The Buffett Rule, Tax Fairness and the 2012 Presidential Race

MS. SUSAN PAGE

10:06:56
Thanks for joining us. I'm Susan Page of USA Today, sitting in for Diane Rehm. Diane is recovering from a voice treatment. President Obama is promoting the Buffett Rule as a way to combat widening income inequality. The proposal would raise taxes on people who make $1 million or more a year.

MS. SUSAN PAGE

10:07:16
In the studio to discuss what the idea would mean to the economy and the 2012 election: Michael Linden of the Center for American Progress, Roberton Williams of the Tax Policy Center, Carol Lee of The Wall Street Journal and Kevin Hassett of the American Enterprise Institute. Well, welcome to you all.

MR. MICHAEL LINDEN

10:07:36
Thank you.

MS. CAROL LEE

10:07:37
Thank you.

MR. KEVIN HASSETT

10:07:37
Good morning.

MR. ROBERTON WILLIAMS

10:07:37
Yeah.

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10:07:38
We invite our listeners to join our conversation later in this hour. You can call our toll-free number, 1-800-433-8850. Send us an email at drshow@wamu.org, or find us on Twitter or Facebook. Well, Bob Williams, let's start with the basics. What is the Buffett Rule?

WILLIAMS

10:07:58
The Buffett Rule is an attempt to make sure that high-income individuals, people with incomes over $1 million, pay at least 30 percent of their income in tax. You calculate your tax the way -- I believe one of us does on our standard 1040. You take a look at the bottom line. If it's not 30 percent under some calculation, then you owe more money, just like another alternative minimum tax.

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10:08:18
And would it raise a lot of money? Would it...

WILLIAMS

10:08:20
No.

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10:08:20
...affect the deficit?

WILLIAMS

10:08:21
The Joint Committee on Taxation estimates it would raise about $47 billion over the next decade. Compared to our deficit over that period, it's less than 1 percent. So it's a small piece of what we need.

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10:08:32
So $47 billion sounds like a lot but, in the scope of things, maybe not so much. Michael Linden, is it a good idea?

LINDEN

10:08:38
It is a good idea. You know, there's -- there are some fundamental unfairnesses in our tax code, and one of them is that for some very high-income individuals -- not all, but for some -- they get away with paying very low rates, rates that are lower than many middle-class families. And for that reason alone, some version of the Buffett Rule makes a lot of sense. I should just note that that $47 billion that it's projected to raise is against a baseline, a projection of the future in which the Bush tax cuts all expire.

LINDEN

10:09:11
And so, of course, there are fewer millionaires in that world that pay very low rates because the Bush tax cuts cut taxes very dramatically, especially for people at the top. In a world in which we maintained all the Bush tax cuts, the Buffett Rule would raise around $160 billion, still not enough to solve the deficit by any means, but significantly more than the $47 billion.

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10:09:32
Right. The Bush tax cuts are scheduled to expire at the end of the year. A lot of people think...

LINDEN

10:09:35
That's right.

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10:09:35
...they're likely to be extended...

LINDEN

10:09:36
That's right.

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10:09:36
...I guess, depending on who wins the election. That might affect that. But do you think -- is it important for the money it would raise or for the symbolism of the action?

LINDEN

10:09:45
I think it's more important for installing a sense of fairness in the tax code. Even if it only raised $1 billion, they would still be worth doing. You know, the American people need to trust that the tax code that they pay, the tax system that they pay into every year is treating people fairly. And the fact that there are some very extremely wealthy people who get to pay very low rates because of a special rates on investment income and deductions and special treatment of certain kinds of income, it undermines the confidence in the tax code.

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10:10:17
So, Kevin Hassett, tax fairness sounds like a good thing. Do you agree?

HASSETT

10:10:22
Well, I agree that tax fairness is a good thing. But I think that this Buffett Rule is a very unfortunate proposal, especially if you look at the Senate proposal, the specifics of it, which Bob has -- his team has just done a great analysis to help us understand it. But I have a few problems with it. The first is that it's another alternative minimum tax. And so it's an extra layer of complexity.

HASSETT

10:10:41
The next is it's a break from a kind of bipartisan consensus that goes back to the '70s on capital gains 'cause, really, I think one of the main ways that you're going to get on the Buffett Rule is that you have a big lumpy capital gain. And it throws you in, and the capital gains rate is a lot lower. Dividends could kind of get you there, too, but I think it's probably lumpy capital gains that'll be the dominant force getting you into this Buffett Rule.

HASSETT

10:11:00
And a big increase in the capital gains rate is, again, contrary to a bipartisan consensus. Jimmy Carter cut the capital gains rate about 20 percent in '78. In '97, Bill Clinton got it down to 20 percent. And I think the reason why people have supported those lower rates is that, if you have high rates, then what happens is that people tend not to realize their gains because they don't want to have to pay that high tax.

HASSETT

10:11:20
And you get a lot of distortion from this lock-in effect. And so I think there are good economic reasons for lower capital gains rate. You know, historically, there's been a bipartisan consensus about that. And what President Obama and the Democrats are doing right now is they're jacking up the capital gains rate in the name of fairness but doing it in a kind of stealthy way.

HASSETT

10:11:39
So if they really want to take this on, you know, then, sure, go ahead and do it. But be more direct about it and, like, go after the specifics of capital gains and dividend taxes. And the final problem I have with it is that, you know, they call it the Buffett Rule, I think, in part because it's so good for Warren Buffett. You know, one of the main reasons you could get into this low-tax state if you're up in the million-two million range is if you have a lot of municipal bonds, but they exempt municipal bonds from the treatment. You know, Berkshire Hathaway holds $3 billion of muni bonds.

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10:12:06
Well, we'll talk, you know...

HASSETT

10:12:07
I'm sorry.

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10:12:07
You know, we'll talk about that particular issue a little later in the hour. Carol Lee, President Obama must think this is a great idea. He has given 21 speeches so far this year promoting the Buffett Rule, including an event he did yesterday at the White House, a speech in Florida earlier this week. Why is he talking about it so much?

LEE

10:12:25
Well, he's talking about it right now 'cause the Senate is going to vote on it Monday. But he's also talking about it at this time where we're moving into the general election phase. And this is the president and the White House's attempt to frame the debate going into the general election. What you're going to hear in the next six-and-a-half months is all about tax fairness.

LEE

10:12:44
They're trying to tap into this populist sentiment out there where people feel like there is inequity in income. And he's -- this is part of his effort to frame the election. And also, the White House thinks that this a pretty good wedge issue for -- in the -- put against the Romney campaign on a number of levels. We've seen him, you know, brought -- bring out Romney's tax rate, which is around 14 percent. And you've seen yesterday the president bring out a bunch of women.

LEE

10:13:15
I mean, the idea of having a millionaire pay more -- less in tax rates than his secretary, I mean, it tops -- everybody's fighting for the women vote. You saw him sort of double barrel that yesterday at the White House. And so you're just going to hear him talk much more about this in the next week and then, I think, more broadly in the next coming months about just this whole idea of fairness, which is basically how they're trying to frame this election debate.

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10:13:42
So the Senate votes next week on the Buffett Rule. What are the odds it will pass?

LEE

10:13:47
About zero. This is a purely political exercise. Nobody expects it to pass. I think the question is whether the Senate Republicans block this right off on Monday or allow this to go and proceed into a debate for the rest of the week as we saw. I mean, the White House did this a few weeks ago with trying to repeal oil and gas subsidies, which is another issue that they just want to put the Republicans on record on. And now, they're doing this with the Buffett Rule.

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10:14:15
Bob Williams, talk about what effect do you think this would have on the economy if it was passed, if it wasn't active.

WILLIAMS

10:14:22
Because it's so small a share of the economy, it's not like you'd have much effect one way or the other. It hits very high-income people. It hits them fairly hard, but not egregiously hard. The average tax increase under the situation where we -- Bush tax cuts expire is scheduled will be only about $170,000 for each of 116,000 people. That's a lot of people, but in terms of the effect on the big economy with 300 million people, it's not all that big. So the negative on the economy is unlikely to be very large.

WILLIAMS

10:14:51
These people also have lots of money sitting in the bank right now. They don't know what to do with. So giving them more money is not likely to unleash their investment energies. I would like to point out a couple of things, though. One of the points the president has made is that raising the effective tax rate for these high-income people to 30 percent will make them pay what people in the middle class are paying. People in the middle class don't pay anywhere close to 30 percent.

WILLIAMS

10:15:14
We estimate that people on the middle of the income distribution, people with incomes between about 35 and $65,000, pay about 3.5 percent of their income in income tax, and, if you count both the employer and employee shares of payroll tax, maybe another 10 percent, so we're talking 13.5 percent total. That's less than half of the 30 percent being bandied about as the number these high-income people should be paying. Where'd the 30 percent come from?

WILLIAMS

10:15:36
As near as I can tell, it's 15 percent tax rate that most of us are in in the middle income distribution, plus 15 percent combined employer-employee payroll taxes. That gets you to 30 percent. But nobody with incomes under $100,000 is paying 30 percent of their income in taxes.

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10:15:52
Well, Michael Linden, doesn't that go to your whole point about fairness? I mean, if most people are paying about what Mitt Romney is paying -- he's paying 14 percent on his taxes last year -- why is there such a big issue of fairness?

LINDEN

10:16:03
'Cause most people aren't making what Mitt Romney is making. If Mitt Romney were making 35 to $65,000 a year, then paying 15 percent in taxes would be completely reasonable. But, of course, he's making millions of dollars a year. And so it's not at all reasonable that he's paying the same rate that somebody -- a middle-class family is paying. And I agree that, you know, middle-class families aren't paying 30 percent. We don't want them paying 30 percent.

LINDEN

10:16:24
But we have this idea -- and I think most people agree with it -- that the more you make, the more you pitch in. And so it seems reasonable to ask that millionaires pay, you know, more than middle-class people. And it is true, as Bob points out, that middle-class families don't pay 30 percent, but a lot of millionaires do. Lot of millionaires who aren't taking advantage of the various special provisions in the tax code, they really are paying around 30 percent. And so the sense that some millionaires are getting away with it than some others, that's not a good thing either-- so that's -- it makes sense.

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10:16:57
You know, Kevin, I wonder one reason, though -- as Carol said, one reason the White House loves this issue is because they think it puts Mitt Romney, the presumptive opponent, on the spot because he's such a rich guy and because he has released two years of tax returns that indicate he's paying this 14 percent or so rate. Does it make it harder -- does his personal wealth make it harder for him to respond effectively in political terms on this issue?

HASSETT

10:17:25
You know, I'm not really sure about that because I think that Americans historically have been very impressed by success. You know, I've, over the years, been astonished by how much attention Donald Trump gets, for example. And it must just be that he's wealthy, and people view that as a sign that he's confident, and so that he is a person who could be in authority. But, you know, I think that the danger for President Obama in this -- and it goes back to things that Carol said, you know, this is a wedge issue for him, it's purely political -- is that, you know, guess what?

HASSETT

10:17:53
One of the big reasons why there's so much income inequality is that unemployment is so high. If you set a bunch of people -- you take a bunch of people -- like, look at the sort of total unemployment rate, not just the people looking for jobs -- and you set their income to zero. That's really bad for inequality.

HASSETT

10:18:06
And to have a president at a time with high unemployment who's out there, you know, pursuing wedge issues that are purely political that, you know, will crack down on a bipartisan consensus, that we should have low taxes on capital gains 'cause otherwise, you get a lot of distortion from lock-ins is a kind of thing that, I think, could lead voters to turn against him. And so the fairness issue, I agree, is a powerful one. Inequality is a serious issue, but I worry that he's going in the wrong direction.

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10:18:31
We're going to take a short break. And when we come back, we'll continue our conversation, as all of us face tax day next week when our federal taxes are due. We'll go to the phones. We'll take some of your calls, and we'll read some of your emails. Stay with us.

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10:20:04
Welcome back. I'm Susan Page of USA Today, sitting in for Diane Rehm. And with me in the studio: Michael Linden from the Center for American Progress, Kevin Hassett from the American Enterprise Institute. He's also an economic policy adviser to the Romney campaign, Carlo Lee of The Wall Street Journal and Robertson Williams. He's with the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

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10:20:28
You know, we were talking about income inequality as an issue that's of a lot of concern to some Americans. Bob, do you think that this a growing problem? Is this a bigger issue now than it used to be?

WILLIAMS

10:20:42
It is much larger than it was 20, 30 years ago. If we look over the long period, back in the 1920s, 1930s, we had very unequal incomes. The high-income people had very disproportionate share of income, 13, 14 percent of all income. Between World War II and 1970, incomes became much, much more equal, and the share going to the top tier of individuals dropped off by more than half.

WILLIAMS

10:21:08
In the intervening 40 or 50 years, we've seen inequality returning to where it was back around the time of the Depression. The high-income people have gotten many -- most of the gains of income over the last quarter century, and we're as unequal now as we were at our worst time before World War II.

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10:21:25
And why has that happened?

WILLIAMS

10:21:27
A lot of it has to do with the fact that we have a winner-take-all economy, that the high-income people are doing very, very well. CEOs are now paid much, much more than they were paid 30 years ago, 40 years ago. The athletes, the actors, all these high-income people are doing much, much better, and other people are sort of stuck in jobs that do not pay nearly as well, haven't seen the wage increases.

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10:21:46
Kevin, does this worry you? Or do think this is, OK, a reflection of a vibrant economy that lets some people do very well?

HASSETT

10:21:52
No. It's a genuine worry, and it's something that you see kind of worldwide. And I think there's a very thoughtful and interesting paper written by Larry Summers and Jim Hines that's at the National Bureau of Economic Research website for those listeners who'd like to have a look at it, who basically said that in -- the other thing is that, as the world becomes flat, then, you know, people of every skill level are competing against people of the similar skill level in other countries, and they can have a big impact on the income distribution.

HASSETT

10:22:18
But as the income distribution is becoming more unequal because of forces like that and forces like what Bob mentioned, then your ability as a policymaker to do something about it is weakened as well because the natural thing to do would be something like, say, the Buffett Rule, which, you know, hammers capital. But if you hammer capital, then capital is going to move to another country.

HASSETT

10:22:37
And then that's going to hurt workers here 'cause they won't have the machines they need to drive their wages up. And so it's a very, very tricky policy issue right now, how to deal with income inequality, and I think nations around the world are struggling with it.

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10:22:48
What do you think we could do to address the issue that would make more sense to you than the Buffett Rule?

HASSETT

10:22:52
Yeah, I think the first thing that we should do is stipulate -- at least I would stipulate that having a consumption tax or having low taxes on capital, low corporate taxes so that capital locates here is good for workers. There's a big economic literature that suggests that if we cut the corporate rate, for example, that blue-collar wages would go up. There's even a recent paper that finds a connection at the state level in the Unites States between lower state corporate taxes and union wages in those states.

HASSETT

10:23:20
And so I think that what we need to do is start to be more clever about -- like, what are the forces that are driving inequality? It's, you know, things like joblessness, things like insufficient capital because, if your marginal product's higher, you got more capital work with your wages higher. And I think that we should try to attract capital, recognize that capital and workers can be friends, and that they can work together and not sort of try to divide us with these wedge issues that we put forward for political reasons.

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10:23:41
Michael Linden, I know this is an issue that concerns you. So what do you think about Kevin's approach to it?

LINDEN

10:23:46
You know, I think it sounds plausible, but there's not a lot of evidence for it in the actual, you know, history. We cut taxes on capital pretty dramatically in 2000s, and income inequality didn't go down. It went up pretty substantially over the last 30 years, 40 years as income inequality has gone up. The federal tax code and federal policy has done less and less to address that. We, you know, in the -- in 1979, the federal tax code was reducing after-tax income inequality by around 10 percent, depending on various measures that you use.

LINDEN

10:24:23
And then it declined substantially with the regressive tax cuts and -- of Ronald Reagan. It increased -- the effect of the tax code on inequality increased in the '90s with tax increases on high-income individuals. And, not surprisingly, in the 2000s when President Bush cut taxes, especially on capital, the tax code did less and less. And I do want to say that Kevin has mentioned several times that there's a bipartisan consensus on lowering the capital gains taxes, and I...

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10:24:51
Or keeping the rates low, yeah.

LINDEN

10:24:53
Keeping the rates low, lowering them, and it's surprising to hear him say that because I don't think there's a bipartisan consensus at all. I think that it's -- we tried lowering capital gains rates, and it did not deliver the promised economic benefits.

LINDEN

10:25:07
And it's also worth mentioning that the one president who -- you could say that there's a bipartisan consensus to raising capital gains rates because Ronald Reagan was the president who raised capital rates to 28 percent, which is a full 13 percentage points higher than where it is today. So I do think it's a little bit of an overstatement to say there's a bipartisan consensus on that.

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10:25:27
So would Reagan support the Buffett Rule, do you think, Kevin Hassett?

HASSETT

10:25:30
No.

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10:25:30
Because that's an argument we heard President Obama make yesterday.

LINDEN

10:25:33
And he absolutely would.

HASSETT

10:25:34
Yeah, you know, he wouldn't, and you have to go back and look. Reagan did, you know, cut the heck out of taxes at the beginning and then watched the deficit grow and then wheeled some of them back. And that kind of flexibility is something that's different. I mean, you don't see that today. But the bipartisan -- I'd like to respond to two points. The bipartisan consensus, you know, it was Jimmy Carter. It was Bill Clinton.

HASSETT

10:25:53
You go back and look what Bill Clinton was saying in '97 when it was cut. He was celebrating the fact and, I think, Jimmy Carter certainly did, too. In fact, Carter gets too little credit, I think. He was also the first big deregulator, if you go back and look at the late '70s. He did a lot of sort of conservative stuff. And in terms of the evidence, you know, there really is a lot of evidence that corporate taxes have an impact on wages.

HASSETT

10:26:13
It's -- I wrote the first paper on this maybe about five years ago. It was, you know, very contentious at the time, but now there have been a bunch of other papers finding similar effects. And Bush -- President Bush didn't cut the corporate tax rate. And so the channel that I'm talking about and that, I think, is the next place to go -- and even President Obama has kind of acknowledged with some of his proposals -- is that we have to become more friendly for corporate capital, and that if we do that, then that'll have a big positive effect on blue-collar wages. And there's a lot of evidence for that.

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10:26:38
And I think that we should note that it's rare to hear a conservative Republican praising the tenure of Jimmy Carter. So I hope Jimmy Carter who was a friend of "The Diane Rehm Show," has often been on the show to promote his many books out. So that's very interesting. Carol, was Obama just having fun yesterday when he said he would be happy to change the name of this proposal to the Reagan Rule?

LEE

10:26:59
The Reagan Rule.

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10:26:59
What was he doing there?

LEE

10:27:01
I thought he was being a bit puckish. And, yeah, he's having fun. I mean, he very much in campaign mode, and this is what he's like when he's in campaign mode. I think, you know, as we -- these gentlemen have pointed out, I mean, the issue that he's trying to get out with this income inequality is obviously a big issue. I think that the risk for him is in damaging his political brand in the sense that, you know, he's pushing this thing that's purely political. If you talk to White House folks, you know, quietly, they will admit that it's purely political.

LEE

10:27:34
And while what he's talking about, the idea of income inequality and championing the middle-class is what he also talked about in 2008, the difference now is that he's not actually trying to do anything substantive about it. And I think that that can -- could turn out to be a bit of a risk for him in the sense that, you know, he came to Washington to try and change things a little bit, and this is not, I think, what a lot of voters who supported him in 2008 may have expected out of him.

LEE

10:27:59
And even a year ago, when, you know, the White House and the Congress were in a big fight over the debt ceiling, you heard the White House constantly criticizing House Republicans for passing cap and balance, saying it was a purely political move. And now, you know, a year later, they're sort of doing the same exact thing, taking these, you know, having the Senate take these votes that really have -- are not going to become law.

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10:28:25
Bob.

WILLIAMS

10:28:25
I think the one thing to look at with the president is he kind of painted himself in a corner in the 2008 campaign when he promised not to raise taxes on 98 percent of Americans. He said, I will not raise your taxes if you're a couple with income below $250,000, single person with income under $200,000. When you -- why move 98 percent of the people off the possibility of a tax increase? You're forced to focus on this very narrow, very wealthy group.

WILLIAMS

10:28:48
The problem is, while they have a lot of money, their pockets are not infinitely deep, and we can hit them a couple of times. We can't keep coming back to them, and they do not have enough money to solve our budgetary problems.

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10:29:00
Michael, you were shaking your head.

LINDEN

10:29:01
No, no. I mean, I think there's some truth in that. But, you know, contrast that with the other side who has taken 100 percent of the people off the table for a tax increase, and, you know, I do think that it is possible that, in the future, we're going to have to look at a wider or a broader tax reform. But let's start with the people who have benefited dramatically from the tax cuts of the past 10 years. Let's start with those people at the top.

LINDEN

10:29:26
Let's start with these obvious inefficiencies in the tax code or inequalities in the tax code where some people are getting away with very, very low rates. And I agree it doesn't solve the problem all by itself -- or not the deficit problem, but it does solve a different problem, which is that people feel like the tax code is rigged against them and rigged in favor of the wealthy, and they're not entirely wrong.

LEE

10:29:49
Well, even the president said that yesterday. I mean, he's admitted that this is not something that's going to do a whole lot to address this, but you have to start somewhere. And why not start by doing this? And so, in that sense, it's a very much a symbolic move.

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10:30:02
Is the tax code rigged against the middle class, Bob?

WILLIAMS

10:30:06
The tax code as a whole is not rigged against middle class. High-income people pay a lot more tax, a larger share of their income than people in the middle, and they pay a lot more than people at the bottom. Famous statistic: Almost half of us pay no federal income tax. That's because we use the income tax not just to collect revenue, but also to deliver a lot of social policy.

WILLIAMS

10:30:25
Of the people who don't pay income tax, about half of them are just too darn poor to pay. Their taxable income is wiped out by the standard deduction and personal exemptions. But the other half, 23 percent of us who don't pay federal income tax are taken out -- off the tax rules by all of the special preferences: the mortgage interest deduction, the state tax deduction, the charitable contribution deduction.

WILLIAMS

10:30:43
In fact, we can save money when retirement comes, all these different things. And the people who benefit most from a lot of those are middle class. The provision in the tax code that benefits the wealthy the most is the reduced tax, the potential tax rate on capital gains and dividends. Ninety-five percent of the benefits go to the richest fifth. Almost half of the benefits go to the richest one-tenth of 1 percent, one in 1,000.

WILLIAMS

10:31:04
So that's a very unfair part of the tax code. If you ignore the economic aspects that Kevin wants to point out -- there are economic aspects to this -- you probably don't want to tax them at the same rate that you're taxing ordinary income because there are good reasons not to. The question is how much differential should there be between ordinary tax rates and taxes on gains and dividends?

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10:31:24
And, Kevin, there is one aspect of the Buffett Rule that you wanted to talk about earlier, and I said we'd get back to it. Let's talk about it just briefly, and that is the exemption for, what, state and local government for municipal bonds?

HASSETT

10:31:35
For municipal bond interest.

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10:31:36
Yes.

HASSETT

10:31:36
And, again, so that -- this is the kind of thing that you have to do if you're an economist and you're trying to think through what happens if this becomes law. So what happens is the dividend-paying firms cut back their dividends. We actually saw, when the dividend tax rate went down, the dividend payments went up a lot, and then you get all sorts of problems where there's lots of cash sitting inside the firms. And maybe the executives are misusing it.

HASSETT

10:31:58
I mean, there are a lot of arguments to encourage them to pay dividends. People stop realizing capital gains because they don't want to pay the high tax. And since this doesn't go after people who invest in muni bonds, which are federal tax-free, then what they'll do is they'll move their portfolios towards municipal bonds.

HASSETT

10:32:13
And so, you know, all of that moving around means that -- I agree with Bob -- that it's likely that the economic damage from the proposal that's on the table is going to be hard to get into a really big number because all this moving around is going to happen. But the moving around is dead weight lost, in some sense. It's unfortunate that we're forcing people to do that.

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10:32:31
Maybe we shouldn't take the details so seriously because everyone agrees this isn't going to get passed anytime soon. But you're suggesting that the municipal bond exemption is a payoff or a kickback...

HASSETT

10:32:43
It looks weird to me. But one thing I wanted to do, too, though, is just weigh in on the income tax issue like the bottom half don't pay. I have a piece in The Washington Post a couple of years ago that people can Google, you know, "Why We Pay Without A Whimper." But it's based on some work I did with Anne Moore, who's now an economist at the Joint Tax Committee, where we looked at the total taxes paid by people.

HASSETT

10:33:03
And there's actually a lot less redistribution in the code than you would think once you account for everything like sales taxes and payroll taxes and so on. Almost everybody pays about 30 percent on their income and taxes.

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10:33:12
I'm Susan Page, and you're listening to "The Diane Rehm Show." We're taking your calls, 1-800-433-8850. Bob, you wanted to weigh in on this.

WILLIAMS

10:33:20
I think one thing that's important to point out with regard to municipal bonds is the benefit of the deduction goes to states and local governments. It doesn't really accrue to the taxpayers very much because they end up taking a lower interest rate on those bonds that they don't pay tax on. So Warren Buffett is paying a price for having those -- holding those municipal bonds. The price is paid to the state and local governments that can borrow money at lower interest rates.

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10:33:46
Is there a good reason, Michael, do you think, to include this municipal bond to exclusion?

LINDEN

10:33:50
You know, I think, frankly, that, as you mentioned, I think focusing on the details of this proposal is a little bit misguided.

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10:33:57
So we have no defenders of the municipal bond exclusion.

LINDEN

10:34:00
Well, look, I do -- I think that, you know, the design of this proposal -- there's other things that I would take -- maybe take issue with in the design of this particular proposal for the Buffett Rule. I don't love the million-dollar phase out. There's various things that I think could be addressed. But the basic principle of the Buffett Rule, which I don't think we should get too far away from, which is that millionaires should pay more than middle class people, it's hard for me to understand anybody arguing against that.

LINDEN

10:34:27
You can argue against the specific, you know, the specific proposal, and there's this change and that change. But we have -- we should have a progressive tax code as a whole, which asks people who pay more and who earn more to pay more, and that's what this principle, at least, would do.

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10:34:43
OK. Let's go to the phones and let our listeners join our conversation. Mario is calling us from Cincinnati, Ohio. Mario, thank you for joining us.

MARIO

10:34:51
Thank you. Yes. I want to follow up on that last comment that millionaires should pay more. I would say that if you're comparing apples to apples on the same economic entity, maybe that should be the case, but you can't have the full equivalent that labor and investment are the same thing.

MARIO

10:35:10
And I'll give you the example that if a laborer worked for an organization, and then they were -- let's say that organization went out of business. We don't go back to the laborer and say, give me back all your earnings while the persons or the investors that had the organization lose everything and they no longer have that source of income.

PAGE

10:35:27
All right, Mario. Thanks for your call. I wonder, Michael, do you want to respond?

LINDEN

10:35:30
Well, look, there -- it's true that there are different sources of income, and, as Bob mentioned earlier, you know, there's some good reasons to believe we should tax those slightly differently. But at the moment, we're taxing them incredibly differently. The top rate on ordinary income, wages and salaries, is 35 percent, and the top rate on capital gains and dividends is 15. That's a massive difference, which I don't think the economic literature suggests -- supports for such a huge difference.

LINDEN

10:35:56
And I'll also just note that when a company goes out of business, there are -- sometimes, you know, labor ends up taking a hit because they lose their pension or they lose their benefits, and a lot of times the laborers do take a hit. So I'm not sure that the distinction is quite as clear as the caller made it out to be.

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10:36:12
Kevin?

HASSETT

10:36:12
Well, I think Bob would agree with me that the economic literature actually supports a bigger difference than what we have in the go because of the growth benefits of consumption taxation. And so I also agree with the caller that capital and laborer are different, and, you know, that's why we have limited liability corporations and so on. It's a fundamentally different problem, and that's one place that gives you the result that we find in the literature because they're so different.

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10:36:35
Bob, do you think Americans have a pretty good understanding of what they pay in taxes?

WILLIAMS

10:36:40
I think most Americans don't understand the tax system. Sixty percent of us hire somebody to fill out their income tax returns for us. Another quarter of us use software that makes things pretty opaque. And the few that do fill out their own tax returns must have very simple ones 'cause it's pretty hard to fill out your tax rate. You have much complication. Most people don't understand how the tax system works. They don't understand the progressive tax rates, where as you move from -- as your income goes up, you move one tax bracket to the next.

WILLIAMS

10:37:02
You don't pay any more tax on your earlier income. You just pay that additional tax on the higher income you make. But people don't understand that. They don't understand how all the credits and deductions and exemptions work. And because of that, I think there's a lot of suspicion that other people are getting breaks that I'm not getting. Somehow I'm paying too much, and they're paying too little.

PAGE

10:37:19
In defense of Americans, I would just say the tax code does seem pretty complicated. So it's easy to understand why some people don't have a sophisticated understanding of it. I would include myself in that group. We're going to take a short break. When we come back, we're going to go straight to the phones and take some of your calls. Stay with us.

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10:40:04
Scott is calling us from Dallas with a question and a comment. Scott, hi, you're on "The Diane Rehm Show."

SCOTT

10:40:11
Good morning. How are you?

PAGE

10:40:12
Good morning.

SCOTT

10:40:14
My question is, what was wrong with the tax rates and the code of the post-World War II period, which saw virtually every income group double its real income? Why don't we reinstitute that? It seems like we're arguing over fairness instead of arguing over what's best for the economy. And -- tax codes seem to value labor because the higher tax rates actually increase the value of deductions of which labor is one.

PAGE

10:40:42
All right. Thanks very much for your call, Scott. Bob, maybe we should turn to you to talk about what were the tax rates back then, much higher than they are today.

WILLIAMS

10:40:50
Tax rates were incredibly high. The top tax rate in the early 1950s was 92 percent on personal income, and there was this lower rate on capital gains because we only taxed half of your capital gain. We tax at the regular tax rate, but we only tax half of it. So we had much, much higher rates then. It wasn't until President Kennedy, we dropped tax rates some in the 1962 tax cuts. President Reagan in 1981, big tax cut bringing top rates down to 50 percent for earnings, and then in 1986, bringing it down to 28 percent.

WILLIAMS

10:41:18
But we were way, way higher. If you go back before World War II, most people didn't pay the income tax. Only 4 percent of the population paid income tax in 1940. By the end of the war, 70 percent paid tax.

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10:41:28
Here's an email from Bill, who writes, "The tax rate used to be 90 percent, and I've heard that people like Henry Ford never complained about it." Was it an issue then, or were people -- rich people happy to be so rich that they could pay that much taxes?" Kevin?

HASSETT

10:41:42
Well, I think Bob and I are the two panelists that were actually almost around back then, right? But the -- so the stylized fact about the code back then is that the rates were really high, and they were really easy to avoid. And one of the reasons why there was a push to lower rates was that they did that combined with changes in the law that made it harder to hide your money with passive losses and things like that.

HASSETT

10:42:06
And so the high rate, I would guess, that -- I wonder, in fact, if your -- if Brookings Urban Center has ever looked at this, but the high rate probably didn't collect a whole bunch of revenue.

WILLIAMS

10:42:16
I don't think we know what was collected back then. There's not enough detail at the micro level.

LINDEN

10:42:22
I mean, I think it's -- I think Kevin's basically right that, you know, they were very high rates, but very, very few people paid those rates. It's like the Rockefeller rate. You know, there's the one family who paid it. But it does suggest that the obsession that we have about the top marginal tax rate is a little bit misplaced. We had enormous growth, as one of the earlier callers mentioned, enormous growth in the economy when the rates were much, much higher.

LINDEN

10:42:46
And it just -- it suggests to me and it suggests to a lot of people that we shouldn't worry so much about where the top rates are. We should really worry about how much revenue we're bringing in and if we are paying for the government that we want.

PAGE

10:42:59
One of the things that's complicated the debate these days is the fact that, as the panel has noted earlier -- I think it was you, Michael -- Republicans generally put 100 percent of the U.S. electorate or U.S. population away -- shield them from higher taxes. Many Republicans have signed the tax pledge, no new taxes, when they're running for re-election. Now, we've heard Sen. Chuck Grassley of Iowa in an interview with National Journal yesterday seem to open the door to some tax rates. Carol, can you tell us what he said?

LEE

10:43:35
Sure. Well, he essentially said that they would...

PAGE

10:43:42
Well -- or maybe, Kevin, do you want to talk about what he said?

HASSETT

10:43:43
Yeah. I think Grassley was basically appealing for dynamic scoring. And he said, if we get more revenue out of these things, then we'd be willing to sign on to them. But, you know, what -- it's an interesting thing. But if you took away the state and local income tax deduction and the mortgage interest deduction and the health exclusion and then just had an across-the-board rate reduction, you could get the rate down to maybe 23, 24 percent, the top rate if it's proportional.

HASSETT

10:44:06
Maybe, you know, the number is a little higher than that. But the point is if you went a little -- you went half the way, then the marginal rate would go down a lot, and you'd get a lot more revenue. And I think he might have been opening the door for a deal like that, too, in his statement. It's hard to say.

PAGE

10:44:18
And does that -- he's, of course, a former chairman of the Senate Finance Committee, a very senior Republican. I don't know, do we see this as, Michael, as him opening the door to something that didn't seem possible before?

LINDEN

10:44:28
Well, I think there's a really important distinction, and it's one that Kevin brought up, which is there's a difference between saying we can get more revenue by lowering rates and then paying for it and then some by removing deductions or reforming deductions, basically getting more income into the tax code. And then -- and that's one thing, and that's real. That's actual tax revenue that would be scoreable, that the Congressional Budget Office and the Joint Committee on Tax would say that's real revenue. That's one thing.

LINDEN

10:44:54
On the other hand, if he's saying let's get more revenue by lowering the rates and that'll have some magic effect on the economy in which we'll get more revenue, in other words the tax cuts will pay for themselves and then some, that's fake. That's just magic fairy dust that says, we cut taxes, and all of a sudden we get more revenue. And that doesn't happen. We know that that's not real. Now, if he's saying we can have more taxes because we'll do that second thing, that's not new.

LINDEN

10:45:17
That's pretty typical, standard talking point. If he's saying we can do the first, we can lower rates but broaden the base such that we actually get more revenue, that's reasonable. And that's something that I think there can be some negotiations over.

PAGE

10:45:29
You know, Carol, this whole debate underscores how significant this fall election could be because we hear very different proposals from Mitt Romney and Barack Obama. And these issues, as you said earlier, are getting just pushed off to next year on the extension of the Bush tax cuts on the Buffett Rule and other things because all we're having this year is a debate about them.

LEE

10:45:49
Right. And I think that that's the overarching point of all of this. Right now, the president is talking about the Buffett Rule and this whole idea of fairness. And if you notice, he's -- in 2008, he was always talking about raising taxes on people making $250,000 a year or more. And now he's moved it up a notch, and now he's talking about millionaires. But, really, it's all about the people who are making $250,000 or more because what the whole fight is about is the Bush tax cuts in the fall. You're also going to have a fight over the sequester, the -- which takes place in the beginning of 2013.

PAGE

10:46:23
And tell us what the sequester is.

LEE

10:46:25
Well, essentially, the congressional Republicans and the White House came -- reached a deal last year to raise the debt ceiling. And within that deal, they agreed to a certain amount of deficit reduction and created a congressional panel, which, of course, didn't achieve its goal of coming up with a plan for deficit reduction.

LEE

10:46:43
And so in -- the consequence of that is that in January of 2013, these automatic cuts take place, which is what -- what's interesting about what Sen. Grassley was saying is that that whole debate around the debt ceiling and deficit reduction has been Republicans saying they would do something that's revenue neutral and the -- in terms of the taxes and the Democrats saying that -- and the president saying that you have to have something that actually creates a net revenue in order to deal with this deficit.

LEE

10:47:13
So essentially, you know, the president is running around talking about the Buffett Rule. We're all talking about the Buffett Rule. It's not going to become law. But it's setting up this whole debate for all of these issues, which are pretty big and serious, that are going to have to be decided in the fall. And whoever wins this debate is going to be the one who has the upper hand in that discussion.

PAGE

10:47:31
Catherine has sent us an email that says, "It bothers me that news reports keep referring to those affected by the Buffett Rule as millionaires. I thought millionaire referred to those whose net worth is a million or more. But this rule refers to those whose annual income is $1 million or more." That's right, isn't it, Bob?

WILLIAMS

10:47:46
That's absolutely right. I mean, it's just a matter of terminology. It's convenient to call somebody a millionaire.

PAGE

10:47:51
And it sounds pretty rich even if there are a lot of people now who are millionaires.

WILLIAMS

10:47:55
There are, we estimate, over 400,000 people in the country who'll make $1 million this year.

PAGE

10:48:00
Let's go to Annapolis, Md., and talk to Scott. Scott, thanks for holding on.

SCOTT

10:48:05
Thank you very much. I'm a middle-class businessman. I've got one -- two employees, and I'm getting ready to hire a third. So if I could put some perspective on the Buffett Rule from a guy that's paying, you know, almost just under 25 percent taxes, you know, first of all, you know, the Constitution only requires that we provide for the general defense and promote the general welfare. It doesn't say to provide it.

SCOTT

10:48:34
So as a middle-class person, we're frustrated. It's not that Warren Buffet is paying 14 percent. It's that we're not paying 14 percent, and we feel like we're carrying the bulk. You know, you got 98 million people last -- in 2010, filed taxes, and, of them, only half actually paid. So you have 50 million people paying for services for 300 million, and we're tired of it. I mean, we're just very frustrated.

SCOTT

10:49:01
And you know, my point is I would rather see a lower rate for myself in the middle class, not, you know, now, granted that doesn't solve the problem of what do we do about the debt, but, from a middle class perspective, we are extremely frustrated. And we feel like we're getting stepped on, and we're tired of it.

PAGE

10:49:20
Scott, thanks so much for your call. And, by the way, congratulations on being ready to hire a third employee for your business 'cause I know that's good news for all of us. Michael, you wanted to say something?

LINDEN

10:49:29
And there's couple of points I'd make. One is that, you know, almost every working American pays some taxes, whether that's -- and almost every working American pays some federal taxes. And certainly if you combine all taxes -- state, local and federal -- then pretty much every adult pays taxes. I do think there's a bit of an artificial distinction between the income tax and every other tax.

LINDEN

10:49:50
Federal income taxes are only 40 percent of all federal -- 42 percent of all federal revenue, and payroll taxes are another 40 percent. So, actually, the payroll tax, which a lot of people pay into and a lot of low and middle-income people pay into, is almost as big as the income tax. So we have to remember that it's not this distinction that, you know, 50 percent of Americans aren't paying taxes.

LINDEN

10:50:11
The other thing I'll say is that, you know, I do agree with the caller that middle-class people have not seen their tax rates go down very much over the scope of the last 30 years, whereas people at the top have seen their income tax rate or their federal tax rates combined go down. And that's why -- I think that's why we're focusing on the top is because that's where the erosion in the tax base has been.

PAGE

10:50:35
Here's a comment from Jim who sends us an email. He says, "If we're seeking equity and fairness, why not just move to a flat tax?" Would a flat tax be fair, Kevin?

HASSETT

10:50:45
You know, the interesting thing in this -- it goes back to the piece in the Post that I mentioned -- is that if we did away with all the taxes and replaced it with flat tax, you know, for maybe people with income of 40 or $50,000 and above, then it wouldn't be a whole lot different from what we've got right now because of issues that we're raising so that people with high incomes have lower rates because of capital gains and so on, and that people at the bottom pay a lot of taxes that, you know, aren't easily easy to distribute.

HASSETT

10:51:12
But this is what our research paper did. And so property taxes and cigarette taxes and gasoline taxes, there are million things that low-income people pay that don't show up at the income tax tables, which is also kind of a response to the idea that only, you know, half of people or 50 million people are burying the burden for everybody. That's actually not true. It's -- even very, very poor people are paying sales taxes and so on. So if you put all those things on the table and said, let's just wipe them off and replace them with a flat tax, it's actually not a lot different from where we are right now.

PAGE

10:51:41
Well, sounds simpler then. Bob, would it make a big difference?

WILLIAMS

10:51:43
It doesn't change things so much. It -- the details really matter in this, what gets taxed, what doesn't get taxed. Do you tax everything, in which case you'd keep rates fairly low? Do you exempt a lot of people or relatively few people? The more people who are exempt from the tax, the higher the rates you have to pay. Does government pay tax on its purchases? If it doesn't, then that's a big part of the economy that should take out of the tax system. Do states and local governments pay tax?

WILLIAMS

10:52:07
Who pays it? Who doesn't? And when you start to figure all that out, it's hard to forget just what the tax rate would have to be. And until you know what the tax rate is, you don't really know what the effects will be.

LINDEN

10:52:17
And I just want to make one other point which is that tax code complexity is not about how many brackets there are. It's not hard once you figured out what your income -- taxable income. That's the hard part, figuring out what your taxable income is. And once you've gotten that part down, figuring out what your bracket is is dead easy. So if you want to do a flat tax for simplicity then you're kind of missing the boat.

PAGE

10:52:39
I'm Susan Page, and you're listening to "The Diane Rehm Show." We're going back to the phones, 1-800-433-8850. Let's go to George. George is calling us from California. Where in California are you, George?

GEORGE

10:52:51
Twenty-two miles from Oregon, midway between Sacramento and Portland.

PAGE

10:52:55
All right, that's pretty specific coordinates. So do you have a question or a comment?

GEORGE

10:52:59
Yes. Basically, we're talking about taxes when we should be talking about the function of government. It has been almost 80 years of stress from the Republicans saying that all social programs should be monitored, should be administered by the religious aspects, and government should have nothing to do with social programs.

GEORGE

10:53:23
And the Democrats as well as most -- the rest of the industrialized world feel that the function of government is to assist the least of us, and it even says so in the Constitution, promote the general welfare. And the laws of the stuff that did not exist at the time of low taxes now exists and are vital especially when you consider what private industry is doing to meet, for instance, that's going to cause medical problems and social problems with their prophylactic administering of medicines to the animals...

PAGE

10:54:04
So, George...

GEORGE

10:54:04
...to get more products.

PAGE

10:54:05
George, just -- that just seems to take us off in a different direction. But just in terms of your own taxes, we had Scott call and complain about his level of taxation is unfair. How do you feel about the level of taxation that you pay?

GEORGE

10:54:16
Not enough for the services that I'm getting and certainly the kind of services we should have as the modern economy.

PAGE

10:54:25
That's very interesting, George. I think that's a rare comment. Mike, would you agree? But he, you know, he's making such a good point that the reason we get revenue is to fund the kind of government we want to have.

LINDEN

10:54:34
That's exactly right. The number one role of the tax code is to drive revenue, is to generate revenue to fund the government that we want, and it is a -- the caller makes a great point. We shouldn't have a conversation about taxes without having a conversation about the services that the government provides.

LINDEN

10:54:48
And at the end of the day, because of the aging of the population, the rising health care costs, even if we wanted to keep government in exactly the same level of services that we provide today or even the level of services we provided 10 years ago, it's still going to cost more just because of those two underlying demographic and economic factors, which means we're going to have to raise taxes.

PAGE

10:55:06
And, Kevin, of course from the Reagan years, we know that the decision to take such a hard line on taxes, in part, was an effort to affect what government could afford to spend. I mean, it was, in fact, an effort to curtail some of these programs that Republicans opposed.

HASSETT

10:55:18
You know, but the first thing I'd have to say, though, is that I think that George is sort of overstating the case. Just as Bob said that, well, President Obama says we shouldn't increase taxes on 98 percent of Americans, the Republicans say it's 100, that's actually kind of a 2 percent difference, right? So from Mars, if you looked at that, it wouldn't seem like why are these people so, you know, hateful towards each other.

WILLIAMS

10:55:36
And in terms of government spending, you know, of course, Republicans support the big safety net programs like Medicare and Social Security. They're not trying to eliminate them or anything like that. They're trying to reform them so that they're sustainable. And so I don't think that the gap on those things is nearly as large as the rhetoric suggests.

PAGE

10:55:50
You know, I'm -- we just have a little bit of time left. I'm interested since everyone has to file their taxes by next Tuesday, I guess, we get a little bit of reprieved from April 15 because it falls on Sunday. I wonder if you all, since you're all such experts on taxes, if you prepare your own taxes. What about you, Michael?

LINDEN

10:56:05
I do my own. I use TurboTax, but I have very simple tax returns.

PAGE

10:56:10
How about you, Carol?

LEE

10:56:10
I am not an expert on taxes and definitely don't do my own.

PAGE

10:56:14
How about you, Bob?

WILLIAMS

10:56:14
I started using TurboTax a few years ago when I was during my mother-in-law's return and state tax return and a few others. TurboTax makes a life a lot easier.

PAGE

10:56:23
And, Kevin, what about you?

HASSETT

10:56:23
And I can hear my wife laughing as the question comes up because you would never trust me to do the taxes. I'm too disorganized, and so, yeah, we hire someone.

PAGE

10:56:30
Yeah. Well, it sounds like an ad for TurboTax 'cause my husband does our taxes, and he uses TurboTax, too. But it is a complicated system. There's no question about that. And, Carol, when you talk to audiences, Republican or Democratic, the idea of a simpler fairer tax code is something everybody applauds.

LEE

10:56:47
Yes, absolutely. And the president has talked about that and will likely continue to talk about that. I mean, they put forward some basic proposals in that general area, and I'm sure we'll here more from him on that topic.

PAGE

10:57:01
I want to thank our guests for being with us this hour. Carol Lee from the Wall Street Journal, Kevin Hassett from the American Enterprise Institute, Michael Linden from the Center for American Progress and Roberton Williams from the Tax Policy Center, thank you all.

WILLIAMS

10:57:15
Thank you very much.

HASSETT

10:57:15
Thank you.

LINDEN

10:57:15
Well, thank you very much.

LEE

10:57:15
Thank you.

PAGE

10:57:16
I'm Susan Page of USA Today, sitting in for Diane Rehm. Thanks for listening.
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