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President Barack Obama called for a one-year extension of the Bush-era tax cuts for those making less than $250,000. Diane and her guests discuss tax rates, sluggish growth in the U.S. economy and the 2012 presidential campaign.
- Jason Furman assistant to the president for economic policy; principal deputy director of the National Economic Council
- David Wessel economics editor, The Wall Street Journal; author "In Fed We Trust"
- Chris Edwards director, Tax Policy Studies; editor, www.DownsizingGovernment.org, Cato Institute.
- Alan S. Blinder professor of economics and public affairs at Princeton University; former vice chairman of the Federal Reserve Board
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. President Obama hits the road today to push for extending tax cuts for low and middle-income families. Rival Mitt Romney has pushed for an extension of cuts for all taxpayers. Joining me to talk about taxes and the 2012 election, David Wessel of The Wall Street Journal and Chris Edwards of the Cato Institute. Joining us from a studio in Princeton, N.J., Alan Blinder of Princeton University.
MS. DIANE REHMI do invite you to join our conversation. Call us on 800-433-8850. Send us your email to email@example.com. We're on Facebook and Twitter. Good morning to all of you.
MR. DAVID WESSELGood morning.
MR. CHRIS EDWARDSGood morning.
PROF. ALAN S. BLINDERGood morning.
REHMAnd before we begin our conversation with all of you, we're joined from the White House by Jason Furman. He's assistant to the president for economic policy. He's principal deputy director of the National Economic Council. Jason Furman, thanks for joining us.
MR. JASON FURMANOh, thanks for having me, Diane.
REHMI'd like to ask you about President Obama's proposal yesterday to pass a one-year extension of the Bush-era tax cuts for families making less than $250,000 a year. There are some Senate Democrats, including Ben Nelson of Nebraska, who've expressed openness about taking that figure up to $1 million and to negotiating with Republicans on extensions on tax rates for all income levels. Suppose the Congress, including Democrats, agrees to compromise on $1 million ceiling, would the president sign that?
FURMANWell, Diane, first of all, let me just give you a little bit of context for what the president did yesterday which is we have very big economic challenges in this country. There's a lot we need to do to create jobs now and put us on a more sustainable economic footing. The president would love to do all of that, but what he did yesterday was took from his budget one of the most pressing issues, one of the most important for our economy and one that he thinks should be the least controversial which is extending the tax cuts for the middle class for another year.
FURMANAnd then we're gonna have the whole election to debate all of the bigger issues, what do to do about the millionaires, what to do about the billionaires. And the voters will really, you know, have a lot of say in how we resolve that other set of issues. But the one thing that we think all the voters agree and we think both political parties agree is that you don't wanna let the middle class be the casualties of that debate. You don't want the economy to be a casualty of that debate, which is why the president wants a one-year extension for the middle class.
FURMANThe president has also certainly said that he would veto a bill that extended the tax cuts for everyone. We simply can't afford the extra 65 billion a year, a trillion dollars over the next decade for those high-income tax cuts.
FURMANAnd he thinks the majority of Democrats are with him in both the House and the Senate on that.
REHMAll right. But you used the phrase extending those tax cuts for everyone, and I am quoting some Democrats who say they'd be willing to extend the tax cuts for those making up to $1 million as opposed having a cut off at 250,000. Would the president be willing to compromise to that extent?
FURMANMm-hmm. Diane, I think you've seen some different tactics in Washington on the Democratic side of is it better to have a debate around 250, better have a debate around 1 million. There's no difference in philosophy which is that you wanna protect the middle class but you also wanna address our budget deficit, and the president says it's calling to do that by doing the cutoff at 250. Yesterday, you saw some senators like Sen. Schumer who previously had been in favor of 1 million, say, you know what, president wants to do 250, we're gonna work together with him to get that done.
FURMANAfter the election, we can take on, you know, all of the other issues when the voters have had the chance to speak about them. But for now, just -- it's as simple as it could possibly be, extend those middle-class tax cuts. (unintelligible) cut off to 1 million, it costs a lot money. It costs several hundred billion dollars relative to what the president's proposing, and that would be an expense that is hard to justify with the budget deficits that we have right now.
REHMBut considering the current congressional standoff, not much is likely to happen on the president's proposal now, is it?
FURMANWe're doing everything we can to make the case for it, and we, you know, we're very hopeful that both the House and the Senate will act on it. But obviously you're gonna want to ask some of the Republicans that have blocked these types of tax cuts for the middle class and has held them hostage in order to pursue another agenda that could never stand on its own. It's very hard to go out and explain why you want to extend tax cuts for people who make over $ 250,000 a year.
FURMANThe only way -- anyway, anyone's ever made that case is with misleading arguments that blur it together with the middle class or make salacious arguments about small business. But as a standalone proposition, I think Republicans know what's a failure, and that's why they're continuing to hold the middle class hostage.
REHMSo, Jason Furman, considering the current situation, what are your realistic expectations?
FURMANWe would love to see Congress act now. It really, you know, you hear a lot of talk about economic uncertainty. Here is a great opportunity for Congress to act now. I don't think any of the Republicans disagree that we should continue the child tax credit at $1,000 instead of 500. I don't think any Republicans want a return to marriage penalties for middle-class families. So we agree on that. Both sides agree. Let's take the child tax credit and extend it for a year. Let's take marriage penalty relief and extend it for a year.
FURMANIt's rare in Washington that everyone agrees to something, and when you do, we think you should go ahead and do it. If it doesn't happen now, the president is just going to keep doing everything he can to make the case on the campaign trail and to make the case going into November because there's gonna be a choice around these issues, and his choice is the middle class, both because they've seen their incomes decline, 'cause they are the most important to job growth and the economy, 'cause they're more likely to spend their money and because we can't afford to do anymore than that given the deficit.
REHMForgive me but that does sound more like hope than realistic expectation.
FURMANYou know, the president, his -- he goes out there every day and pushes for what he thinks is, you know, the most important priorities for our economy. And I think to some degree, you should be going and asking Republicans, do you disagree? Do you want a marriage penalty next year? Do you want to the child tax credit to be cut in half? And if their answer is no, they agree with the president, and I think most of them do agree with the president, then why won't you join with him and pass this.
FURMANAnd then, you know, if Mitt Romney was elected, he'd have a good chance to make the ones above 250 permanent. If the president is reelected, they won't be permanent because he would veto it. And so that bigger issue will be later. It's rare you have agreement in Washington. We should be taking the president pushing to take advantage of that agreement and act now to remove that uncertainty middle-class families would otherwise face.
REHMJason Furman, assistant to the president for economic policy. He's also principal deputy director of the National Economic Council. Thanks so much for joining us.
FURMANThank you, Diane.
REHMAnd turning now to you, Chris Edwards, your reactions to Jason's comments.
EDWARDSWell, there's one big problem, and that is yesterday, President Obama said that the tax cuts for higher-income people are the least likely of all the tax cuts to promote growth. That's where the sharp disagreement with Republicans comes in, and I sharply disagree with the president too. I think the tax cuts at the high end are the most likely to promote economic growth in the United States. The people at the top end are very important to the economy.
EDWARDSThey are entrepreneurs and investors, people who build and expand businesses. Those are people are the last people we wanna be raising taxes on. And so that's where the disagreement with Republicans is. Republicans wanna put all -- extend all the tax cuts because they know, as the president have said, he would veto any separate bill to keep the lower rates for high-income Americans.
REHMWhat about Jason's point regarding the marriage penalty, for example?
EDWARDSSure. There's a lot of middle-income tax cuts that I think should be extended permanently as well and that's fine. But, again, if we're worried about the poor economy, the high unemployment rate in this country, I believe and I think most Republicans believe that it's -- you need to get businesses, small, medium and large, investing and being confident about the future. And you don't do that by raising taxes on them.
REHMAnd what about this point that it is the lower and middle-class Americans who do need these tax cuts now the upper income is fine?
EDWARDSWell, people at the top end pay an enormous share of all the taxes already. I mean, just to throw one number on this, the top 10 percent of federal income tax payers pays about three quarters of all income taxes now. So they're already heavily burdened, much more burdened than people at other income levels even with the lower Bush tax rates.
REHMChris Edwards, he is director of Tax Policy Studies at the Cato Institute. When we come back, we'll hear from Alan Blinder, professor of economics at Princeton University, and David Wessel of The Wall Street Journal.
REHMAnd welcome back. We're talking in this hour about the president's proposal to extend the Bush-era tax cuts only for those making up to $250,000. With me here in the studio, Chris Edwards of the Cato Institute and David Wessel of The Wall Street Journal. Joining us by phone, Alan Blinder. He is professor of economics and public affairs at Princeton University, former vice chairman of the Federal Reserve Board. Alan Blinder, President Obama makes the argument that tax cuts for the wealthy have not helped the economy. How do you see it?
BLINDERWell, I think they've helped the economy a little bit. The basic problem since Reagan really -- since before Reagan, in fact, is outlandish claims have been made about how cutting the upper income tax bracket -- by the way, from wherever it is that's always cutting it are going -- it would create some kind of supply-side miracle. It was not true with Reagan. It was not true with Bush. It's not true.
BLINDERThat doesn't mean it doesn't give some help to the economy. You know, cutting anybody's tax is gonna give some help to the economy. The question is really bang for the buck, and the evidence shows that this particular way of cutting taxes has relatively little bang for the buck, not zero but relatively little.
REHMAnd, Chris Edwards, here's an email on that very point from Matt in Plano, Texas, who says, "When these Bush-era tax cuts were enacted, the reasons given were that this would create jobs and improve the middle-class income. Where are all these GOP-created jobs? Did we squander the budget surplus that Clinton created?"
EDWARDSWell, the problem under President Bush in my view is that spending went through the roof which was a reversal of the policy under President Clinton. I mean, some people talk about how the income tax rates were a bit higher under President Clinton, but he also cut spending to pretty dramatically low levels, about 18 percent of GDP. The problem today is that spending is up to 24 percent of GDP because of President Bush and President Obama.
EDWARDSAnd that has sucked resources out of the private sector economy into the less efficient government sector of the economy through wars and domestic spending. And I think that's where the harm to the economy is coming from.
REHMDavid Wessel, what do you make of the timing of the president's plan?
WESSELWell, I think it's transparent. The president was eager to change the topic from jobs. We had a lousy jobs report on Friday, and he came out Monday with a speech that basically, as Jason Furman says, reiterated something he said in his budget and was spectacularly successful in changing the topic.
REHMChanging the topic for?
WESSELAway from jobs in the economy to an argument he wants to have with Mitt Romney about really two fundamental issues, do we need to raise taxes on somebody? Obama says yes. Romney says no. And if we're gonna raise taxes, should we do that in a way that hits the rich harder than it hits other people? Obama says yes, and Romney says no. The president would like to have the presidential campaign focus on that. Every day the campaign is not talking about jobs is a plus for Obama.
BLINDERYou want me to address the same question?
BLINDERYeah, I don't think the timing was any coincidence. This is a proposal where we've known Obama is -- President Obama is in favor of, and it is a difference between challenger Romney and incumbent Obama that it looks to me, it looks to everybody that the polls -- of which the polls favor the Obama side. But I want -- if I could just stress the point that David made. As we move through time -- it doesn't have to be this year. But as we move through time, taxes have to go up.
BLINDERAnd there is so much denial of that obvious, almost arithmetical principle from the Republican Party that that's really at the root of the stalemate. They have opposed everything -- anything that would raise taxes on even the richest the people and have been willing to hold anything hostage. Remember the national debt ceiling mess we had last summer.
BLINDERWe may have another one. Who knows? But they seem to stand on that principle more than on any other principle in the face of overwhelming arithmetic that some taxes have got to go up.
REHMChris Edwards, there's a new poll out this morning from The National Journal finding that 60 percent of those poll think that extending the Bush tax cuts for those under 250,000 is very important versus 40 percent who think extending all the cuts is very important. And 70 percent think it's very important that Congress agree on new federal spending to create jobs and prevent layoffs. Now, you might just speak to Alan Blinder's point that you got to raise taxes on everybody at some point.
EDWARDSWell, Alan says, you know, we have to raise taxes because of the mathematics of it. That's only true if spending keeps going up as it's projected to. President Obama's budget has spending going up roughly from 3.6 trillion this year to 5.6 trillion a decade from now, so an increase of two trillion. So it's this relentless increase in spending that is pushing, you know, over this pressure to raise taxes.
EDWARDSSo compare that two trillion increase in spending over the next decade to the value of these tax cuts for wealthy people that are only about 100 billion a year. We've got two trillion increase in spending over the next decade. We've got these high income tax cuts valued at around 100 billion, maybe 150 billion a year. The spending is a much greater driver of the deficit than tax cuts for high-income Americans.
REHMBut how do you cut taxes and reduce the deficit at the same time?
EDWARDSWell, I would cut spending and reform the tax code. I mean, I think cutting spending is far more important than this debate we're having on taxes. It is the spending that is driving this country to a Greek-style bankruptcy. It is the entitlement programs that are unreformed, the fault of both parties. That is driving the financial crisis here, and unless we reform that, yeah, we won't get tax reform.
WESSELI think that it's arithmetically possible to bring the deficit under control without raising taxes. But I don't think that there is the popular will to restrain spending that much. Doug Elmendorf for the Congressional Budget Office once said that the fundamental problem with the deficit is the American people want more in benefits, particularly for the elderly, than they're willing to pay in taxes.
WESSELAnd what we're seeing here, I'm afraid, is both President Obama and Mitt Romney pandering to that preference of people rather than speaking candidly to them. The president continues to insist that we can deal with the deficit without touching taxes for people who make less than $250,000 a year. But that would require extraordinary restraint on very popular programs like Medicare and Social Security, as well as future reductions and defense spending and so forth.
WESSELMitt Romney, on the other hand, says he can lower tax rates, and he says he'd make up for that by doing away with a lot of credits, deductions and exclusions and stuff, but you notice he's rather unspecific about which ones because every time you finger any one thing, you discover that, oh, my God, that's the hot button that either creates jobs or offends your base.
REHMSo, Alan Blinder, are we going to reach a point where taxes must be raised on everyone and spending must be cut?
BLINDERI think the answer is yes as long as you realize that, I'm sure you do, with spending relative to the baseline. We're not talking about absolute spending. But, yes, spending must be cut. And, I think, realistically -- eventually, this would be a terrible, terrible time to do it now. But eventually, you have to have tax increases for everyone of some sort. Just prominent example, we knew very well in the year 2001 that the Bush tax cuts were unaffordable. In the long run, we could afford them in 2001. That was not a problem.
BLINDERBut in the long run, the projections then were not so different from what they are now showing gigantic deficits way, way out. In an environment like that, you don't have a massive tax cut, but we did. So that problem is still there, made worse by the Bush tax cuts. But Chris is right that as you look at these very long run numbers, he went out 10 years. Go out 20, 30, 40. Most of the restraint is gonna have to come on the spending side. And somehow, most of that is gonna have to come by reducing the rate of increase of health care prices, somehow.
REHMSo you're saying that no matter who gets elected, that the spending has to be controlled and taxes are going to have to be raised.
BLINDERYes, but I could imagine squeaking through another four years, another presidency, without doing either. I don't think it's a good idea. I think the sooner we tackle this problem, the better 'cause it just gets harder and harder as you move the calendar forward. It would have been a lot easier 10 years ago than it is now, and it'll be a lot harder 10 years from now. So it's not necessarily something that has to happen in the next presidency, but it has to happen.
EDWARDSI think it's extremely unfair to American taxpayers to start talking about raising their taxes, we have to raise their taxes, unless we cut all the waste and unneeded programs out of the federal budget. Congress is now considering, for example, another big, massive farm subsidy bill, a $25 billion giveaway to wealthy farmers. Until we cut that type of waste out of the federal budget, we shouldn't be raising taxes on anyone.
REHMDavid Wessel, how much waste can we get from the federal budget?
WESSELWell, there's undoubtedly a lot of waste in the federal budget, just like there's a lot of waste in the -- in any corporation in America, but it's not gonna solve our problem. Alan Blinder is right, and I'm sure Chris agrees, that the fundamental drivers of our deficit are spending on benefits. And if we can lick the health care problem, then we have a hope of bringing the balance -- bringing the budget closer to balance. And if we don't fix health care, nothing else will suffice.
REHMAll right. We have a great many callers waiting. I'm going to open the phones now. First to Syracuse, N.Y. Good morning, Josh.
JOSHGood morning, everyone. How are you? There was a couple of things, but I guess I'll just narrow it down to one. Earlier on, you had -- someone had said, and I'm sorry I didn't get the name of the panel, but someone had talked about that 75 percent of taxes or 70 percent of taxes was being paid by the top percent, top 10 percent. And, you know, with our progressive tax structure, shouldn't that -- if the top 10 percent is holding 90 percent of the net wealth, which it is at this point, and they're paying 70 percent of the taxes, isn't that an imbalance? Isn't that a problem?
JOSHAnd also, your math on the Obama projection of two trillion over the next decade, the tax cut or the tax increases for the rich, you said, would add 100 billion to $150 billion a year. Well, in 10 years, that's $1.5 trillion. So you cut off 75 percent of Obama spending, surely we can come up with the other 500 billion, you know, through tax cuts or through spending cuts. Thank you.
EDWARDSOn the latter bit, 10 years from now, federal spending will be about $2 trillion higher than it is now under Obama's budget. If he raises taxes on the top earners, as he says, that will only raise about $150 billion a year 10 years from now. So you're comparing 150 billion to the two trillion in higher spending. On your first bit, the -- it's true that people at the high end have a high share -- they generate a high share of the income. Absolutely.
EDWARDSBut because of that, they pay an even higher share in taxes. And you can get down -- you can drill down into this by looking at overall so-called effective tax rates. What share of income do people at different income levels actually pay? The top 1 percent pays one -- pays 30 percent of all their income in federal income payroll and all types of taxes. People in the middle pay a rate of about half of that, about 14 percent. So people at the top end, they make a lot of money, but they also pay a much higher overall tax rate.
REHMChris Edwards of the Cato Institute, and you're listening to "The Diane Rehm Show." David Wessel, a question I asked Jason, Where is this going? Anywhere? With the Congress being as conflicted as they are, even with some Democrats sort of hedging their bets a bit, is this going anywhere?
WESSELNothing is gonna pass Congress on this score before the election, and it's an open question what happens after the election. Let's remember how we got here. Two years ago and one year ago, Congress and the president pointed a loaded gun at their heads, and they said, we are gonna force ourselves to deal with the federal deficit by making taxes go up at the end of 2011. And it's not just income taxes. Remember, we have a payroll tax holiday. It's equal to about 2 percentage point of wages for most people. That goes away at the end of the year too.
WESSELAnd if that's not enough, we're gonna have across-the-board spending cuts that we're -- none of us like. And the idea was if we do that, we load the gun and we point it in our heads, that'll force us to come to some kind of compromise on the deficit so we can avoid this outcome, which nobody thinks would be good for the economy. Now what you're seeing, I'm afraid, is a bit of hesitation. Well, what if it doesn't work, and what if we can't compromise? We don't wanna really pull the trigger, so maybe we can take some of the bullets out of the gun.
WESSELAnd I think we'll see, after the election, whether the political climate allows them to come together and say, here's something that'll help the economy in the short run, help the economy in the long run and reduce the deficit, or whether they'll say, we can't endanger the economy, so we got to pass something to extend all this pain for another six or nine months so we can work on the project a little longer.
REHMAll right. To Reston, Va. Good morning, Sloan.
SLOANGood morning, Diane. Thank you so much for having me on.
SLOANIt's an honor to be on the show.
SLOANI think that something that is critically important in how this debate is framed -- and it's almost always missed, it seems -- President Obama's tax cuts are indeed tax cuts for all Americans on our first 250,000 of household income. It's only beyond that that the proposal is to return the rates to the modestly higher rates of the '90s when the economy was doing great. So the notion that it's just for people making under 250, that's actually not technically correct. It is for all Americans. It's not class warfare. In fact, the class warfare seems to be coming from the other side.
EDWARDSNo, that's -- he's right that President Obama's tax cut extensions would reduce tax, to some extent, at the high end. But the important thing, for my point of view, is the marginal rates that people at the high end pay. President Obama would push the top dividend tax rate, for example, from 15 percent today up to 40 percent. I think that would be really distortionary to the economy. It would encourage corporations to issue a lot more debt rather than equity. So it's the damage of raising the rates at the top end that is the problem.
WESSELI think it's important to separate two issues. One is an issue of fairness. How should we allocate taxes? That's really a pumped political issue. It has to do with values. The other is one of economic analysis, and people disagree on what impact these tax increases would have.
REHMAll right. That's the voice of David Wessel of The Wall Street Journal. Before this break, I do want to welcome a new affiliate, KBSX 91.5, Boise State Public Radio. So glad to have you as part of "The Diane Rehm Show" audience. Short break, right back.
REHMAnd let's go right back to the phones. To New Bern, N.C. Good morning, Penny.
PENNYGood morning, Diane, and thank you. I'm calling because here in Eastern North Carolina, we have -- we see all the evidence of greatly wealth as well as extreme poverty. I can't see any signs of the wealthy suffering or sacrificing in any way because of any of President Obama's policies. In fact, I recently learned that many professionals send their money to offshore accounts. They have offshore accounts. Doesn't that protect that income from taxation? And these are people who are earning their money in the United States.
REHMAnd, of course, that includes Gov. Romney, Alan Blinder.
BLINDERIt does. And I think he must be one of the biggest, actually. On that point, you can put money in offshore accounts for many, many reasons, some are to hide illegal activities. There's no reason on Earth to think that has to do at all with what Gov. Romney has done. The main reason there is that these funds of various -- or private equity funds, hedge funds of which the Romney family -- I guess it's divided among various people, I don't know -- has many of them in many, many millions of dollars, and they are typically domicile offshore for tax reasons, perfectly legal.
BLINDERPerfectly legal tax reasons, but it's something that I think ordinary Americans would feel a sense of anger about. But the root cause in the case of Romney -- and as I said, there are many, many reasons for these, but the root cause in the case of Romney is the low 15 percent marginal tax rate on income from so-called carried interest, which the earnings of these private equity and hedge funds.
EDWARDSAmericans are taxed on their worldwide income, so generally, you know, taxed in all your offshore accounts, whether it's in France or Switzerland or Australia. It's taxable, currently, every year in the United States. Some of the biggest users of offshore accounts are actually university endowments, and there's legal reasons why they can help shield some of their very large earnings in these offshore accounts. But to me, it shows that, you know, we live in a global economy here where capital is very mobile.
EDWARDSWe have to make sure we don't raise our taxes too high because it will push more people and institutions like universities and hedge funds and others to move their money offshore, and I think that doesn't do us any good.
REHMDavid, I wonder how much email you get about offshore accounts, how many letters on columns you might write.
WESSELWell, I think that, as we've seen in the last couple of days, the Americans' interest in the taxes they pay and that they perceive wealthy people pay is extraordinarily high. I was a little surprised yesterday. I mean, after all, the president, with a lot of fanfare, reiterated something he's been saying for months and months and months, yet it's on the front page of every paper, we're having this show and we got -- there was something like 2,000 comments on the story on this subject on our website early this morning.
WESSELSo people are interested in it, and I think it's for a couple of reasons. One is they're worried about the economy, and they perceive that somehow something we could do with taxes would make the economy better. Secondly, it affects them personally, of course, and thirdly, there is -- and you can hear it in some of the callers -- a bit of resentment about how wide the gap has gotten between the winners in our economy and the losers.
WESSELAnd the way in which our society usually tackles that problem is by taking some of the money from the winners, and they perceive that that isn't happening now.
REHMAnd, Alan Blinder, if it were to happen to the extent it, in some people's mind, should, how might that affect economic growth?
BLINDERWell, I think the way you phrased the question Diane if it -- if the rich -- if the taxes in the upper brackets went up to the extent that many people think they should, that might really...
REHMWhich would be what?
BLINDEROh, that could be 50, 60 percent...
BLINDER...on top income brackets. That would hurt the economy. Nobody in political power and no economist, that I know of anyway, is talking about anything remotely close to that. We should remember -- this is what I try to jump in on earlier -- this whole debate about whether letting the upper bracket tax increases revert to where they use to be is about going back to the Clinton top tax bracket of 39.6 percent.
BLINDERNow, I remember extremely well -- I was in the Clinton government when that passed -- there were predictions from -- it was then the Gingrich Republicans, but it was the same story we hear now -- that this would ruin the economy, we'd have a recession or worse. My recollection is that we did a bit better than that under a 39.6 percent top bracket. So how anyone can claim that that would be the ruination of American capitalism I find very hard to understand.
WESSELI would say President Clinton did a lot of other things right, free-trade agreements with Canada and Mexico, and he cut spending to really low-levels, much lower than under President Reagan. So President Clinton did a lot of other things right. I don't think he's tax increase was the right thing to do. And I would remind Alan that in the late 1980s, the big bipartisan Tax Reform Act of 1986 cut the top rate to just 28 percent and now, as a bipartisan deal, 28 percent.
EDWARDSToday, we're talking about hiking it from 35 up above 40. So times have changed, unfortunately, and I think the whole political spectrum has moved to the left on this issue.
BLINDERThe last comment that the whole political spectrum has moved to the left seems very contrary to everything I see. Now, in terms of the '86 tax reform, I was a huge supporter. It was bipartisan. It came originally out of the Reagan Treasury, and it was modified in many ways in the Congress. It closed loopholes dramatically and used that money to lower the top bracket rate to 28 percent. I would love to be able to do that today but -- and so with many other people.
BLINDERBut as David was pointing out earlier, when you look at the loopholes left to be closed, they are not gonna go anywhere, the big ones. I mean, there are many. There are hundreds and hundreds of them that we could chip away. But the big money is in a handful of loopholes, like the mortgage interest deduction, that no politician on Earth, Republican or Democrat, is gonna go out there saying, we should abolish. So we -- it will be nice to go back to that, but we can't.
WESSELDiane, I'd like to make two points about the '86 tax reform, which really was a political miracle of sorts. One is it succeeded by raising taxes on business to lower taxes on individuals. That's not gonna happen now, and most economists think that would be a bad idea. And the second thing it did, which is kind of interesting, given that Ronald Reagan was it's proponent and signed it into law, was it did away with the tax break for capital gains.
WESSELThat is profits from the share of stocks were taxed exactly as income from wages or your interest income. So the world really is not prepared to go back to that model, as attractive as it seems, in retrospect.
REHMAll right. To St. Louis, Mo. Good morning, Nick.
NICKGood morning, Ms. Rehm. How are you, ma'am?
NICKFirst comment, is it true that I think they have a distortionary tax policy? And I think it impacts technology. Second comment, as we move to a more technologically-heavy economy where labor positions essentially are being downgraded or replaced by technology, what's the impact of our tax structure on that? And then I think the final thing is there's a great article on the Cato website about -- called "Europe's Self-Inflicted Decline." I do not want to be like Europe.
NICKWe cannot continue to kick the ball down the path. And the final comment is their comment about we tend to look at our timelines in America based on our political -- when we have elections versus a long-term timeline to make decisions that'll impact people down the line versus this emotional response that I want right now.
WESSELOne, taxes are, by their nature, distortionary. They're the price we pay for having government and the social safety net. And what we ought to do is find a way to make them as little distortionary as possible. Secondly, if you tax something, you get less of it. And so that's why there's always this interest in taxing things that we want people to do less, like smoking or burning gasoline or fossil fuels, and while there are some reluctance to tax people on their savings and investments, which we presumably want more of.
WESSELAnd third, the world is changing and that makes this difficult. Once upon a time, we were more of an economic island. And we could tax our companies and our businesses and not worry about the fact that, as Chris has said, capital was so mobile. But that day is gone, and so that's why there's considerable concern that if we tax business and capital too heavily, that we will shoot ourselves in the foot.
WESSELSo I often talk to chief executives who say privately, I'm willing to have lower taxes on business 'cause I think it's good for the country. And I'm willing to pay higher taxes on my salary, which is kind of an Obama-kind of approach. But very few of them are willing to say it in public.
REHMWe have an email from Tony, who describes himself as a tax accountant who provides services to the really wealthy. He says, "I have yet to see one of them pay the marginal rate. It's important to speak to the effective tax rate on average people making over 250,000 pay between 15 and 20 percent." Alan Blinder, would you agree?
BLINDERYeah. I believe that probably -- I don't know his practice, of course, but I believe that probably means the average tax rate. You know, the average tax rate is, except for the very wealthy, substantially below the marginal tax rates. So they are paying a smaller tax as was said there. The more important point, which is sort of at the beginning of the question, is once you get into the upper stratosphere of income, the loopholes available, such as the 15 percent tax rate that I mentioned before that the Romney family benefits from and many others benefit from, are all over the place.
BLINDERSo that's why we have tax accountants and tax lawyers. And absolutely, those people are not paying those kinds of rates. We all remember that Warren Buffett pays a lower rate than his secretary.
REHMSecretary. And to Boston, Mass. Good morning, Andrew. I gather you have something of the same complaint.
ANDREWYeah. When Mitt Romney came out with the percentage of how much he made and how much he paid in taxes, I did the math. And I make about 1/200 of what he made last year, and yet I pay a higher percentage of taxes. Now, my whole argument is, yeah, the top 1 percent, the top 2 percent pay a heck of a lot in taxes but they -- it's a percentage, right? I have a friend who's very, very wealthy, and he says, yeah, but I pay so much than you. I said, yeah, but you make so much more than me.
ANDREWYou know, I also firmly believe that the taxes that someone pays on dividends and things like that from stocks, capital gains taxes, should be based on your income. I think that just having the right tax, you know, someone like me who pays the same amount of taxes to someone who has several million of dollars and makes several million dollars off of it stocks, just the fact that Mitt Romney makes so much more, and yet I'm somehow paying more in taxes than him, how is -- can that possibly be justified by Republicans? It's...
REHMAll right. And before you respond, Chris Edwards, let me remind you, you're listening to "The Diane Rehm Show." Chris.
EDWARDSMr. Romney and Warren Buffett and a few others who got in the media's spotlight for paying a low effective rate are really an anomaly. If you look at the detailed data, the top 1 percent pay a much higher overall average income tax rate than everyone else. The exception is if you go to the very, very top. The IRS publishes data for the top 400 in the country. Those people have a heavy amount of capital gains in their income, and their marginal rates are lower. But what these people are -- this is a very dynamic group.
EDWARDSThey are people who have built up businesses their whole life. And then when they retire, they sell their businesses, and they spike to the very top of the spectrum. And that capital gain, when they sell their business, is taxed at the lower rate. So it is a very dynamic group at the very high end that are an exception to the general rule of heavy taxation at the top end.
REHMAlan Blinder, do you wanna comment?
BLINDERYeah. I just like to add, a lot of those people -- first of all, that's what we were talking about, the people way, way up at the top, and it's true. Secondly, in addition to cashing out at the lower -- very low capital gains tax rate, quite a bit of that wealth then gets passed on debt tax free and is never ever taxed at all.
REHMHow can that be with the so-called taxes we do pay on up to -- right now, up to $3 million, is it, David or five...
WESSELWell, first, I can't remember the number, but "A," most of the estates in the United States passed to their heirs' tax free because of the exclusion. Secondly, if you have a big estate, you have a big incentive to come up with all sorts of ways to avoid the estate tax, and people do that. We give them every excuse to. And finally, if you inherit stock, of course, the capital gains go away because the stock becomes worth what it was for tax purposes when you inherited it rather than before.
WESSELAnd there's a big argument about that between Democrats and Republicans, really, about how heavily should we tax the estates. Is it a good thing to do so we don't have generation to generation of wealth? Or is it unfair because if you make a lot of money, why shouldn't you be able to pass it to your kids?
REHMChris Edwards, one final question and email from Carla. (sp?) "How does your panel propose we pay for crumbling infrastructure if no one wants to pay for taxes?"
EDWARDSFirst of all, I'll question whether the infrastructure really is crumbling as much as a lot of politicians say, and I've looked into this. If you look for -- everyone -- all the politicians say that our bridges are crumbling. If you look into the Federal Highway Administration data, for example, the number of bridges in the United States or the sheer bridges that are in poor condition has fallen steadily over the decades. So I would question, actually, whether it's crumbling as much as people think.
EDWARDSSecondly, I think, like a lot of other countries, we ought to get private sector investment in our infrastructure. The private sector is widening the beltway in Northern Virginia, for example, in the nation's capital, billion dollars of private money is helping to do that. That sort of private investment and public infrastructure is great. We ought to be doing more of it.
REHMWhat do you think of that, Alan Blinder?
BLINDERI'm all in favor of private-public partnerships. I don't think it's nearly enough. The civil engineering society -- I can't remember its proper name -- keeps tabs on our infrastructure need, and it's just titanic amounts. And look, all you have to do is go to any other wealthy country on the planet, including places where people live at half the living standard that we live at, and see a vastly superior infrastructure. So to deny that we have gigantic infrastructure needs is, to me, amazing.
BLINDERAnd the last point to your caller's question. When the government can borrow 10-year money at 1 1/2 percent, and there are thousands and thousands of construction workers idle and unemployed, for us not to be repairing our infrastructure is miraculously foolish.
REHMAlan Blinder, professor of economics and public affairs at Princeton University, Chris Edwards of the Cato Institute and David Wessel, economics editor at The Wall Street Journal. Thank you all so much.
REHMThanks for listening. I'm Diane Rehm.
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