates winners and losers. And in a town like this -- I see heads nodding. In a town like this, it's going to be extremely hard to get there. In the meantime, we need some kind of a levy against this excessive income accumulation at the top. It's bad for the economy, and it's bad for our fiscal position.
REHMSo you're saying, even though we can't tackle the whole big thing, we need this one thing. Alice, would you agree?
RIVLINI'm saying that, too. I'd go for the Buffett rule. Right now, it's a small fix, and it's a good thing. But I would sacrifice it in a minute when and if we get to reform the whole tax code.
LEONHARDTHere's part of the problem. In rooms like this, you can also often get quick agreement on fundamental tax reform, right? The idea is you put a smart conservative and a smart liberal in a room, and you can get fundamental tax reform.
REHMI've got them all here.
BERNSTEINWell, we figured everything in this room.
LEONHARDTHere's who doesn't want tax reform -- a large number of the American voters. And that's because if you ask if they want tax reform, sure. That sounds great. But if you ask them, hey, do you want to lose your mortgage deduction? No, they don't want that. Do you want to lose the huge deduction for health care? No, they don't want that. They want to get rid of little tax deductions that almost no one pays.
LEONHARDTAnd so if you look at the polling here, you can make a really good argument that what the American people want is not fundamental tax reform. It's what economists want. And so you could say that a really good leader could go out and sell them on that. We don't have that leader right now anywhere in either party. But if you look at the polling, what the American people want, for better or worse, depending on your view, is not fundamental tax reform. They want higher taxes on rich people.
REHMBut do they -- has there been polling on the Buffett rule, Alice?
RIVLINI don't know. There's certainly -- on the exact Buffett rule. There certainly has been polling on the attitude toward very rich people and the notion that they don't pay their fair share, and that's what this is about.
REHMBut is this class warfare, Steve?
MOOREYeah, I think it is, and I think -- look, the problem with this whole discussion is I'm the only one who's brought up the corporate income taxes. And the corporate income tax is a second tier of tax on top of all these other taxes we're talking about. So, for example, when Jared says, well, these rich people like Warren Buffett are paying 17 percent, they're not paying 17 percent.
MOOREThey're paying 17 percent -- they don't get a -- Warren Buffett doesn't get a penny of his money until Berkshire Hathaway paid 35 percent tax rate on the profits before he received them. So my point is we should either have a capital gains and dividend tax, or we should have a corporate tax. But we shouldn't have both.
LEONHARDTSteve, I mentioned the corporate tax rate before. Those numbers I gave on the percentage of each average dollar that people pay in taxes included the corporate tax rate.
MOOREThat's true. Right.
LEONHARDTAnd so, if you go back to the '60s and '70s, you see that very affluent people were paying 50, 60 percent of their income, on average, to the federal government. They're now down to about 30, 35. That's including the corporate tax rate. So I agree with Steve that some of this discussion of Romney's taxes has been exaggerated because it doesn't take into account the corporate tax rate. But even when you include the corporate tax rate, the tax rates of people at the very top have gone down dramatically.
REHMAll right. Here's an email from John in Cleveland: "I don't buy the argument that taxing millionaires that earn on investments would hurt the economy. Instead, they'd get this tax cut to allow them to invest and create jobs. However, it's the same investors pushing corporations to make more profits. This, in turn, sends jobs overseas for cheaper labors. Tax them at a higher rate. This is just a smoke screen." Steve.
MOOREYeah. Look, I completely disagree with that. I think we are in a competitive world today, whether we like it or not, and American companies are competing with companies in China and Japan and Germany. If we raise our taxes on investment here, if we make it more expensive than last year at the margin, more investment will go abroad. I don't think any of you would disagree with that premise.
BERNSTEINIt's a perfectly plausible theory. What you have to do with every one of these economic theories is actually go into the data. And, luckily, we've had so many changes in the capital gains tax rates over the years -- it is a bit of a political football -- that we can actually look in the data and see if it has -- had any of the kind of empirical effects that Steve would mention, and the fact is it has not. It has simply not showed.
BERNSTEINThe emailer is exactly right. It has simply not shown up that when you lower the capital gains rate, you get an investment boom, or when you raise it you get an investment bust. David made the point earlier, looking at the Clinton years versus the George W. Bush years. And...
MOOREWait. Clinton cut the capital gains tax.
BERNSTEINWhat -- Clinton -- no. But I'm saying if you look at when Clinton cut the capital gains tax...
BERNSTEIN...and when you look at when Reagan's rate was higher than that, 28 percent, what you don't see are the investment effects or the job effects that you mentioned, that the caller very correctly pointed out just haven't shown up. What you do see is people rearranging their capital gains so that they can take advantage of the tax change.
RIVLINBut let's come back to this tax reform that you say we all agree on in principle and David says we'll never get. I think we will get it. Two deficit reduction commissions on which I served made very clear that there are two things you need to do to get the deficit under control. One is reform entitlements. The other is reform taxes and raise more revenue therefrom, and that includes the corporate tax. It includes getting our corporate tax rate down, but broadening the base because it is true that we have a high rate compared to other countries.
REHMAlice Rivlin of the Brookings Institution. You're listening to "The Diane Rehm Show." Let's open the phones, 800-433-8850. First to Russell. He's in Grapevine, Texas. Good morning to you.
RUSSELLGood morning, everyone.
RUSSELLI just had a question regarding how do you actually get to the uber rich, you know? They have teams of lawyers, accountants who posture themselves according to any rules that you concoct. Specifically, say, for instance, John Kerry and Teresa Heinz actually funded part of the school down the street from my house on zero-coupon municipal bond, so they get 8 percent for investing in a school construction.
RUSSELLBut then there's a group in Washington that says, well, they shouldn't be making $100 million a year. So now we're going to tax on their receipts from the interest on that? And who's going to fund the school next time? Who's going to fund the bridges, the roads?
LEONHARDTIf you look at history, when you raise tax rates at the top, taxes do really go up on people who make a lot of money. Yes, there are loopholes. Yes, they can move around money in different ways. But that isn't the dominant thing, and so that, if you look at -- if you go back to the '80s and you look at the big tax cut that Reagan put in place on people at the very top, that really did lower their tax rates.
LEONHARDTAnd then you look at the tax increase that Clinton put in place on people at the very top, much smaller than the cut Reagan put in, that really did increase their tax rates. So it's true there are loopholes that people use in their exceptions, but they are the exception, and so that if you were to raise tax within the band we're talking about, if you were to raise taxes on people at the top, you really would raise their taxes.
MOOREI guess we'll just look at a totally different set of data 'cause in the 1980s when Reagan cut tax rates, David, you know, when Reagan came into office, we had $500 billion of revenue. Ten years later, when he left office, we had a trillion. Now, not all of that was income tax revenue. A lot of it was payroll tax revenues, other taxes. But the point of lowering tax rates is to grow the economy.
MOOREThe economy did grow. We created 16 million jobs in the '80s, and that boom went into the '90s. You're right, David. Bill Clinton did raise income tax rates, but he also cut the capital gains rate. And Jared, as you know, after 1997, when we cut the capital gains rate, the revenues from the capital gains tax doubled. So every time we've cut the capital gains rate, we've got more revenue. And every time we've raised the rate, we've gotten less revenue.
BERNSTEINYeah. I don't disagree with that point, and it's exactly what I said before. People -- and they've got a lot of tax lawyers who help them figure this out -- move their capital gains rates around to take advantage of changes like that. The question that I think Steve doesn't ever go far enough in is in actually looking at the bottom line for the American middle class, which is, do we actually help the broad middle, low-income people, through the supply-side, trickle-down changes?
BERNSTEINWe know that the money trickles up. We've already talked about that. What we don't know is whether it trickles down, and, in fact, the evidence is that it simply hasn't done so. The more we pursue the trickle-down kind of ideas that Steve is espousing, the worst outcomes we get on jobs and income.
LEONHARDTThe caller's specific question wasn't about economic growth, right? Reagan cut taxes and the economy grew. Clinton raised taxes and the economy grew. The caller's concern is that if you raise taxes on affluent people, they simply get around it. And when you look at any numbers, the Congressional Budget Office numbers, what you see is that when Clinton came into office, the tax rates on people at the top were below 30 percent.
LEONHARDTTalking about total federal average tax on the top 1 percent, he took them up to more like 34 or 35 percent. So when you put a tax increase in place on affluent people, it really does affect them.
RIVLINI thought the caller was worried about who was going to fund the schools when affluent people didn't have as much to give to charity. I think affluent people will give to charity anyway. Warren Buffett certainly does. And I'd rather have the schools funded the way they're supposed to be through taxes at the local level.
REHMAlice Rivlin. She's senior fellow at the Brookings Institution. Short break now, and when we come back, more of your calls, your email. I look forward to hearing from you.
REHMAnd we're back. Here's an email from Dwayne in Charlevoix, Mich. "How do we become more competitive in a global economy? We pay our workers about $1 a day, reduce health care even more, make our workers live in substandard dorms and apartments, make sure that the lobbyists make the rules so that we are more like China, Southwest Asia, et cetera. Just look at the news today," says Dwayne.
REHM"I love Apple, but I think it's appalling that Apple is competitive because many in China have to suffer under low wages, endless hours and less than fair working-living conditions. Buffett is right. And it's a start. If we don't follow his lead soon, we will not be like Europe, but like China." And that's the question. Is the Buffett rule a start? Would it make sense? David Leonhardt.
LEONHARDTWell, I'll leave that to the other three folks here to decide whether it would really make sense. But I guess the one thing I would say is that a lot of these things that we're worried about with China, I think we worry too much about. We -- there was just a poll about what country has the strongest economy in the world, and more Americans pick China than pick the United States. That's remarkable. We're so much richer than China.
LEONHARDTIf you go to China, all they talk about there is how they want to learn how to innovate the way we're learning. And I agree China is an economic threat in some ways, but it's worth remembering that we don't want dollar-a-day jobs. We don't have dollar-a-day jobs. And all China wants to do is make its economy more like our economy. And so what we want to do is keep pushing further and further ahead and not get too wrapped up in looking behind us.
RIVLINI totally agree with that. And you're already seeing in China, fortunately, strikes of workers and people protesting the very conditions that shock the caller. But what we need to do is the opposite of what he is suggesting we may do. We need to raise wages so that people have more money to buy things, and we need to invest in people and training and education to get more skill. And we need to invest in our infrastructure.
RIVLINWe need to do that at the same time we're bringing down our long-term debt or getting it under control. That's not impossible. But it's a tall order, and we haven't gotten a political system that's able to deal with that right now.
REHMAnd is the Buffett rule a start?
MOOREYou know, I think the Buffett rule isn't all that -- doesn't have a ton of impact on these issues that we're talking about, which, in many ways, are the greater, more important issues for the prosperity of the country and the broad middle class in terms of jobs, in terms of expanding industries, in terms of investment in people's skills and investment in expanding sectors. The -- we spend much -- too much of our time obsessing over these tax changes.
MOOREAnd as David said very correctly -- I think he made a important point earlier, that if you actually look at the economic growth record, it's far, far, far less sensitive to these tweaks in the tax code that we all get obsessed about. If you look at the historical record, if you cut taxes for rich people, they do a lot better. If you lower taxes -- if you raise taxes for rich people, yeah, you know, you earn more revenue for the Treasury.
MOORENow, that's actually important, and that's why I think Alice and I are supportive of the Buffett rule because, like I said at the beginning, it brings in 40 to $50 billion a year. And if you want to do more investment and if you want to do more education, if you want to have a healthier economy, amply-funded government, that's what you need.
REHMAll right. To St. Louis, Mo., good morning, Teri. (sp?)
TERIGood morning, good morning. I have just a comment and question, and it really goes back to the beginning of your program.
TERIFirst of all, loop is kind of a loaded term, frankly. These are deductions that were enacted by the Congress or tax that were enacted by the Congress. People who use them use them legitimately, and they're not loopholes in any sense that normal people understand that word. My second question is -- someone said that the very wealthy pay an average effective tax rate of about 30 percent. What is the average effective tax rate middle class? Does anybody have any information?
BERNSTEINIt's about 15 percent, and that's why I think the Buffett rule is very deceptive. I mean, a lot of Americans, Diane, think that rich people pay a lower tax rate than the middle-income plumbers and secretaries, and it's just flatly not true. And, you know, David, I'm disappointed in the media that, you know, for example, why isn't Warren Buffett -- why even people in the media ask Warren Buffett to release his tax forms and his secretary so we actually know how much he pays and she pays?
BERNSTEINYou know, I'll respond briefly -- this is Jared, just to say. Yeah. I mean, it's actually 14 percent for the middle class. And, you know, I agree that -- with what Steve just said. I think the problem isn't that the -- remember, the average middle class income is around 50,000 bucks. So you're talking about a guy whose income is some -- we're talking about Romney now whose income is somewhere in the $200 million range, paying the same effective tax rate as someone who's got about 50,000 bucks. That's the fairness issue right there.
REHMBut what Steve says is effective tax rate.
MOORERight, the average rate on all other income.
BERNSTEINI'm -- that's what I'm talking about, the effective rate. This is what Buffett and Romney said, effective rate, meaning if you take what they pay as a share of their income, it's 14, 15, 16 percent, about the same as a middle-class family.
REHMAnd that's where Steve disagrees.
MOOREI disagree because that doesn't include the corporate tax. That's why the CBO data is important 'cause it's saying that the middle class...
BERNSTEINThe CBO includes the corporate tax.
MOOREI know. That's the 30 percent rate that's double what a middle-class family makes.
BERNSTEINMitt Romney does not the pay the corporate tax rate because...
MOOREHe does, too.
BERNSTEIN...his income is passed through...
MOOREFrom a corporation.
BERNSTEINAny corporate income he gets is passed through to his individual tax (unintelligible), and that's why he completely evades the corporate rate.
LEONHARDTI think if we had the absolute perfect look at these numbers, we would include the corporate tax rate, and I think we would also include state and local taxes. I mean, what we care about at the end of the day are how much money do people have to spend on themselves when it's all said and done. And so when you include the corporate tax rate, the corporate tax rate is vastly progressive. It falls overwhelmingly on affluent people. And state and local taxes are quite regressive. They fall largely on people in the middle.
LEONHARDTAnd so, still, what you're left with, I think, is a similar picture, which is there are exceptions. But, by and large, the typical affluent person pays a higher tax rate than the typical middle-class person. But the typical affluent person pays a much lower tax rate than the typical affluent person did 30 years ago.
RIVLINI agree with the caller, that loopholes is a bad word, but there are some features of our tax code that are quite unfair. The way that hedge fund managers are compensated, for example, it's called carried interest, and it isn't really very defensible.
RIVLINWell, the people whose money they manage pay fees, right, but those fees are not counted as ordinary income for reasons that escape me. They are taxed at the same rate as capital gains, and so if you're a successful hedge fund...
REHMStill 15 percent.
RIVLINStill 15 percent. Now, you -- that's not illegal. These people aren't doing anything that they shouldn't. It's actually in the tax code, but it's ridiculous. It shouldn't be there. It's unfair because that's income that those people are earning, and they don't have to be taxed like it.
BERNSTEINI'm going to call it a loophole, with apologies to the caller.
REHMAll right. Let's go to Hedgesville, W.Va. Good morning, David.
DAVIDGood morning, Diane. I emailed you just to pan out to your advisers there, but I would like to see the tax code changed on capital gains to promote investment and discourage the speculation that caused, like, our last recession that we're still in. I would like to see them increase the tax on capital gains in the real short term, up to 50 percent less than 30 days. And for people that keep their money invested for 10 years, the first million would be free of capital gains and 10 percent on everything else. And it would be at five years 10 percent on capital gains.
DAVIDSo we could get people to invest for the long term and stop the speculation that has hurt everyone, both in gas prices, as well as house prices, and watching their 401 (k) drop by 50 percent when the housing bubble dropped.
REHMWhat do you think of that, Stephen Moore?
MOOREIt's an interesting idea. I think the reason people should be concerned about capital gains is this really is kind of the rocket fuel for our economy. I mean, this high-risk capital that people put in venture capital funds and so on, that often is used to start small businesses, and, sometimes, those small businesses become large businesses. And there is a couple of reasons we have a lower rate on capital gains right now. One is that the tax system makes you pay tax on your capital gains, but you don't get to deduct your capital losses.
MOORESo that's a bit unfair. And the second thing is, when you talk about some -- an investment that is 10 or 15 years, we don't allow you to index your capital gains for inflation. Either we -- if we're going to have a higher rate of tax on capital gains, then we should probably allow those capital gains to be indexed for inflation over 10 or 15 years.
REHMI'm also worried about how often small business become large business and how many small business owners go down.
MOORELook, two-thirds of small businesses fail. Three-quarters of them do.
MOOREBut you're looking for the diamond in the rough that's going to be the next Staples or Home Depot.
BERNSTEINJust a factual point. People do get to deduct capital losses from their income.
MOOREOnly at the top.
BERNSTEINLook, it was interesting to me that the caller was from Hedgesville. I thought this was perhaps...
BERNSTEIN...perhaps a town of hedge fund managers. The issue that I think the caller raised as well -- and Alice alluded to it a second ago -- one of the problems we have -- and it does lead to excessive speculation -- is when we have all these -- in respect to our previous caller, I'll avoid the term loopholes -- we all have these special preferential treatment in the tax code. You don't get more growth. You don't get more investment. You don't get more jobs.
BERNSTEINWhat you get is a lot of -- unless you want to count jobs for tax lawyers -- what you get is a lot of people rearranging their income in order to get the best deal from the tax code. We see this all the time. By the way, if you ever want to -- if you have trouble falling asleep, pore through Mitt Romney's tax returns, and you'll see lots of varied gifts -- Cayman Island accounts or Swiss accounts. You'll see lots of tax planning.
BERNSTEINAnd someone said earlier, not against the law, but that kind of speculation doesn't really help economic growth. It just helps enrich those through those preferential treatments.
RIVLINI agree with that. And I think we ought to be talking about how you simplify the tax code, make it less welfare for lawyers and accountants and also a lower rate with a broader base. But if we want to grow the economy, we shouldn't be so preoccupied with the tax rates. We need to do much more important things than fiddling around with the tax code. We need to invest. We need to do infrastructure. We need to do skills. All of those things are more important than fiddling with the tax code.
REHMAlice Rivlin of the Brookings Institution. And you're listening to "The Diane Rehm Show." The question is, we've had lots of talk, good explanations, good opinions. Is anything going to get done or changed...
MOOREThis is what the election's going to be about.
MOOREThis election is going to be about this very issue we've been talking about for the last hour.
REHMDo you agree?
LEONHARDTThat's exactly right. Yeah, Congress is not going to do this this year. There's no chance of it. And so what we're going to get to at the end of this year is a situation in which we have two really important things. One, we have an election. That's the more important. And, two, we have all these different things in the tax code expiring, including the Bush tax cuts. And so you're going to get to a situation in which the status quo probably can't continue, when you combine the fact that we have this deficit with all these expiring things.
LEONHARDTAnd we're going to have to wake up after Election Day and figure out which party is in better shape to try to make things happen. The odds are neither party is going to be able to do precisely what it wants.
RIVLINThat's the point. No matter who wins the election at the presidential or the congressional level, the big things we're talking about having to do -- reforming the entitlements, reforming the tax code, raising more revenue, bending the cost curve on health -- those things are going to take bipartisan cooperation. We've got several blueprints for doing that: Simpson-Bowles, Domenici-Rivlin. You name it. They were all bipartisan. It can be done, but it's not going to be done as long as the two parties are just sniping at each other.
BERNSTEINLook, this year, in this election year with all the dynamics that are going on, what we've been talking about for the last hour, supply-side, trickle-down economics is on trial. And I believe it will be found guilty.
BERNSTEINAnd I think that's going to be a positive thing for our economy going forward.
MOOREAnd I'd make the point that this election is going to be about these issues we've talked about. I'm not sure they can be dealt with in a bipartisan way because the divide is so large. The left wants the tax code to be emphasizing fairness, and the right wants it emphasizing growth and jobs.
RIVLINI think bipartisan solutions are possible. I think the Simpson-Bowles and Domenici-Rivlin commissions proved that. We can -- we almost got there with the super committee in the fall. We...
REHMAnd what happened, Alice?
RIVLINWell, it fell apart because of the -- all the reasons we've been talking about. There was no cooperation. There was no leadership. There was more willingness to blame each other than to get the problems solved. But we must solve the problem, and, unlike Steve, I believe it has to be a bipartisan solution.
LEONHARDTEven more important, John Boehner and Barack Obama essentially got there. They all but had a deal on -- it wouldn't have solved all the problems, but they had a really significant deal on the stuff. In the end, there were a couple of little things that they didn't get to...
REHMLittle things like?
LEONHARDTWell, it depends which side you listen to 'cause these were not public negotiations. But the main thing is that the Republicans in the House weren't willing to go along with as much new revenue, new tax revenue as Boehner was. And so they didn't support the deal, and it fell apart. But if you look at all these different models, Simpson-Bowles, Domenici-Rivlin -- I would add Obama-Boehner to the lists -- there is a road map, and so I do think you can make an optimistic case.
LEONHARDTI'm always happy to make the pessimistic case on what's going to happen here, but I do think you can make an optimistic case that, in the next several years, we will get some kind of bipartisan budget deal.
BERNSTEINWe mustn't -- and I think that Steve just put it on, and I just -- we mustn't pose growth and fairness as alternatives. We can either have growth, or we can even have fair -- or we can have fairness. We must construct an economy -- and whether it's tax code, investment, education policy, you name it, it must be growth with fairness. Right now, we've had, for decades, growth, absent fairness, and I think the combination of those two has to be the goal in public policy.
REHMSteve, last word?
MOOREThe last two, three years have been the worst three or four years for the middle class in the last 50 years, and, in fact, the share of taxes and the share of income going to the rich have fallen dramatically in the last three years. So I think we need to put growth first, and fairness will come next.
REHMStephen Moore, member of The Wall Street Journal's editorial board, Alice Rivlin of the Brookings Institution, Jared Bernstein of the Center on Budget and Policy Priorities, former chief economist and economic policy adviser for Vice President Biden, and David Leonhardt, Washington bureau chief for The New York Times. Thank you.
LEONHARDTThank you, Diane.
MOOREThank you, Diane.
RIVLINThank you, Diane.
REHMAnd thanks for listening, all. I'm Diane Rehm.
ANNOUNCERThe 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.
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