Tax Policy Debate: Raising Rates Versus Limiting Deductions

MS. SUSAN PAGE

10:06:55
Thank you for joining us. I'm Susan Page of USA Today, sitting in for Diane Rehm. There are cliffhanger negotiations going on now in Washington. In six weeks, tax rates are scheduled to go up for every American taxpayer when the Bush tax cuts expire. Economists warn that would be a blow to the slow recovery. President Obama campaigned on raising tax rates on the most affluent.

MS. SUSAN PAGE

10:07:20
Congressional Republicans say they're open to raising revenue but not to raising rates. So what might a compromise include, and can they reach it in time? Joining me in the studio to answer those questions: David Wessel of The Wall Street Journal, Roberton Williams of the Tax Policy Center and Rachel Smolkin of Politico. Welcome to "The Diane Rehm Show."

MR. DAVID WESSEL

10:07:42
Thank you.

MR. ROBERTON WILLIAMS

10:07:41
Good morning.

MS. RACHEL SMOLKIN

10:07:42
Thank you. Good to be here.

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10:07:43
We invite our listeners to join our conversation. Our toll-free number: 1-800-433-8850. You can send us an email at drshow@wamu.org or find us on Facebook or Twitter. Well, David, tell us what is happening right now. Are there, in fact, real negotiations going on?

WESSEL

10:08:04
Real negotiations. Hmm, that's an interesting way of phrasing it. I think we've seen the first act which is President Obama and the congressional leadership are determined to look reasonable. If these talks fall apart, each side wants to be able to blame the other. So the opening act was that great tableau we saw outside the White House with the four leaders of Congress, the Democrats and Republicans standing in front of the microphones together.

WESSEL

10:08:33
Right now, the staffs are talking, and that's an important behind the scenes thing because we have learned that when President Obama and Speaker John Boehner sit down together to negotiate, it doesn't necessarily produce an agreement. So I think, right now, we have a lot of talking among the congressional and administration staff to try and feel each other out to see how far they're willing to go towards a compromise.

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10:08:59
So, Rachel, President Obama didn't campaign on a lot of specifics during the recent election, but he did campaign on one which was raising rates on the most affluent taxpayers, that is, households making $250,000 a year and more. So how many people would be affected by that, and how much money would it raise?

SMOLKIN

10:09:19
Well, that's something that President Obama really has stuck to, and we heard him emphasizing that in the very first news conference even saying, let's just go ahead and vote on that alone. Why can't we just provide this relief? The question -- I'll let others get into the more specific numbers, but the real question is here, the early discussion about raising revenue rather than rates.

SMOLKIN

10:09:42
If it's just a matter of closing the tax loopholes in deductions, it's not going to raise nearly enough revenue to help solve the problem. So that's why so much attention on rates, and you're even hearing some Democrats say, well, maybe it doesn't need to be $250,000. Maybe the magic number is $500,000 or even a million. So you're not seeing even perfect democratic alignment on this question.

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10:10:06
So, Bob, how much money would President Obama raise with this proposal, and how many Americans would it affect?

WILLIAMS

10:10:13
He's looking for about $1.6 trillion over 10 years. And with all the tax increases falling in the top 2 percent, the richest 2 percent of Americans, 98 percent of us would be exempt from tax increase under the president's plan. The problem is the top 2 percent, while they have a lot of money, don't have enough money to solve all our economic problems. We need $6 trillion over 10 years to close our budget deficit if we're -- we're only getting a quarter of that from the richest, and it's going to hit them pretty hard.

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10:10:39
And we heard -- as Rachel said, we heard President Obama, this news conference last week, say that the math doesn't work by capping deductions, which is an idea that Mitt Romney talked about during the campaign and some Republicans have adopted. How much many can you raise realistically by doing that?

WILLIAMS

10:10:57
If you go after all the deductions for everybody, you could raise perhaps $2 trillion over 10 years. The problem is we're not going to go after all of them for everybody. If you focus only on the top end, that number shrinks very, very rapidly, less than 100 -- less than $1 trillion over 10 years if you shut them off completely. And the talk now is, well, let's not include charitable contributions. Let's not cap them all. Let's put a cap at $50,000 or $25,000. And very quickly, you'll lose lots of revenue.

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10:11:27
So is President Obama right that it can't work by capping reductions?

WILLIAMS

10:11:30
It can -- well, it can work. It just can't work the way with the parameters that people want to put on it. If you want to get rid of deductions or if you want to go beyond deductions and look at exclusions and other type of preferences, there's a lot of money out there. The problem is if you focus only on just a few itemized deductions that people are looking at and you start moving some of those off the table, you're really in trouble for the revenue perspective.

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10:11:51
So, David, here's the problem: A majority of members of the House of Representatives have signed the pledge, that is, the promise to Grover Norquist organization that they won't vote to raise taxes. And Grover Norquist himself, in an interview in The New York Times this morning, notes that it has been 22 years since Republicans voted to raise taxes. So has that changed our Republicans, especially these House Republicans who are going to be willing to support raising tax revenues even if it doesn't involve raising tax rates?

WESSEL

10:12:22
If all of them stick to the literal interpretation of the pledge as defined by Grover Norquist, if all the House Republicans stick to that, then there's not going to be a budget deal. The only way we get a deal is if the president and the leadership of Congress finds something that at least some Republicans and Democrats in the House can vote for so that some Republicans and Democrats, for different reasons, can vote against.

WESSEL

10:12:48
I do think there's some evidence that Grover Norquist's chokehold on the Republicans is beginning to weaken. That story in The Times and a number of conversations I've had particularly in the Senate suggest that some members of Congress who worry about the size of the deficit, who recognize that it'll be very difficult to get a deal with the president that doesn't involve some tax increases in the conventional definition -- that is, somebody will have to pay more money that they would otherwise -- it's going to be hard to get a deal without doing that.

WESSEL

10:13:17
And so you begin to hear people talking about my pledge is to the Constitution and stuff like that. We'll have to see, when push comes to shove, how many people are really committed to Grover Norquist's own interpretation of his pledge.

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10:13:31
Well, Rachel, do you think that the election kind of changed the political dynamic that has prevented Republicans or prompted Republicans not to be willing to vote for tax increase for two decades?

SMOLKIN

10:13:43
I do think so. Clearly, President Obama thinks so. He clearly sees the election results as an endorsement of his vision for deficit negotiation and this so-called balanced approach where you have to do both cutting and raising of revenue. So he sees it that way. He's been careful not to describe it as a mandate. He doesn't want to overplay it. And, in fact, I think Democrats are in some danger of over-interpreting the election results and overplaying their hand. Yes, they do have the upper hand.

SMOLKIN

10:14:15
This was a good election for Democrats, a more decisive victory for the president, the Republican Party doing a lot of soul-searching right now. But you don't have perfect agreement within the Democratic Party about what should happen and what should come next. And there's some interesting polling out today from Third Way, a centrist group of Obama voters finding that they want to see compromise. They want to see some attention to entitlement programs. So Democrats have to be a little bit careful here. To get a deal is going to take compromise from both sides.

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10:14:46
Bob, you've been in town for a while. Does this seem different? Does this seem like there are the ingredients here to actually reach a deal and avoid going over the fiscal cliff?

WILLIAMS

10:14:55
Well, I prove to be a very poor prognosticator of what's going to happen here in Washington even though I've been here more than a quarter century. What is clear is the president now can stay on path and say, if you don't do what I want to do, we'll just let things fall apart. We got a fiscal cliff coming up in January. If he doesn't act, he can veto anything coming out of Congress he doesn't like. He can say, well, let's just let this go over the cliff, and then we'll see what happens.

WILLIAMS

10:15:18
Republicans raised taxes on everybody in America. Actually, 90 percent, as how many we figure, would see a tax increase from the fiscal cliff. It's the Republicans' fault because they won't come to the bargaining table and protect 98 percent just to save that last 2 percent. I think from a political perspective that seems like a pretty strong position. From an economic perspective, it's certainly a strong position.

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10:15:38
And what happens, David, if we go over the fiscal cliff? What -- would that be such a terrible thing to do? Could it be a negotiating point for the negotiations that would follow?

WESSEL

10:15:50
Well, I do think it's a negotiating ploy to say, I'm willing to go over the cliff. In any negotiation, you want the other side to believe you're completely crazy and will do something reckless. So that's -- but secondly, it's interesting how different this is than the negotiations we had last time. The president has basically said -- whether he means it or not is another question -- I'm willing to go over the cliff because that would mean a recession. But it wouldn't mean that we would lose our credibility with the rest of the world.

WESSEL

10:16:20
In August 2011, we were facing a -- the possibility that the U.S. Treasury would default, and he said that was unacceptable. If we go over the cliff, what happens? Well, taxes go up for almost everybody, as Bob says. The Treasury has a little bit of wiggle room, I think, as to how quickly it implements the changes in the withholding tables, how much comes out of your paycheck.

WESSEL

10:16:41
Spending gets cut across the board for a variety of domestic and defense programs -- indiscriminate meet acts, mindless cuts -- thanks to the law that Congress wrote and the president signed. But OMB has some discretion as to how to spread those out. If we stay over the cliff, it's devastating. We have a recession.

WESSEL

10:17:02
But the other thing is I'm -- I think sometimes when you talk about turning the dial or the -- moving the gauge or the handle of the spending and tax picket, you miss the broader thing, which is I think if they go over the cliff, it will be really upsetting both to the public and to the financial markets, and that psychological impact may be even greater than the sheer plumbing that economists can model.

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10:17:25
Well, given all the rhetoric about how incredibly important it is to reach a deal, Rachel, the failure to reach a deal would surely show a dysfunctional government. Despite the election, Washington still doesn't work.

SMOLKIN

10:17:36
It would, and yet you still have some sentiment, among Democrats at least, that that is what should happen. There's even some thinking that maybe it would give cover to Republicans who don't want to be responsible for raising taxes. In other words, if they don't get a deal, then all the taxes go out because the Bush tax cuts expire. And then any cutting they do, they can say, oh, we cut taxes. Look at that. So it's possible it could give some political cover.

SMOLKIN

10:18:01
Maybe that's wishful thinking on the part of people who subscribe to that belief, but that's certainly a view circulating in Washington right now, that they could come back after the first of the year. The damage would not be permanent. It could be quickly reversed, hopefully, and that they could then get a deal.

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10:18:18
Bob.

WILLIAMS

10:18:19
I think one thing to realize is it's not really a cliff on Jan. 1. You can call it a fiscal slope, maybe a fiscal curb. Something's going to happen...

WESSEL

10:18:26
In Washington, we can't even agree on metaphors.

SMOLKIN

10:18:27
(unintelligible) as bad as fiscal curb.

WILLIAMS

10:18:28
Exactly, exactly. It's kind of a curb because we'd lose the payroll tax cut immediately. That's going to show up in the first paychecks, 2 percent smaller paychecks. But the other things are going to be over time. And if we last for a long enough time, it'll be bad news.

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10:18:40
We're going to take a short break. And when we come back, we'll go to your calls just shortly, 1-800-433-8850. Or send us an email at drshow@wamu.org. Stay with us.

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10:20:03
Welcome back. I'm Susan Page with USA Today, sitting in for Diane Rehm. And with me in the studio: David Wessel, he's economics editor for The Wall Street Journal. He's the author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget." And Roberton Williams, he is senior fellow at the Tax Policy Center, which is a joint venture of the Urban Institute and the Brookings Institution.

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10:20:25
And Rachel Smolkin, she's the White House editor at Politico. You know, right before the break, Bob said suggested that maybe we should call it the fiscal curb, which doesn't really have the drama of the fiscal cliff. Dave, how did the phrase fiscal cliff come to represent this?

WESSEL

10:20:40
This is why Bob doesn't write headlines.

WILLIAMS

10:20:42
We know that.

WESSEL

10:20:44
So the phrase fiscal cliff has a long history, and it was actually widely used in the past to describe something different, the notion that someday in the distant future, we have to pay for the retirement of the baby boom and their health care cost. It was first used -- it was popularized in this context, referring to the end of the year collision, by Fed Chairman Ben Bernanke in February.

WESSEL

10:21:08
I found a Reuter story that said that people on the Hill -- congressional staff, had been referring to it, and that story ran before the Bernanke testimony. But Mr. Bernanke, in answer to a question, used the phrase and it has stuck. And I'm told by people on Wall Street who travel around the world that it is now part of the international financial jargon, that you can be in China or Paris or Singapore or Hong Kong or Brussels, and people will ask you, in whatever language they speak, what's happening to the fiscal cliff.

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10:21:39
Interesting. You know, we watch the markets for their judgment on what's going on. Perhaps a mistake.

WESSEL

10:21:43
Always a mistake.

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10:21:45
But the markets seem optimistic that there's a deal in the works. Markets went up yesterday. Did they see something that -- I mean, the three of you Washington insiders do not seem as optimistic as the markets perhaps have seemed. What do you think, David?

WESSEL

10:21:57
It's a good question. The market has been a little fickle lately. I mean, the markets fell on the day that Obama was declared the winner and then fell the next day. When there are signs of hope from the negotiations, the market goes up. I think that for a long time, people on Wall Street, they'll -- well, surely they'll find a way to avoid going over the cliff. I think there's a substantial amount of concern now that they won't, and you can see that more importantly than what happens to the market in the attitudes of business executives.

WESSEL

10:22:27
This notion that we've told a whole lot of businessmen, if we go over the cliff, I read it's going to be a recession. We're going to go over the cliff unless Washington gets its act together. I look at Washington. They don't seem to be getting their act together. That seems to me to imply that recession is a good chance in 2013. I think I'll hold off in hiring an investment. And we've seen that show up.

WESSEL

10:22:48
So while the market can go up and down and if there's a bad day in the negotiations, maybe it'll go down and who knows what else they're thinking about, it's having -- I think now, for the first time, I really believe it's having a palpable effect on the pace of growth on what businesses are doing with investment and hiring and perhaps -- although, I don't think we know yet -- on consumer spending.

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10:23:08
We saw a Wall Street Journal story on the front page of yesterday's Wall Street Journal about cutbacks in business investment. I think it got a lot of attention raised to a lot of concern. And also stories today, Rachel, about Wal-Mart moving up the date of paying out its dividends from Jan. 2 to Dec. 27. So I guess they think that there is going to be a deal that will raise tax rates.

SMOLKIN

10:23:31
Well, it's funny. We were talking before about this tableau of leaders coming out and talking to reporters after the first meeting at the White House, and I almost wonder if that sparked some of the good feeling. The interesting thing about that meeting is that really nothing happened and nothing was supposed to happen. This was only the opening meeting.

SMOLKIN

10:23:49
They used it to kind of outline their opening positions and to hopefully create some bargaining space and to set schedules. Congress isn't even here this week. I mean, staff is working hard throughout the week to try to make progress on this. But the lawmakers themselves have gone for Thanksgiving break, and we're going to be looking at a very tight timeframe when they come back.

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10:24:10
And, Bob, if rich people are doing things to calculate to bring in income, having them count this year in case tax rates go up, are there anything that the rest of us should be thinking about doing in December because of what might happen with these negotiations?

WILLIAMS

10:24:26
There's not really much you should worry about. If you've got a very highly appreciated stock and you're at the 15 percent tax bracket, you might want to sell it this year either than next because you face a zero percent tax rate on capital gains whereas next year it might be bigger than that. We don't know what it will be next year.

WILLIAMS

10:24:39
High-income people know they will be seeing a tax increase because the health care tax increases. The ones associated with Obamacare will come into play in Jan. 1. We know that for sure. That's not part of the negotiations. And that will raise taxes for high-income people by 3.8 percent on their investment income and by about 1 percent on their earnings.

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10:24:55
And remind us how that health care tax applies to rich people.

WILLIAMS

10:24:59
The health care tax applies only to high-income people by the president's definition, couples with incomes over $250,000, singles with incomes over $200,000. It's a 3.8 percent tax on all investment income -- capital gains, dividends and interest -- and 0.9 percent increase in the Medicare tax paid on earnings. So it's going to hit high-income people fairly hard. They are the ones with all that income, and they are the ones who are going to see those increases regardless of negotiations going on about the fiscal cliff itself.

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10:25:27
David, do rich people think this isn't fair that they're the target for raising this revenue?

WESSEL

10:25:34
I think some do and some don't. Look, you've seen a large number of people come forward and say, if there's really a deal here that will do something lasting to put the federal government on a more sustainable fiscal course, which will restrain the growth of health care spending, which will do something to adjust the -- all sorts of -- will put us on a more favorable trajectory, I'm willing to pay more in taxes.

WESSEL

10:26:01
I've heard CEOs say that. There are other people, other so-called rich people, who say, look, you know, we already pay a disproportionate share of the taxes, and I don't see why I should pay more taxes when so many people, you know, 40 percent or so, don't have to pay any income taxes at all. So I don't think you'd want to -- I don't know what I predict would happen if you had a referendum of the people who made over $250,000 a year. A lot of them voted for President Obama. My guess is they would not be unanimous, and a substantial number would say it's not fair.

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10:26:35
Bob.

WILLIAMS

10:26:36
I think you need to go back to what the president's argument has been for the last five years. The reason he's focusing on the wealthy is the other ones that have done very, very well in recent years, he feels they can afford to pay more. And the rest of us, the middle-class and below, have not done so well and just don't have the wherewithal to face higher taxes.

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10:26:53
Yeah. And I assume there are a lot of people who make $200,000 a year or households who make $250,000 who don't consider themselves rich although they make up just 2 percent of the rich population.

WESSEL

10:27:02
Yeah, right. I mean, that's often true. And as you know, it's often true when you talk to members of Congress or people in our newsrooms that people don't think of themselves as rich, and they may not actually -- they may not look like the TV caricature of rich people, you know? They don't have 13 houses and a yacht. But, in fact, if you make a quarter of a million a year, $250,000 a year, you are in that top 2 percent.

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10:27:29
Let's go to the phones and talk first to Kelly. Kelly, hi.

KELLY

10:27:33
Hi.

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10:27:34
Where are you calling from?

KELLY

10:27:35
Well, I'm on the road between Louisville and Indianapolis right now. But I'm from Michigan.

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10:27:40
OK. Well, Kelly, thanks for joining us on "The Diane Rehm Show." Did you have a comment or a question?

KELLY

10:27:45
Yeah. Right after the election, my -- I'm -- Fred Upton is my representative, and I emailed him, saying that it is my expectation as his constituent that he cancel his pledge with Grover Norquist because I think Grover Norquist is detrimental to the U.S. right now and that he put revenue on the table and look at a balanced approach and especially looking at the tax increases for the wealthy.

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10:28:18
And, Kelly, did...

KELLY

10:28:20
I got an email back from him that was very general, didn't answer those questions at all. It's the first time since he's been our representative that I haven't voted for him.

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10:28:29
Did you not vote for him this year?

KELLY

10:28:31
Correct. And I think the Republican Party has got to recognize that one of their problems is not listening to the people.

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10:28:39
And, Kelly, just because you didn't vote for Congressman Upton this year, but you voted -- you have voted for him in the past.

KELLY

10:28:45
I voted for him every year until this year. And part of it was because he was in the big six and was -- I believe an obstructionist to get anything done. And he signed the pledge with Grover Norquist.

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10:28:58
All right. Well, Kelly, thanks so much for your call. You know, Rachel, we talked about did the election change the political dynamic. Constituents like Kelly would have the perspective, I think, would have the potential at least to change the political dynamic in Washington if there were enough of them.

SMOLKIN

10:29:14
That's right. This Grover Norquist pledge is going to be such an interesting part of this debate, and we are hearing that just now. And we are hearing more leading conservative voices such as Weekly Standard editor Bill Kristol come out and say, maybe there is some room for a deal that raises tax rates on the wealthy, at least somewhat if you do it in conjunction with some loophole closure.

SMOLKIN

10:29:36
So it's no longer just speaking with one voice on the right. We are beginning to hear influential voices come out and say, wait a minute, we do need to get a deal, and there is going to need to be some movement on our side as well.

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10:29:50
OK. Let's talk to Jeff. He's calling us from Cocoa Beach, Fla. Jeff, hi. You're on the air.

JEFF

10:29:54
Thank you very much. One thing, we got a mass email from Warren Buffett, which is I thought quite interesting, and it is how to fix this problem. That was -- I don't want to go into that detail, but that may be interesting to get a hold of him, have him talk about his email. But the other thing is from whom are we borrowing this money? Who do we owe the money to?

JEFF

10:30:14
It looks to me it's the IMF and the World Bank, not China, and therefore it's just a piece of paper. They aren't giving us goods and services. They're giving us a piece of paper, which we have to pay back with interest. So why are we bothering? Why don't we just change the rules and not deal with the World Bank and the IMF?

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10:30:33
Jeff, thanks so much for your call. I would say if Warren Buffett is listening to "The Diane Rehm Show," we would welcome his call. We would put you on the air, and we would like to hear your solutions to these problems. But let me, Dave, let me let you answer Jeff's question. Who do we owe this money to, and is it the IMF and the World Bank?

WESSEL

10:30:49
It's not the IMF and the World Bank. We don't owe them any money. We borrow about half -- the money we borrow, about half of it comes from abroad now, a good chunk of it from Japan and China. And I don't think they'd look very favorable if we said, well, we've decided we have a bit of a problem here, and so we're going to rip up this piece of paper we gave you, this IOU. We're not going to pay you back.

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10:31:10
I'm Susan Page, and you're listening to "The Diane Rehm Show." We're taking your calls, 1-800-433-8850. Let's take another call. We'll talk to Khalid. (sp?) He's calling us from Louisville, Ky. Khalid, thank you for joining us.

KHALID

10:31:23
Hi. Thank you for taking my call.

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10:31:26
Yes. Please, go ahead.

KHALID

10:31:28
Well, you know, I mean, I'm -- I keep listening, and I keep hearing about the 2 percent. They're worrying about tax hikes, but what about the millions and millions of us who lost their homes? I have a business that I am not even making in my business $30,000 a year -- I'm not -- after I was making almost close to $100,000 for the first two years. I have it for four years now.

KHALID

10:31:50
The last two years, I'm not even making $30,000. I lost my home from the economy. I have a chance or a choice between keeping my business or keeping my home. I decided to lose my home because hoping the economy will get better and I could get my business going and I'd be able to buy a house again.

KHALID

10:32:07
Then when I realized there is a black dot on my credit report that nobody, no matter how low the interest rate keep going down, the rich, the people who have money, who don't need to go borrow, the one who have the 2 percent, they keep buying these houses, and they keep getting richer. And people like me who just wanted a house to live in, not to invest, I can't afford to go and buy a house because the banks -- nobody put in restriction or asking the banks to give people like me who lost their home the opportunity to be able to buy a house.

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10:32:43
Khalid, thanks so much for your call. We're so sorry to hear about you losing your house and your business being in peril. You know, Bob, it is true that Republicans who talk about concerns about raising tax rates talk a lot about small business owners. I don't think that would include Khalid 'cause it sounds like his income has gotten too low to be affected by this debate. But they talk about small businesses as jobs generator and as a group that would be disproportionately affected by raising tax rates. Is that true?

WILLIAMS

10:33:10
Not really. Only about 3 percent of small business owners have income high enough to be hit by higher tax under the president's plan. So it really wouldn't hit them very hard. In addition, it's not clear what that would do to their business' proper and what it would do to jobs. One thing that's very confusing about the job creation myth is, yes, it is small businesses that create jobs, but it's not all small businesses.

WILLIAMS

10:33:34
It's new small businesses, the ones that are growing and hiring new workers. Mature small businesses are not the job creators at all. They're going to stay what they are. The small law firms, doctor's office, the hedge fund -- they got a lot of money. They're not going to create new jobs if we give them any number of tax breaks, and it's not clear these new growing firms are going to care about the tax breaks. They care about getting bigger.

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10:33:56
Rachel.

SMOLKIN

10:33:57
I would just make one larger political point about the backdrop to these discussions, which is that many Americans are still suffering from the slow economic recovery. Many have lost jobs, have lost homes, have lost businesses and that one of the reasons President Obama won reelection is that he was seen as being more empathetic to the plight of the middle class, and we heard that in all of his rhetoric about a fair shot. We've been talking about asking the wealthy to pay more. All these things are connected, as we just heard on the phone.

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10:34:27
Dave.

WESSEL

10:34:27
Right. I agree exactly with what Rachel said. It's worth remembering that the deficit, for all the noise we hear about it in Washington, really isn't a big problem today. The U.S. government is able to borrow zillions of dollars, much of it from abroad, at rock-bottom interest rates. The problem we have today really is the kind of stuff that Khalid talked about: small businesses that are languishing, people who have lost their houses, an unemployment rate still close to 8 percent.

WESSEL

10:34:57
And so one question is, if they do a deal, can they do the two-fisted fiscal policy, a little help for the economy now combined with some really credible deficit reduction that'll take effect not next year, but over the next several years?

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10:35:12
Well, David, if deficit -- the deficit is not a big problem right now, why the big focus and determination by both sides to reduce the deficit?

WESSEL

10:35:21
I think part of it is a kind of sense that, oh, my gosh, the debt has gotten so big, we have to do something about it. And secondly, there's among the thoughtful people -- and, as you know, not -- it doesn't apply to everybody in town -- it's that we need to make decisions now because the real deficit problems are things that are not going to be quickly solved.

WESSEL

10:35:40
Slowing the growth of benefits, slowing the growth of health care cost is something you have to do over time. So all the changes that they're talking about to Medicare and Social Security, they're not going to take effect in 2013 or 2014, but it's important to get them in place now so that we can, in the lingo of town, bend the curve.

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10:35:58
And yet, Rachel, you talked about Democrats not being all of one mind when it comes to these negotiations. And one of the issues is not taxes, but trying to make changes in Medicare, Medicaid and Social Security to bend the curve. Are Democrats going to be willing to simply follow, congressional Democrats be willing to simply follow President Obama's lead, whatever he negotiates on that is going to be OK with them?

SMOLKIN

10:36:21
No. No. The answer is absolutely not, not Democratic lawmakers and not progressive liberal groups. We've seen a couple of labor unions get involved very quickly. Some are even running ads that began today. And even before the election was over, they were already reminding President Obama, if you win, it's going to be in large part because of our efforts to get out the vote, and we want you to remember that if you've been reelected. Now they want to see him hold firm on these issues.

PAGE

10:36:51
So, Bob, what do you see happening?

WILLIAMS

10:36:53
It's really hard to predict because you do have both sides with opposition to some of the changes. As Rachel points out, the liberals are not going to be happy with entitlement cuts. The conservatives are not going to be happy with tax increases. They're both going to have to give on those issues, to come together, get some sort of accommodation before the end of the year.

WESSEL

10:37:11
Right. So I think that that leads you to two possibilities if they get a deal. One possibility is that it'll have enough tax increases to make the Democrats happy, but not all of them, and it'll have enough spending cuts to benefits to make the Republicans happy, but not all of them. So they have to structure it just right so they get a compromise, and the second is they might get a smaller deal.

PAGE

10:37:32
We're going to take a short break, and when we come back, we'll talk about whether the stage has been set for an overhaul of the tax code entirely next year. We'll -- stay with us.

PAGE

10:40:04
Let's go back to the phones and talk to Jim. He's calling us from Little Rock, Ark. Jim, welcome to "The Diane Rehm Show."

JIM

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

PAGE

10:40:13
Good. Thank you.

JIM

10:40:14
That last call was a wonderful segue into my question, and I will say upfront I know that I am not the sharpest knife in the drawer so, you know, maybe somebody can straighten me out on this. But I have a problem with people who, on this program even in fact, say that there is no tax increase for people like the man who just called or myself when the ruling by Judge Robertson of the Supreme Court in regards to Obamacare and the fines or whatever you want to call it -- the fact of the matter is that taxes are going up all over the place.

JIM

10:40:51
If you talk about carbon credits and all of the stuff that they're talking about, the price of the electricity and utilities going up, I don't -- you know, there are a lot more people like the last guy that called than I think you realize. And I just don't see -- I certainly understand why Grover Norquist is the way he is and why some people are so tough about it. It's pretty scary out here. So...

PAGE

10:41:14
And so, Jim, let me ask you, do you think the idea of signing this pledge as majority of members of the House have done, saying, under no circumstances will I vote for these taxes, is that something you think is a good idea? Would you like your representative to do that?

JIM

10:41:27
Listen, my representative down here in Arkansas, Tim Griffin, promised in his campaign that he would not vote for an increase in the debt limit. And he went straight up there to Washington, and he voted to do it even though there were people who didn't do it. I -- that is a -- that's -- we got problems in this country.

JIM

10:41:43
And I don't think the people at the top understand what the people at the bottom are feeling. Maybe somebody -- how can you talk about not raising taxes when, in fact, the taxes are going up? I mean, maybe not strictly speaking by your definition, but the cost of living is going up, for crying out loud.

PAGE

10:42:02
Jim, thank you so much for your call. Now, one issue, of course, is whether -- that you raise is whether tax rates go up for everybody under the Affordable Care Act, under Obamacare. Bob, what happens here? You had mentioned, though, tax increases for wealthy people under Obamacare.

WILLIAMS

10:42:20
There are some taxes increase that have already taken place very early in 2010 when the tax law was first passed. We had an increase in taxes on tanning salons, for example. That took place immediately. More recently, in January, we'll see the tax hit high-income people to help pay for health care. In 2014, people will have to get health care coverage or have to pay higher taxes when it comes time on their tax returns, so there potentially is a tax pay -- tax levied on them if they don't get health coverage.

WILLIAMS

10:42:51
But the health coverage they get will be subsidized by the government if their incomes are not fairly high. It's not going to put a heavy burden on lots and lots of people. And most of the tax will actually fall on employers who choose not to help pay for tax -- health care for their employees.

WESSEL

10:43:05
I think there's another issue. Doug Elmendorf, who's the director of the Congressional Budget Office, summed up the fiscal problem that the United States faces in one very nice sentence. He says that there's a fundamental disconnect between the benefits that Americans want from their government, particularly from the elderly, and the amount of money they're willing to send to Washington in taxes. So I think part of the reason this is so hard to solve is that there's a -- people are a bit schizophrenic.

WESSEL

10:43:34
If you really do believe we can get out of this hole without raising taxes, then you have to be willing to take some pretty stiff spending cuts, and it's not going to be just closing the post office in your community. It's going to mean that people are going to get less money for Medicare and Medicaid and Social Security and farm price supports if you're going to -- and we'll have less money for almost everything the government does. The hole is so big that if you were really going to do it all on the spending side, my judgment is that the American people would be -- object to that.

SMOLKIN

10:44:07
I think that's an excellent point and shows just why this is so hard to get done. It's not just spending cut. People don't want their taxes to go up. They'd rather see tax breaks. And then we talk about closing loopholes and deductions. Well, that sounds like a great idea. What a wonderful idea, except some of those are very popular, like the mortgage interest deduction.

SMOLKIN

10:44:26
People want to get those tax breaks on their homes, and that's where you could save a substantial amount of money. So anytime you get to the specifics, this gets much harder. In the abstract, we all want a balanced budget. We want to cut the deficit, all of these things. But when you start taking away things that people appreciate and depend on, it gets far more complicated.

PAGE

10:44:48
And we hear -- in both our two most recent callers, Jim and Khalid, we hear people talking about the impact of this long recession that we're now pulling out of and that, you know, a lot Americans don't feel prosperous. They've seen their lifestyle take a hit, their family finances take a hit. They're not optimistic. They don't have that sense of possibility that would make it easier to agree to things like tax hikes and spending cuts.

WESSEL

10:45:12
I think it's clear that a lot of people have suffered through and continue to suffer through recession. We still have 8 percent unemployment. The real employment -- unemployment is much higher than that. The people have been unemployed for so long, they dropped out of labor force. They don't show up in the statistics.

WESSEL

10:45:25
And for them it's really, really hard to get back on track -- the people who lost their homes who can't get credit, the people who lost their jobs and can't find a new one. There -- it's going to take them a long time to get back up. And the younger people coming into the labor force are having trouble getting jobs, and that's going to make their entire work lives totally different trajectory.

PAGE

10:45:43
Here's an email question from Susan. She says, "My biggest question is why the line is $200,000 for an individual and $250,000 for a couple. I don't mind paying more, but I'm not sure why there is this huge discrepancy."

WESSEL

10:45:58
Well, I don't think there's any particularly logical reason that the president drew the line there. As Bob says, it does affect the top 2 percent. And there's a lot speculation in town that the eventual compromise may be to lift that threshold and perhaps the tax increases would be limited to the people who make over $500,000 a year.

PAGE

10:46:18
But do you get, Bob, do -- does that get you enough money to make a difference? How big is the loss of revenue if you raise the limit that way?

WILLIAMS

10:46:28
Our estimate is if you were to follow the president's plan or, technically, what the House -- Senate Democrats passed, that if you raise the limit to $500,000, you'd lose about $7 billion of revenues. You raise it another $500,000, lose another $7 billion. In total, we're only talking about 400 -- $40 billion a year out of the entire group from these pieces that we're talking about raising these limits on. It's not going to peel away a lot, but there's not a lot there to begin with. It's not going to solve our problem.

WESSEL

10:46:57
Right. But -- so that's why one thing -- there's a lot of talk in town that the president wants $1.6 trillion in deficit reduction and a $4 trillion plan, although you could argue about how he gets to the big number, so one possibility is here. They don't do such a big deal. They get a smaller deal because the Republicans are only willing to raise revenue a little bit, and the Democrats are only willing to cut entitlements a little bit. And it'll be an installment plan. We'll be paying this debt off for over a decade.

PAGE

10:47:21
And they do a small deal now which seems more realistic than doing a big deal, then is that just the first stage, Rachel? The next year, do we have a bigger deal?

SMOLKIN

10:47:29
That would become the first stage. They would need to set some timetables and some pretty firm goals, deadlines because Congress is always going to want to push back a deadline if it can. So if we see a small deal, I think we're going to see the outlines of a much larger deal for next year, the one that at least makes some progress on that.

SMOLKIN

10:47:49
But there's another possibility besides making a big deal, a small deal or going over the cliff, which is just to push back the deadline and say we're not going to have all these defense cuts take effect right away, maybe we're going to slightly extend the Bush tax cuts, although President Obama is not going to be excited about that. It does remain an option if they can't get a deal to avert bad things happening to the country early next year.

WILLIAMS

10:48:12
To repeat what David was saying earlier, our problem is not the immediate right now. The problem is down the road when more and more baby boomers retire, when health costs become more dominating in the budget spending. We've got to do something now. We got to tie our hands now so we don't do more bad things in the future. And if that means a small deal today, a bigger deal tomorrow and a real big deal further down the road, that's fine. Just get it done.

PAGE

10:48:35
But we know that Washington tends to act only if it has no other options. For instance, the fiscal cliff is what forces the next six weeks to be -- appear of...

WILLIAMS

10:48:44
Maybe.

PAGE

10:48:44
...really intense negotiations, whether or not they reach a deal, so if you make a small deal now with the Republicans -- oh, but we're going to do something big later on -- what forces action later on?

WESSEL

10:48:53
Right. Well, nothing will force action later on unless they are really serious about doing it. My experience here is that when Congress does these complicated rules, they don't force Congress to do anything. It's -- it works better when they actually have a consensus. And there could be a consensus this year that, enough of this. The public really does want Washington to function.

WESSEL

10:49:14
We have to find a way to do some tax reform that raises tax revenue. We have to do something about health care cost. And we will commit to do that, and we're serious about it, and the rules will be to encourage us to actually get there. They're very well aware that their credibility of saying, oh, we're going to fix this by June 30 is nil. So it'll only work if there's the bipartisan agreement that we're going to do this.

SMOLKIN

10:49:40
And we heard President Obama talked about that on election night when he gave his victory speech, saying, the American people want action. I think there's a clear recognition from both sides. The election happened. Elections have consequences. You can certainly over interpret those consequences. But the American people would like to see their lawmakers and their president get together and figure something out.

PAGE

10:50:00
Let's talk to Mark. He's calling us from San Antonio, Calif. Is that right, Mark?

MARK

10:50:05
San Antonio, Texas. Yes. Thanks for taking my call.

PAGE

10:50:07
San Antonio, Texas. All right. Hey, thanks for coming on the show. Did you have a question or a comment?

MARK

10:50:12
Yeah. I've got a few comments. I'm part of the 2 percent. My wife and I own two dental clinics. And on the one hand, we don't really mind paying taxes. And if you don't like paying taxes, try living in Mexico for a while and you realize that, you know, you do receive a great benefit from it. But on the other hand, having spent six years in the military, you know, people want to see that money that they pay in administered properly.

MARK

10:50:37
And, you know, the ways from their views as you see in some of those places or -- and some of these entitlement programs is almost sickening. And on another point, we employed 15 people, seven in one office and eight in another, and we're thinking about opening a third. But I'll tell if you the tax rates go up on me, the 2 percent, it's just not going to be worth the headache to create eight more jobs. And so I'd like to hear the panel respond to that.

PAGE

10:51:07
And, Mark, before they respond, like, what would be -- what would prompt you to say, OK, I feel OK about opening a third office, hiring a couple more people? Like what would be tolerable in terms of new or higher taxes or tax rates?

MARK

10:51:22
Well, I paid almost $100,000 in taxes last year. And, you know, it's more than my fair share, I would say. But at the same time, I don't mind paying it if they kept it the same. But I don't need that mortgage -- the mortgage interest deduction and a lot of -- some of these deductions. But I think if they would close some of those loopholes as well as just have some better administration or stewardship for the funds that I am giving them, I think that would go a long away.

PAGE

10:51:53
All right. Mark, thanks so much for your call. Dave.

WESSEL

10:51:55
I think that's a very thoughtful call, and there are two things that occurred to me. One is it's extraordinarily important that the American people trust the government, is doing everything it can to ferret out waste, fraud, and abuse. There's no line item for life's fraud and abuse, and it may not be as much money as people think, but it's really important. If people are going to pay more taxes, they want to be sure that the government isn't wasting their money. And that's why some of these little scandals are so devastating.

WESSEL

10:52:22
Secondly, he's implicitly making the case that the Republicans make, that the marginal tax rate isn't -- influences these decisions, and he would prefer to see base broadening, that is do away with some of the deductions, credits, loopholes and exclusions. And there may be something to that. So that's why we all kind of wonder if there are some middle ground here where there's a little bit of base broadening, a little bit of rate increases, and everybody can go home.

PAGE

10:52:47
And, you know, well, we talked about the impact on Wal-Mart or what Warren Buffett wants to do, and we're still waiting for his call. The fact is the American economy has a lot of people like Mark that have a small business, employ 15 people or thinking about opening a third office, would employ eight more. And that is a really critical part of our economy.

SMOLKIN

10:53:05
And I think that's another reason why it is so important that Congress and the president reach a deal. We were talking about, can they wait until next year? Can we push it off even more? It does create uncertainty for investors and for business owners out there.

PAGE

10:53:19
I'm Susan Page, and you're listening to "The Diane Rehm Show." So we have another caller, Dawn from Houston, who says, if income taxes go up 1 percent for everybody, what impact would that have on the deficit? Bob, I know you're a mathematical wizard. Can you tell us what kind of impact that would have?

WILLIAMS

10:53:37
Well, overall income tax will bring about a $1 trillion a year, round figures. One percent more -- are we talking 1 percent more in the tax rate?

PAGE

10:53:45
No, 1 percent more on the tax rate.

WILLIAMS

10:53:47
On the tax rate.

PAGE

10:53:48
It's a harder question.

WILLIAMS

10:53:49
So -- yeah.

PAGE

10:53:51
It's all right. I think you've stump the panel, Dawn.

WESSEL

10:53:53
It's -- I know. It's -- hold up. We know the order of magnitude...

WILLIAMS

10:53:56
Yeah.

WESSEL

10:53:56
...is that if you got 1 percent more taxes, it would be about $100 billion a year, right?

WILLIAMS

10:54:02
Yeah. That's about right.

WESSEL

Yeah, right, yeah.

WILLIAMS

10:54:04
Well, yeah, this is about $10 trillion of income.

PAGE

10:54:07
All right. So that doesn't fix our problem?

WILLIAMS

10:54:08
It doesn't solve one.

PAGE

10:54:09
Yeah.

WESSEL

10:54:09
But no one thing is going to fix our problem.

WILLIAMS

10:54:10
Yeah.

WESSEL

10:54:11
It's going to be a list of things. This is going to be like going to the buffet. And all the food is going to look unattractive, and you have to say which ones are you willing to stomach.

PAGE

10:54:19
Here's a question, an email question from Marshall, who asked, "What will happen to the yearly AMT fix?"

WESSEL

10:54:24
Oh, God.

WILLIAMS

10:54:26
The AMT is a problem today because Congress has done nothing about the AMT fix for 2012. If they do...

WESSEL

10:54:32
Robert, why don't you explain what that is?

WILLIAMS

10:54:33
OK. Yes, good idea. The AMT is an alternative tax targeted on high-income people but start to hit more and more people on middle incomes -- upper middle incomes. In a typical year, about 4 million people pay AMT. If you're AMT tax is higher than your regular tax, you owe extra dollars to the government. If Congress -- and Congress, over the years, has set a higher exemption level that has kept many, many people, millions of people off the AMT.

WILLIAMS

10:54:59
If they do not raise that -- set that higher exemption level this year, the AMT patch, they will have about 28 million people pushed on to the AMT who were not expecting it. We called it stealth tax. They'll find out about it only when they do their tax returns. I don't think there's an accountant or TurboTax says you owe a couple thousand dollars more money.

WESSEL

10:55:14
And this is for income earned in 2012.

WILLIAMS

10:55:16
In 2012.

WESSEL

10:55:17
Everything else we're talking about is what happens to your taxes on 2013 income, but the AMT is a 2012 problem.

PAGE

10:55:23
Rachel, is the stage set for a more far-reaching overhaul of the tax code?

SMOLKIN

10:55:31
Yes. I think that it is set for that. It depends what happens over the next few weeks, and whether they're able to create some kind of framework where Congress could really take this up next year in a serious way. I mean, we're just talking about the alternative minimum tax. And it's just one of the many other things rolled up in this complicated package that needs to get some attention.

SMOLKIN

10:55:49
We keep focusing on the tax rates and the loopholes and cutting spending, but there's a lot packed in there, corporate tax breaks. Republican leaders want to extend the nation's foreign policy. All these things are rolled in together that have to be dealt with in some way. And then you got the much larger question of how to reform the nation's tax code.

PAGE

10:56:07
And a real reform of the tax code that would simplify, you know, wouldn't -- might raise revenues but lower rates. But we haven't done that as a country for, what, since 1986.

WESSEL

10:56:15
1986 was the last major tax reform. Economists would love to see that. Economists are great believers in very low tax rates that don't affect people's behavior so that people like Mark will not say, I can't open a new dental clinic because my tax are too high. It keeps the rates low. But to do that, you have to tax a lot more stuff, get rid of these special preferences. That's what we would really like to see, and that's one direction that the Congress might be moving.

PAGE

10:56:36
Well, I think this is not the last time this year that "The Diane Rehm Show" will be talking about the debate over taxes, but this has been a great discussion. I want to thank Rachel Smolkin from Politico, Roberton Williams from the Tax Policy Center and David Wessel from The Wall Street Journal for being with us this hour.

WESSEL

10:56:52
You're welcome.

WILLIAMS

10:56:53
A pleasure.

SMOLKIN

10:56:54
Thank you.

PAGE

10:56:54
I'm Susan Page of USA Today, sitting in for Diane Rehm. Thanks for listening.

ANNOUNCER

10:56:59
"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Nabors, Rebecca Kaufman, Lisa Dunn and Jill Colgan. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington, D.C. This is NPR.
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