MS. DIANE REHMThanks for joining us. I'm Diane Rehm. White House officials and congressional Republicans are said to be close to a deal over extending tax cuts and unemployment benefits. With November's unemployment numbers at 9.8 percent, Fed chair, Ben Bernanke, warned against actions on this year's spending and taxes that could hurt the economic recovery. On "60 Minutes," last night, he added, that doesn't stop us from thinking now about the long-term structural budget deficit.

MS. DIANE REHMJoining me to talk about the challenges of addressing the nation's long and short-term fiscal health, Major Garrett of the National Journal, Alice Rivlin of the Brookings Institution. David Walker of Comeback America Initiative joins us from the NPR studio in New York, and Dan Mitchell of the Cato Institute is on the phone with us from Tampa, Fla. Throughout the hour, we'll look forward to hearing your questions, comments. Join us on 800-433-8850. Good morning to all of you.

MR. MAJOR GARRETTGood morning, Diane.

MS. ALICE RIVLINGood morning.

MR. DAVID WALKERGood morning.

MR. DAN MITCHELLGood morning.

REHMMajor Garrett, if I could start with you, how much do we know now about the deal that's apparently in the works on the Hill?

GARRETTWell, you see a singular -- here's what I know, and we can incorporate it into the row. We -- if we choose to think it's credible or not -- but here's what I know. What I know is that the rough outlines and the contours of the deal are as such, resolved possibly as early as the end of this week, maybe slightly sooner -- if not, early next week -- a two- to three-year extension of all Bush tax policy, including the tax cuts for those wealthiest Americans that the president and the White House had heretofore resolutely opposed. So that's score one for Republicans. The other part of the deal is a one-year extension of unemployment insurance benefits for the 99 weekers (sic) -- those people who have been chronically unemployed.

GARRETTAnd there are a great number of them in the United States -- 1.6 million will lose their benefits by Christmas Day. And then extension packages not put forward, a one-year extension provides clarity for the administration, clarity for those who are on the unemployment lines and relieves the White House and Congress over renewal of this debate, let's say, six months from now. So a complete one-year agreement, that seems to be understood. In compensation for giving so much ground to the Republicans on the upper-end Bush tax cuts, Democrats have advocated the White House.

GARRETTAnd they've now asked Republicans to consider, also, at least a one-year extension of the Make Work tax credit that was part of the stimulus. That's worth about $400 per year to a single taxpayer, $800 to a family. It's essentially a refund on a portion of your payroll tax deductions. That's not exactly how it works, but that's essentially how it works out. Republicans are considering that. There are also other tax extenders the Republicans would like to see also put in this package.

GARRETTAll of this will have to deal with some fine-grained choices about whether or not the Make Work Pay tax credit is refundable or nonrefundable. I can defer to Alice Rivlin on that on why that matters to Republicans and why it matters to the White House and what it economically means to those who receive it. But those are the outlines of the rough deal. One thing I haven't detected is any effort to pay for any of this, which will have deficit implications.

REHMMajor Garrett, he's congressional correspondent for the National Journal. Alice Rivlin, what do you see coming?

RIVLINOn this, I think Major is right. That's about where it is. I'm not privy to any internal discussions. I just hope they get it done and get the other things they need to do done and get out of town because...

REHMWhat about these tax credits that the Obama administration is using as a bargaining chip?

RIVLINWell, the Make Work Pay tax credit was in the stimulus. It is a credit against your earned income, and the issue of refundability -- as it's called -- means if you don't earn enough to pay tax, do you get the credit anyway? And that's the way it was originally structured. That's what makes sense. It gets money to people who have low wages, and I hope they do it that way.

REHMDavid Walker -- turning to you -- how likely do you see this plan moving through as Major Garrett has outlined it? And do you think it's a fair deal?

WALKERWell, first, I think they're going to have to reach agreement because there could be market instability if they don't reach agreement. They could have market-generated sell-offs because of tax considerations, and that doesn't really make any sense. You know, my personal disappointment is that basically the Republicans want all the tax cuts, irrespective of the economic merits and the potential consequences. And the Democrats want to be able to extend, you know, unemployment benefits and other types of assistance, you know, for an – you know, for additional time. Nobody wants to pay for anything.

WALKERYou know, in my view, they ought -- they shouldn't be extending the tax cuts for high-income individuals -- I mean, maybe $400,000 in individual and $500,000 for families. They should come to some resolution on the estate tax. The idea of not having an estate tax is ridiculous. I mean, we've got a huge birth burden on newborns. And there's got to be a limit as to how long we can keep people on unemployment. I mean, if you are on unemployment two years, I mean, how long are we going to subsidize people being on unemployment? And so, unfortunately, rather than coming up to some recent compromise, everybody gets everything they want. And nobody pays for it today.

REHMAnd, Dan Mitchell, how do you see it?

MITCHELLWell, I don't really disagree with any of the political prognostications we're seeing here. I guess the one wrinkle I would add to what's been said is that I'm a supply sider. I think the important thing is to keep marginal tax rates low, and I'm actually pleased that the Domenici/Rivlin Debt Reduction Task Force included lower marginal tax rates, the same thing with Obama's fiscal commission. But when I want lower marginal tax rates, I don't want them to turn into gimmicks.

MITCHELLAnd what worries me -- if you have a two-year extension, or something like that, is that really going to encourage people to work more, save more, invest more? So, yes, I guess having this kind of deal is better, certainly, than not having that deal and having a big tax increase on Jan. 1. But I don't think we're going to get much bang for the buck because I don't think investors, entrepreneurs, small business owners are going to make permanent long-term plans to create jobs and expand output in response to short-term fiscal policy that will still have a tremendous amount of uncertainty about what happens a couple years down the road.

REHMAlice Rivlin, David Walker mentioned estate taxes. They're not part of this deal, are they?

RIVLINThey could be.

GARRETTThey could be.

REHMThey could be.

GARRETT'Cause the estate tax currently is zero right now, and if nothing is done, it'll rise to 55 percent, I believe -- David, you may need to correct me on that -- but I think that's what it will rise up to Jan. 1. So there are definite estate tax implications, and that -- when I was mentioning extenders and other things that are sort of pending that are going to get thrown into this very large ever-growing kitchen sink as this week continues, that will be one of them.

REHMAnd...

WALKERIf I could drop in, Diane...

REHMGo right ahead.

WALKERWell, first, I think, you know, it makes no sense to have no estate tax. I mean, we're not paying our way now. It just further causes a difference between the haves and the have-nots in this country. I mean, think about what this country is going to look like in 100 years with no estate tax. They need to resolve it for, you know, something along the lines of a $3.5 million individual exemption, $7 for -- $7 million for a couple and a tax rate of around 40 percent or so. I mean, you know, they just keep on kicking the can down the road rather than making decisions. We pay them to make decisions.

REHMDan Mitchell, what's the country going to look like without an estate tax?

MITCHELLWell, I think, we'd have a much more prosperous country without a death tax. I think it's not only economically destructive to have this tax on capital, but it's morally outrageous that we tax people just for dying, on income that's already been taxed one or two or three times already. I think what we're going to see is a 45 percent death tax with some increase in the credit, as was just discussed. But the fundamental problem about the future of the country is it's not what we're going to look like with or without a death tax -- because we're going to have it, unfortunately -- but we’re heading on a path to becoming Greece.

MITCHELLWe're increasing spending, which is going to lead to higher taxes, which is going to lead to a weaker economy, which will lead to more spending. We're going to be in the same downward spiral you see in Europe. Now, we're behind them by, you know, 20 years or so, and that's good. I might rather, you know, postpone bad news for the future. But that is where we're heading with this entitlement state, bloated government, high tax rates, and I'm very depressed about the future of the country.

REHMOn the road to Greece, Alice Rivlin.

RIVLINWell, let me disagree with Dan on the estate tax, not the death tax -- we don't tax people for dying. We tax them for passing on very large estates to their children. But I couldn't agree more about his worry that we are on the way to a catastrophe if we don't get on top of our rising debt. We're not Greece. But we're in a very dangerous situation, which could have much wider ramifications for the whole world than a default in Greece, which wouldn't actually matter very much 'cause Greece isn't very big unless you're Greek. It's -- but we have, as we look ahead, rising debt driven by the demographics and health care, the aging population and the rising cost of medical care, which will make our government, as it's currently structured, more and more expensive every year.

REHMHow did you interpret -- Alice Rivlin, how did you interpret Ben Bernanke's comments last night on "60 Minutes," when he said he was warning against actions on spending in taxes that could hurt the economic recovery?

RIVLINI think Ben and I completely agree. We should not have a tax increase right now because we're having a hard time getting out of this recession. We shouldn't have addressed expanding cut right now either, like this year. But we should also put in place a long-term plan, which would start quite soon and be legislated -- not just thought about but legislated -- that would bring our deficits down over time. And Chairman Bernanke is for that, too.

REHMAlice Rivlin, she is senior fellow at the Brookings Institution. She is founding director of the Congressional Budget Office and director of the White House Office of Management and Budget from 1994 to '96. Short break. We'll be right back.

REHMAnd here's our first e-mail as we talk about the economy. It's from Bort, (sp?) who says, "I think this sudden focus on the deficit is just a Republican ploy to prevent Democrats from getting anything done. Can any guest explain why we're trying to fix the deficit right now in a downturn when we happily let it balloon when Bush was in charge?" Give us a little history on that, Major.

GARRETTWell, I would say the short history is -- let's just go back to January of 2009. When President Obama was inaugurated, there was a massive crowd here in the nation's capital, and there was a tremendous amount of conventional wisdom about the realignment of American politics to a center-left country. And then the Tea Party movement began to express itself, and Republicans still remained disorganized and not very well energized. And yet beneath them, the Tea Party began to organize itself and became, what I would call, the first genuine third party movement we've had -- that neither two parties have tried to control or were able to control -- for about a year. And then Republicans wrapped their arms around it from the leadership level.

GARRETTAnd if the Tea Party has one unifying message -- and it was visible in many House races that Republicans narrowly won, giving them 63 House seats and a new House majority -- it is to focus on deficit and debt. And so the leadership now is going to focus on the deficit and the debt because that's what the people who elected them want them to do. Now, that is not to say it is the most brilliant economic insight or the dumbest economic insight. What I'm saying is it's the reality of those who took to the streets, took to the polls, took to talk radio and brought this House majority to Republicans.

REHMAlice Rivlin.

RIVLINI totally disagree that the focus on the deficit and the debt is some kind of Tea Party thing. It is a very genuine problem that members of both parties have been avoiding dealing with for some time, but it can't be put off any longer. The problem is that we have, as I said a minute ago, a prospect of rising debt if we don't change course because we have made promises over the years, both Republicans and Democrats, that mean that our government spending -- primarily from Medicare and Medicaid and, much to a lesser extent, Social Security -- will rise a lot faster than our revenues.

RIVLINThat's not new news. That's been true for a long time. But because of the recession and because of the things we did to get out of it -- that we haven't yet -- we have a much higher debt level, and that makes us more vulnerable. But we've got to get on top of this rising debt, or we will be Greece. We will be beholden to our creditors around the world.

REHMDan Mitchell, where are you on this?

MITCHELLWell, let me start by agreeing with a lot of what Alice said. And I especially want to give her credit because her task force with Sen. Domenici actually did address the health care entitlements that are really driving our long-term problem. But I would look at it a little bit differently. I don't think we have a long-run debt and deficit problem. We have a long-run government spending problem. All of our increases in red ink are because the burden of government spending is going to climb. And what worries me is that to the extent that this gets framed as a deficit and debt issue, we're going to give politicians an excuse to do what they love to do anyhow, which is to raise taxes so they can increase spending more.

MITCHELLAnd that's sort of the dog chasing its tail approach that got Europe into trouble. They'd raised spending, then raised taxes, and raised spending some more, and then raised taxes. And, I think, we have to put the focus exactly where it belongs. We need to control government spending. And I think the Tea Party is not so much -- yes, it's debt and deficit, but it's also bailouts and big government. So I think the Tea Party movement does have a nice libertarian theme to it about, let's control the size and burden of government.

REHMDavid Walker.

WALKERTwo things. First, let's talk about what the numbers are. The most recent International Monetary Fund report that came out in May of this year said that based on comparable numbers -- looking at federal, state and local public debt, which is what you need to do to compare our country to Europe -- we were already worse than Portugal. We were already worse than Spain. We were already worse than Ireland. And we were already worse than the United Kingdom. We were 10 years away from where Greece was when they had their crises.

WALKERBut when you consider what we owe Social Security and Medicare -- $2 to $3 trillion in debt, backed by the full faith and credit of the United States government -- we're three years away. So this is a very real issue, and we're adding debt at record rates. Now, I would agree with Dan that this is primarily a spending problem. I think it's two to three to one, a spending problem. But the government has grown too big, promised too much and waited too long to solve it solely on the spending side without decimating social insurance programs and some of the constitutional roles of the government. And so everything has to be on the table. And for all the commissions that have reported recently, they put everything on the table.

REHMHere's a question on the politics for you, Major. "Why can't the president veto this bill? I want him to, even though I know taxes will then go up, the economy would dip again, and the Democrats would bear the brunt of the blame. I'm just sick of Democrats being utterly spineless. What else is holding the president back from pressuring Republicans to be responsible?"

GARRETTThe president has decided he's not going to take that path. The president's top advisor, David Axelrod, said, right after the election, we have to deal with the world the way we find it. And the way we find it is with Republicans in control of the House. And that was a signal to all within the Democratic Party that the president was going to move -- they didn't know how far -- but he was going to move on this issue. The President does not want to have taxes increased for the middle class.

GARRETTThe ransom note for that for Republicans is to make sure the tax policy that currently exists, that's been enforced for 10 years, stays, and there's no move -- Republicans will not move and will not budge on that. And the President can't move them. So if he doesn't do anything, if he doesn't agree to their terms, then everyone's taxes goes up, including the middle class. And he loses unemployment insurance, and he loses a lot of other things. He has no leverage to negotiate, a Make Work Pay tax credit exemption or extension. So he's making the best of a situation in which he finds himself with less leverage than this e-mailer believes he has.

REHMAlice.

GARRETTThis e-mailer believes you have the veto. You can have a fight and that fight is worth fighting. The president fundamentally disagrees, which means it won't be waged.

REHMAlice.

RIVLINI'm with the president, although I think he should have gotten out there a little sooner and gotten the message out. It's inconceivable to me that most of the country wants to see millionaires' taxes cut.

GARRETTThey don't. The polling indicated -- the polling data is very across the board on this.

RIVLINRight. And the Democrats have not made the most of that, but I think Major is absolutely right about where they are now.

REHMAnd, David Walker, how do you see that?

WALKERI think the biggest deficit this country has right now is a leadership deficit. And that's not a personal thing, and it's not a partisan thing. I think the country and our elected leaders have done a very poor job of communicating with the public about where we are, where we're headed, the need to differentiate between the short-term and the structural.

WALKERYou know, frankly, we might need to take more actions to try to be able to get unemployment down and get the economy moving. That could exacerbate the deficit in the short-term. That's okay, as long as it's properly designed and effectively implemented and coupled with a structural deficit plan that gets implemented in phases over time. The president is not talking about that. It's time he did. The congressional leadership is not talking about that. It's time they did. It's just more of the same.

REHMAll right. And here's an e-mail from David, who says, "Central to the Republicans' insistence that all tax cuts be extended is their claim that not extending tax cuts for the top income earners will raise taxes on 700,000 small businesses. Virtually no small business is structured in a way that the business pays income tax. Rather, small business are structured so income and losses, for tax purposes, pass through to the owners. Yet the Democrats and the media allow the Republicans' claim to go unchallenged." Dan Mitchell.

MITCHELLWell, there's all sorts of small business structures, whether you're a Subchapter S corporation, a sole proprietorship, so on and so forth. But the real debate is, how much small business income is hit by this -- and there's a lot -- versus how many small businesses are hit by this? And, of course, it's only the more successful small businesses that are hit by this. So both parties take different approaches. I'm fundamentally against class warfare policy. I want the lowest possible marginal tax rates.

MITCHELLYou have the greatest sensitivity or, as economists say, elasticity of response to tax rates at the upper end of the income spectrum. So why on earth would we want to hurt the economy, get the government very little revenue in exchange and appeal to sort of the darker instincts of the American people to try to go after a tiny minority of people? I just think it's the wrong approach, economically and philosophically.

REHMAlice.

RIVLINWell, I guess put me in the group that is in favor of class warfare, if this is class warfare. It just seems to me that if we are extending tax cuts that we can't afford to extend, we certainly don't need to extend them to people who have made out very well. And it's not class warfare to point out that the people who have benefited most from the economy, not only in the good times but even recently, are those in very high income groups, and people who have low wages and are struggling to find a job are doing badly.

REHMGo ahead.

GARRETTOne other quick point, Diane, and I bet you, David, have some thoughts on this. There are structural issues that, economically speaking, this debate simply misses. There is no stimulative effect of this tax policy that we're talking about. We have the tax policy now. Our economy is in a recession -- now, not a technical recession -- but we are not growing anywhere near rapidly enough to generate jobs. Ben Bernanke said on "60 Minutes" last night, we're on the razor's edge of an economy that simply cannot continue to grow, even to keep pace with where we are now.

GARRETTSo there's nothing stimulative about this current policy. We're trying to, from the Republican point of view, trying to avert something that would be worse. But what is there that is going to generate the kind of economic growth that's going to reduce unemployment, that's going to bring higher revenues to the federal government, which Alice knows, from the '90s, were a crucial part of building a bridge toward deficit reduction -- and not to mention Bill Clinton's reelection in 1996?

REHMWell...

GARRETTRevenue is crucial to all this, and we're not in an economic situation where we're -- we have a prospect of generating new revenue, economic growth or reducing unemployment rate.

REHMOn that very point, David Walker, Dan Bartlett said to Howard Kurtz -- and this was reported in a number of different places -- we knew that, politically, once you get it into law -- he's speaking of the tax cuts -- it's almost impossible to remove it. That's not a bad legacy. The fact that we were able to lay the trap does feel pretty good, to tell you the truth.

WALKERWell, the sad thing is, is that a lot of people are doing things for political advantage and for short-term reasons. And who's looking out for the future? I mean, who's looking out for what the -- where this country will be in the world 20 years from now and beyond? Who's looking out for our kids and our grandkids? And the simple fact of the matter is, very few, and clearly not enough. And that's got to change. Look, there's a difference between the short-term and the structural. We could all agree on that.

WALKERWe need to make progress on both. But we cannot continue to kick the can down the road on our large and only growing structural problems because it threatens our position in the world and our standard of living at home. And it's not just economically irresponsible. It is immoral, what we're doing to our kids and our grandkids.

REHMDavid Walker, former U.S. comptroller general. He's founder and CEO of the Comeback America Initiative. Tell me about that, David.

WALKERIt's a new 501 (c)(3) entity that will focus on federal and selected state and local fiscal challenges that will be on solutions, trying to help engage the public with not just the facts and the truth and the tough choices, but, what are some of the solutions, and trying to provide support to Democrats, Republicans and independents who need help with their constituents to try to be able to make tough choices and need help in trying to figure out how best to solve the problems and build coalitions to accelerate enactment.

REHMAll right. We're going to open the phones now, first to Jackson, Mich. Good morning, Scott. You're on the air.

SCOTTHi, Diane.

REHMHi.

SCOTTI would like to agree with the earlier e-mail, that the Republicans have been perpetuating this truism that there's some kind of relationship between income tax and job creation. Income tax is based on net income, not gross income. So if I take part of the gross income of my business, and I use it to hire someone, that's a tax write-off. I don't pay income tax on that because it's a business expense. It's a debit, not a credit. And so they're perpetuating this idea that if you lower Daddy Warbucks' income taxes, he'll give you a job.

SCOTTWell, he might hire a gardener or a maid for his big estate or something like that, but within a structure of almost any business -- and I'm pretty sure even this applies to sole proprietorship -- that okay, if you hire someone, that payroll is written off your net income, and you don't -- you aren't taxed on it.

REHMAlice, do you want to comment?

RIVLINWell, with respect to small businesses, it's a little complicated. Some of them do -- some small business profits are taxed as personal income, but I think the caller is basically right. At the very high incomes, the chances that the money will be spent in a productive way are smaller than they are at lower incomes. And it probably doesn't affect business decisions very much.

REHMDan Mitchell.

MITCHELLYeah, well, let me go ahead and give a real-world alert to the caller here. People don't create jobs unless they expect that the total cost in employing someone will be exceeded by the amount of new revenue generated by that additional employee, and that, of course, means some profit for them that will be taxed at a higher rate. And when higher -- when we have higher tax rates, there is less incentive to earn that additional income, and so, yes, there will be a direct and negative effect.

MITCHELLThe caller should look at Hong Kong and compare Hong Kong's fast growth to America's modest growth. And then the caller should look at France and look at France's long-term stagnation compared to America. And, you know, what's the relationship? The countries with the higher taxes and bigger burdens of government grow slower than the countries with the smaller burden of government...

REHMScott.

MITCHELL…and low tax rates.

REHMThanks for calling, Scott. Alice, there were actually two big reports that came out. Tell us the main differences between last week's deficit reduction recommendations and those of the other group you co-chaired with Pete Domenici.

RIVLINWell, let's talk about the similarities first.

REHMOkay.

RIVLINThey are both attempts to lay out a set of compromise plans between Republicans and Democrats that will get on top of the long-run deficit problem. And they all do it by -- or they both do it by a similar set of recommendations. They don't just focus on the drivers of increasing spending, which are Medicare and Medicaid -- although both do. But they say, this is such a big problem that the pain has got to be shared very widely, so let's do a number of things. Let's hold down discretionary spending. The president's group has a more severe set of cuts in discretionary spending, both domestic and defense, than the Domenici/Rivlin group. Both say, let's reform the tax system so that we can raise money in a more growth-friendly way.

REHMAs just Ben Bernanke.

RIVLINRight.

REHMHe agreed with that last night.

RIVLINRight.

REHMAnd the other thing...

RIVLINAnd both...

REHM...is to extend the age of Social Security.

RIVLINWell, no. Actually, one group does, and one group does it slightly differently.

REHMAll right. We'll take a short break here. And more of your questions, and clarification on that last point, when we come back.

REHMAnd, just before the break, we were talking about the differences and similarities between the reports of the Rivlin/Domenici (sic) commission and the presidential deficit commission. Alice, you wanted to finish on that because what you were saying during the break is that Medicaid and Medicare are far more important here.

RIVLINRight. Let me make clear that I was on both commissions, and I support both reports although they are slightly different. One difference that the Rivlin/Domenici commission had was that we had a payroll tax holiday -- one year in which you don't pay payroll tax -- right now, right up front, to stimulate the recovery before the deficit reduction kicks in. But we think it's a package. You have to do both. You have to be able to think of two things at once -- getting out of this recession and controlling the long-run debt. But for both groups, the big dilemma is how do we control health care costs in the long run? And both have proposals that help to make health care more efficient. The Domenici/Rivlin group has a quite drastic reform of Medicare.

RIVLINBeginning in 2018, we would gradually transition Medicare into a premium support program, meaning that people would get -- take their Medicare subsidy to an exchange where they could buy private health care plans, a managed care plan, and those plans would compete on the exchange. And the idea is we might get more efficient health care delivery out of this competition, but in no case would the rate of growth of the government subsidy be faster than the economy was growing plus 1 percent. That's a way to get a control. And we would allow people to stay in traditional Medicare if they wanted to. But if it would cost more -- if the cost increase was more than the economy was growing plus 1 percent, then they'd had to pay for the privilege of staying in traditional Medicare.

REHMBut they...

WALKERAnd this is an idea that Paul Ryan, the incoming Republican chairman of the Budget Committee, has talked about, advocated. They're not exactly similar, as I understand them.

REHMRight.

WALKERBut there is enough similarity there that -- and I don't know, Alice, if you object to the terminology voucherization (sic) of Medicare -- perhaps you do. I don't know. Paul Ryan doesn't. There are certainly some on the left who object to that terminology. But this idea that you can rework Medicare and put more money in the hands of the actual consumers, bring them closer to the marketplace, you're never going to get a pure price point on medical care. But one of the things that continues to create government inflation for Medicare -- medical care is, no one really knows what the price is.

REHMBut, Major, what's gotten the overwhelming amount of press and coverage has really been Social Security...

GARRETTYes.

REHM...not Medicare, Medicaid, whereas at Social Security, increase in age is way down the line.

GARRETTIt's way down the line in both the proposals, and there are different mechanisms to deal with that. I've been in Washington since 1990. And it seems to me that we have more and more third rails of American politics all the time. When I got here, there was only one -- Social Security. But now immigration is a third rail sometimes. There are certain kind of tax policies, kind of a third rail.

REHMTrue. True.

GARRETTWe need far fewer rails in American politics -- that's my one opinionated statement of the morning.

REHMDan Mitchell, I want to know what you think of Alice Rivlin's holiday for payroll taxes.

MITCHELLI'm not a big fan of that for the same reason I'm a little bit sour on this idea of a two-year extension of the 2001 and 2003 tax cuts. I don't think -- unless you're a Keynesian, which I'm not -- but I don't think that you get permanent long-run improvements and job creation productivity and economic output on the basis of short-term tax provisions. We tried this under Bush in 2001 and 2008. It didn't work. We tried short-term, you know, sort of Keynesian stimulus under Obama in 2009. It didn't work. So I just -- I mean, I like the impulse to actually to reduce the tax burden rather than increase government spending, but I just don't think short-term tax policy leads to long-run improvements in output and job creation.

REHMAll right. Let's go to Chapel Hill, N.C. Good morning, Ruth.

RUTHGood morning, Diane. I think that we can do what Robert Gates said about trimming a little off the sides of the Pentagon budget. We are involved in two very costly wars. And if we were to reduce private contracting, we can save $100 billion over five years.

REHMDavid Walker.

WALKERWell, I served as an ex-official member of the Defense Business Board for eight-and-a-half years, and I can tell you that there are plenty of opportunities to cut defense spending beyond what Secretary Gates asserted without compromising the national security of the United States. The simple fact of the matter is, is that we've had longstanding systemic problems with regard to our acquisition and contracting practices that cost us tens of billions a year. A lot of our systems are based upon past threats, rather than current and future threats. You know, we've got too much of a footprint, still, domestically and definitely overseas. And, frankly, our all-volunteer force is not affordable and sustainable over time.

REHMAlice...

WALKERWe're going to have to make some dramatic transformational reforms, or it's going to take us a number of years to do it.

REHMAlice, what did the two commissions say?

RIVLINWell, both commissions basically agree with what David Walker is saying. There is a lot of opportunity for saving in defense just by making it more efficient, making our contracting process less wasteful. And, beyond that, we need to think what we are doing in the world. Is the posture that we have had over the years that we can conduct major wars in other people's countries, is that a sensible thing to be doing?

REHMAll right. To Dallas, Texas. Good morning, Joseph.

JOSEPHGood morning. My comment will be brief. I think that to extend the tax cuts for one year for everyone might be worthwhile. But I think the president should insist that we adopt the taxes that are in the commission's plan which are lower than what our taxes were in the past. But this is not a tax increase as the Republicans want you to believe, and it's not going to help us get our debt under control, which is what they've been crying about. I agree. We need to streamline government, but we need tax revenue. And to let this go for another two years, we'll never be able to get out of the ditch, and he'll never convince the Republicans to adopt anything that he wants to do.

REHMAlice Rivlin.

RIVLINOh, I agree with that. I think we need to reform the income tax so it's much broader-based, get rid of most of -- all of the exemptions and deductions, most of which benefit...

REHMWould you go for a flat tax?

RIVLINNo. I would not go for a flat, meaning...

REHMWould you go for a VAT tax?

RIVLINWell, a flat tax means everybody pays the same rate on their income tax.

REHMRight.

RIVLINNo, I don't agree with that. I think it can be much simpler, much fairer, more progressive, but I would keep a progressive rate structure. In the Domenici/Rivlin plan, we have only two rates, 15 and 27. That's lower than now, but it's still -- it would be more progressive than the current system. And -- but we also proposed -- we don't call it a VAT. We call it a debt reduction sales tax, but it's the same idea. Because I believe that, in addition to a reformed income tax, we need another source of tax revenue that is a broad-based consumption tax.

REHMWhat about that debt reduction sales tax, Dan Mitchell?

MITCHELLWell, I'm not a big fan of a VAT. I don't see why we will want to copy the tax systems of Europe when Europe is in so much trouble. The VAT was a major revenue generator that allowed Europe to create these costly welfare states that have killed growth and created the stage -- set the stage for a fiscal crisis. I admire what was done in the Domenici/Rivlin Task Force, and also Obama's commission, about lower marginal tax rates and getting rid of loopholes.

MITCHELLI've also been a flat tax fan, so anybody who's doing that is going to warm my heart. But, boy, I mean, why on earth would we want to copy Greece and Portugal and Ireland with a value-added tax? We don't want to reward politicians for overspending by giving them a new source of revenue. It's like giving the alcoholic keys to a liquor store.

WALKERIf I could just interrupt you?

REHMMajor Garrett, the -- David Walker, you wanted to say something?

WALKERYes, I do. You know, first, I think we have to recognize we have to do several things in combination. You know, we do need to move more towards a consumption tax approach in our economy. That doesn't mean that we have to replicate what Europe is doing. But we need to combine that with statutory budget controls, you know, discretionary spending caps, reconsideration triggers for mandatory spending programs and tax preferences, you know, pay-as-you-go rules that don't have trillions of dollars of loopholes in it. There's no question, you know, when you think about that.

WALKERThe other thing we have to keep in mind is, while we need comprehensive tax reform and comprehensive health reform -- round two, those issues aren't going to be ripe until the earliest 2013 because none of these commissions had any meaningful engagement beyond Washington's beltway. And there's a major amount of citizen education and engagement that has to take place in order to prepare the way for those types of resources.

REHMAnd, Major Garrett, one wonders, considering the gap between rich and poor that exist today, considering the gap between Republican ideals, Democratic ideals, what's likely to happen?

GARRETTNot much, to be perfectly blunt. And I want to pick up on David's point 'cause I think it's very important. After the president's deficit and debt commission broke up, Kent Conrad, one of the members, said, you know, what we need is a summit. And I covered the last big summit we had in Washington when George Herbert Walker Bush brought the Republicans and the Democrats together, they went out to Andrews Air Force Base and they produced, in the main, a substantial product of deficit reduction that I believe helped lay the foundation for future economic growth in the '90s.

GARRETTBut I would say the politics in America right now could not possibly be more hostile to the notion of a summit -- people in Washington going out in some place, 10 or 12 of them, and cooking up a deal. David Walker is absolutely right. The American people need to be engaged at their level, in their communities where they live and breathe and how they interact with their own federal government. And if you don't do that, if that's not the precursor, you're not going to get -- I don't care how many summiteers you get together in this town. They could produce a fabulous product. The country will rise up against it just because of the level of suspicion and the level of doubt about Washington's ability to do something in their best term -- long-term interest.

REHMAlice.

RIVLINI think that's right unless we have a crisis. And the thing that worries me is that we could have a debt crisis in the next two or three years, a situation in which our creditors around the world and here lose confidence in the U.S. government and the treasury bond, our interest rates go through the roof and the dollar plummets. And then we're in deep trouble, and it's much harder to do anything. But at that moment, the public would say, do something, and something would be done.

REHMAlice Rivlin, and you're listening to "The Diane Rehm Show." Let's go now to Indianapolis. Good morning, James. You're on the air.

JAMESHi. I just had a comment about one of your guests, was speaking about Greece and how we were seeing a lot of overspending there. And then he made a comment that we are 20 years ahead of Greece, and he seems that we're -- that he was okay with that. I am 21 years old.

REHMNo, it was the other way around. I think was that Greece was 20 years ahead of us.

JAMESI -- yes, I'm sorry. I misspoke.

REHMYeah.

JAMESWell, you know, I am 21 years old. I am a junior accounting major in college, and I am completely debt free. I don't have any assistance. I'm out from my parents. I own -- I'm not taking out any loans. And it really upsets me that I'm really careful with budgeting my own money, and it really upsets me that our government and people in government are okay with overspending. We don't have that money. I don't -- my personal opinion is if you don't have the money, you don't spend it. I don't have -- I don't max out my credit card. I pay off all my bills on time. And so, I guess, I feel that our government should be doing the same exact thing and demonstrating financial responsibility with our taxed income.

REHMAlice.

MITCHELLDiane, can I just...

RIVLINI basically agree with you. Congratulations. I predict a long and successful career for you. And as soon as we possibly can -- you can't do it overnight -- I think we ought to get back, as a government, as a nation, to living within our means.

REHMDavid Walker.

WALKERWell, congratulations on selecting accounting as a major. I'm an accounting major and, among other things, a certified public accountant. It's a great major, but, you know, the sad but simple truth is, is American -- America's lost its way. Thirty to 40 years ago, America became addicted to (word?) consumption and debt. We started living for today, rather than preparing for tomorrow. We had a temporary reprieve from the early '90s to 2002 when, among other things, we had two presidents who were concerned about these issues, at least George Herbert Walker Bush and William Jefferson Clinton. We had statutory budget controls in place, and then we lost our way again.

WALKERAnd so government needs to start leading by example. But it does need to understand the difference between the short-term and the structural. More Americans need to be living within their means, but, frankly, they're starting to do that. Americans are cutting back on their consumption. They're increasing their savings. They're reducing their debt. And while government is ultimately going to have to do that, it's got to be careful about how and when it does it.

GARRETTAnd I would say one other thing, Diane. As Americans change their behaviors -- and you see this across the board, you see people buying down their credit, saving more, planning more -- they're going to start sending and evaluating -- they're sending different messages to Washington as they evaluate Washington's behavior. And this is also going to come to the fore because many states around the country have their own budget crises to deal with. And those have to be resolved on a year-to-year basis, right in front of the voters, so this deficit issue is not simply a federal issue, it is a dire state issue as well.

REHMDan Mitchell, you disagree.

MITCHELLI don't disagree. I just -- as I said before, my focus should be, where is the problem? It's government spending. I agree completely with David about going back to what Bill Clinton had. When Bill Clinton left office, the federal government was only consuming 18 percent of GDP in terms of its budget. If we went back to that size budget now, we would solve our fiscal problem, you know, just like that. And so the problem is, we're in debt and deficit because government is too big now. We're going to get in even worse red ink in the future because government spending is going to climb. Let's focus on that. That's the real problem. I don't want a bunch of politicians in Washington deciding that the cure for their overspending is to take more money from the American people 'cause that's what they want to do.

REHMAlice, last word.

RIVLINLast word, I don't think it's necessarily a -- all a spending problem. We are a country that is aging and that has a taste for good medical care. That's going to mean that our government is going to have to pay more and be somewhat larger. We got to pay for it. We've got to get back to living within our means.

REHMAlice Rivlin, David Walker, Dan Mitchell, Major Garrett, thank you all so much.

GARRETTThank you, Diane.

RIVLINThank you, Diane.

REHMAnd thanks for listening, all. I'm Diane Rehm.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our e-mail address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.