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Yesterday House Republicans shifted course and agreed to extend the payroll tax cut without insisting on spending cuts elsewhere to offset the cost. They also largely dismissed the $3.8 trillion budget President Obama submitted for fiscal 2013. His 220 page document which spells out his spending proposal includes higher tax rates for the wealthiest Americans and puts off action on the national debt. The plan is not likely to gain traction in Congress, but it does offer insights into the administration’s election year priorities. Please join us to talk about reaction to President Obama’s fiscal 2013 fiscal budget proposal and the ongoing debate over tax reform, stimulus spending, and deficit reduction.
- Jared Bernstein Senior fellow, Center on Budget and Policy Priorities; former chief economist and economic policy adviser for Vice President Biden.
- Stephen Moore Member of the Wall Street Journal's editorial board.
- Norman Ornstein Resident scholar at the American Enterprise Institute and coauthor of "The Broken Branch: How Congress Is Failing America and How to Get It Back on Track."
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. President Obama's $3.8 trillion budget proposal is falling flat with congressional Republicans, particularly his call for tax increases for the nation's wealthiest. Joining me to talk about the fiscal 2013 budget proposal and to help Republican tax and spending plans compare: Jared Bernstein of the Center on Budget and Policy Priorities, Stephen Moore of The Wall Street Journal and Norman Ornstein of the American Enterprise Institute.
MS. DIANE REHMThroughout the hour, we'll welcome your calls, comments, questions, 800-433-8850. Send us your email to firstname.lastname@example.org. Join us on Facebook or send us a tweet. Good morning, gentlemen.
MR. JARED BERNSTEINGood morning, Diane.
MR. STEPHEN MOOREGood morning, Diane.
MR. NORMAN ORNSTEINGood morning, Diane, and Happy Valentine's Day...
REHMHappy Valentine's Day.
ORNSTEIN...to you and to my wife.
REHMOh, thank you. All right. And before we start talking about the budget, Steve Moore, yesterday, congressional Republicans agreed to extend the payroll tax without spending cuts to offset those costs. First, tell us why and then tell us about the move in general.
MOOREWell, they -- the Republicans caved in on this, Diane, because you recall, right before Christmas, we had a big fight over the payroll tax. Republicans lost that fight. They really got some egg in their face politically. And they didn't want to have this fight again, so they caved in on this. I think it was a bad decision. I think, you know, given what we're going to talk about the next hour, these enormous deficits, the idea of just -- keeps passing tax cuts and passing spending bills without paying for them is how we got to this crisis in the first place.
REHMBut do you see this as the beginning of the spirit of compromise?
REHMYou're laughing, Stephen.
MOORE'Cause I really don't. I think this is just a strategic retreat on the Republicans' part. It's interesting because the companion bill here is the bill to extend unemployment insurance benefits. That's where, I think, the fight is headed because Republicans are going to say, look, if we're going to extend unemployment benefits, we're going to have work requirements. We're going to have drug testing. We're going to not extend the benefits for two years, but maybe a year-and-a-half. So there are still fights to come, I assure you, Diane.
REHMOK. Before we get into the weeds then, Norm, give us an overview of the president's proposal.
ORNSTEINWell, a couple of things to keep in mind about the president's proposal -- all presidents' budgets are political documents. They're not things that are designed to be implemented as written. In a presidential election year, it becomes a little bit more true. In this case, you see some differences from the past, and you see the president putting out some markers. One key element to this is that it's an upfront, I'm-going to-raise-taxes-on-the-rich.
ORNSTEINDemocrats, in the past, have been very reluctant to say they will raise taxes because they get beaten about their head and shoulders politically. Now, there is a clear sense that this is a winner politically rather than a loser. The second key element to this budget, it seems to me, is that there is a direct focus on investment now and spending now so that you can get this economy moving at the expense of short-term deficit reduction.
ORNSTEINAnd so you actually see larger deficits in the next couple of years compared to what we would have seen otherwise and, indeed, out for several years. But it's an upfront acknowledgment that we still have a weak economy, and we better deal with it now. Both of those are going to be key differences between Democrats and Republicans, and part of it is what Steve just said. We're not paying for some of these things.
REHMJared Bernstein, every department across the board is going to feel some cuts but some more than others.
BERNSTEINThat's right. Energy and education do a little better than other departments, in part, because those were the kinds of investment priorities the president has been talking about for longer-term growth. But what you're talking about here, Diane, is an agreement to cut spending on the agencies that was part of this Budget Control Act that you -- I will recall was the resolution of the big debt ceiling debacle.
BERNSTEINActually, the budget that's kind of running the government right now came out of that agreement, and that agreed to $2 trillion in total of spending cuts over the next 10 years. One trillion of those are cuts to this discretionary or appropriated side of the budget that's distinct from Social Security, Medicare, Medicaid. Those are called the mandatory programs. But these discretionary cuts are getting deeper and deeper.
BERNSTEINAnd, in fact, one of the characteristics of the new budget -- in fact, the White House was touting this point yesterday -- is that if you look at the part of this discretionary spending, the kind of appropriations that we decide on every year for the agencies and all the different things that they do: Homeland Security, talked about education, energy, food safety, the FBI, you know, just go right down the list.
BERNSTEINThose cuts, especially on the non-security side, outside of defense, take discretionary spending as a share of the economy down in a few years to the lowest it's ever been on record. So there are some pretty serious deep spending cuts here.
REHMAll right. And to you, Stephen Moore, is this a real document versus a show document?
MOOREI think it's -- you know, that it is a political document. I think it's surprisingly honest. I think that this is basically telling the American people, if I, Barack Obama, am re-elected, here's what I'm going to do. And as we've all said, he's put on the table that there's going to be this gigantic tax increase. I think it would do serious harm to the economy. I think the economy is picking up right now, but I think all bets are off if we have this big tax increase starting on Jan. 1, 2013.
MOOREI don't think it takes the budget deficit seriously. And, to Jared's point, he's right that if all of these cuts take place, you know, we're going to see some severe reductions in these agencies. But I will bet a dime to a dollar that they're not going to take place. I mean, I've been in this town 28 years. I think Norm has been in this town even longer than I have. There's all...
REHMI've lived here all my life.
MOOREMaybe you have. I'm only 42 years. And the -- what's happened -- and this is both parties. We make these grandiose promises that we're going to make cuts in the future, and they never occur. And so -- in fact, on one issue that we haven't brought up, the defense budget takes a very severe hit. Now, Diane, even Leon Panetta, the president's secretary of defense, says that those could be catastrophic cuts. So I just don't believe that they're going to happen. It's that old "Annie" song, you know, tomorrow, tomorrow, you're always a day away.
ORNSTEINDiane, the tax increases here are actually -- and the budget, I think, acknowledges this pretty much up front as well. Every plan that we've had out there -- the Simpson-Bowles commission, the Rivlin-Domenici commission, the Senate Gang of Six -- has come up with the same template: $4 trillion in deficit reduction over 10 years with anywhere between a quarter and a half coming on the revenue's side. And what this budget does is to say, we had those $2 trillion all on the spending side and reductions from the debt limit.
ORNSTEINNow, we're going to look at this holistically. We're not going to say, the next $2 trillion. We'll negotiate and do a quarter of that out of taxes and so on. We're going to actually come up with a formula that includes those revenues. Now, I think there's one problem with it, which is the one that Steve has mentioned, which is that if we indeed let the Bush tax cuts for those making over $250,000 expire in January, the timing is bad. And that's what this budget is talking about. It's saying we've got a weak economy.
ORNSTEINWe don't want to bleed an anemic patient anymore. That's a tricky part. That's one, however, that the president actually has control over because that decision is made in December, whatever happens in the election. At the same time, I do think it's important to recognize that, while Steve is right that we've talked about draconian cuts and usually blink, the changes that have been made in the discretionary domestic budget over the last several years have already been very, very tough.
ORNSTEINAnd this is a portion of the budget that's less than a sixth at this point, and it continues to go down. We've cut the fat. We've cut into muscle. And now, what we see in this budget, even though there are some areas that are going up, like education, national science research, NIH goes down. And we're starting to get at areas of health, safety and security that are going to be problematic.
REHMNorm Ornstein of the American Enterprise Institute. Now, I do want to get to some of the details in this budget. Jared, talk about this proposal to increase taxes on the wealthiest, this so-called Buffett rule.
BERNSTEINThe Buffett rule is actually one piece of the increases on high-end taxes. That's a rule that says if your income is $1 million or over...
REHMIt used to be $250,000. Now, it's a million.
BERNSTEINWell, the $250,000 is still in there in a way. I'll describe in a second.
BERNSTEINThe Buffett rule is specifically for millionaires and up. And that says if you're a millionaire and up, good for you, but you got to pay at least 30 percent on your taxes. The problem we -- that we've been acknowledging lately is that there are quite a few of these folks whose income comes mostly from capital gains and dividends. That's taxed very preferentially in our system, 15 percent. And that's why you see a Mitt Romney or a Warren Buffett paying a 15 percent tax rate, so that's kind of a catch for those guys.
BERNSTEINThe 250 part is that -- Norm mentioned that the Bush tax cuts are scheduled to sunset at the end of this year. What the president wants to do is to keep the middle class tax cuts -- that's up to people whose income is $250,000 or below -- in place but allow the high-end, for families with income above $250,000, to expire. So there still are tax increases in there for people with those incomes above 250K. One other thing that's caught my attention -- I thought this was somewhat underreported yesterday -- this budget ends the favorable treatment for dividend income.
BERNSTEINThis budget takes your income from dividends, from your stockholdings, for, again, just for people above 250, and it taxes it like the rest of your income, like your wage income. So that -- that's actually how we used to do it. Now, it goes back up to where it was.
REHMSteve Moore, what do you think?
MOOREYeah. I just think that would be catastrophic. I think if we're competing in a global economy, I think tax rates really do matter. I think where capital and jobs flow to are -- that taxes are a big factor. And, you know, if we do put in place that plan that the president has proposed, we'll have virtually the highest tax on dividends, capital gains and corporations in the world. That's not a very competitive thing to do.
REHMStephen Moore, member of The Wall Street Journal's editorial board. Short break and your calls. When we come back, questions, comments. Stay with us.
REHMAnd here with me to talk about the president's budget proposal submitted yesterday: Norman Ornstein of the American Enterprise Institute, Stephen Moore of The Wall Street Journal's editorial board, Jared Bernstein of the Center on Budget and Policy Priorities. Here's our first email from Thomas in Miami, who says, "When was the last time a presidential budget was adopted by Congress?" Norm.
ORNSTEINThe answer is never, Diane. Presidents -- you know, before we had the Budget and Impoundment Control Act of 1973, we didn't have a congressional budget. Presidents would submit budget documents, but then Congress would deal with them as individual appropriations bills and individual tax bills. And they were all changed along the way and adjusted. So presidents' budgets are not submitted as a piece of legislation that gets voted on up or down. That's never been true, and that's true now.
REHMDoes the Constitution require the president to submit a budget?
ORNSTEINNo. There's no requirement that a budget be submitted, but it's become commonplace. And certainly in the last 50 or 60 years, you have a time, it's always in January or early February that you get a president's budget, and since the 1950s, you also have it -- since the 1940s, you also have it submitted with, at the same in the year, an economic report of the president that gives you some sense of the state of the economy now and in the future.
REHMAnd his last question, "Who was the last president to submit a balanced budget? I gather that was Bill Clinton."
ORNSTEINBill Clinton submitted not only balanced budgets, but budgets with substantial surpluses, in fact, surpluses so great that Alan Greenspan, then the chairman of the Fed, worried about what we would do when we paid down all of the debt, which is why he supported the Bush tax cuts.
BERNSTEINCould I add a small point to that, Diane? Remember, during the Clinton years, as Norm just pointed out, we had these budget surpluses. We also had the kinds of tax rates that the president is kind of trying to get back to here. We also had a very promising and broadly shared growth. So I stand in very direct contract -- contrast to what Steve was saying, how, if you raise these tax rates, everything explodes.
REHMAll right. Steve Moore, what about corporate tax rates?
MOOREYou know, in -- on April 1, Japan is going to cut their corporate tax rate. Now, why is that important, Diane? Because that will mean we're number one. We will have the highest corporate tax rates statutorily in the world.
MOOREAgain, going back to international competiveness, I hate it, Diane, when I see American factories and jobs moved overseas. I do think if you talk to CEOs of companies and people who do the location of where factories and firms are put, they will tell you that the U.S. corporate tax system -- in fact, Paul Volcker, who headed up President Obama's own tax reform commission, said this corporate tax system is really hurting American's ability to create jobs and factories here in the United States.
REHMNow, in his State of the Union message, President Obama talked about incentives to bring those corporations back. Is there anything in this budget that you see that would do that?
MOOREWell, first of all, on the corporate tax side, the plan is not -- they said we're going to have a plan, but they haven't told us what it is yet.
MOORESo -- but here's the point -- and this is, again, where Jared and I just lock horns. I think if you're talking about tripling the tax on dividends, if you're talking about raising capital gains taxes on investment -- and, by the way, tax -- increasing tax on personal income, those people on the top 2 or 3 percent, Diane, we shouldn't forget, majority of those people are business owners. And a lot of them are small business owners.
MOOREJared, that's where jobs come from, and I've asked you this many times. I mean, how are you going to get more jobs if you're going to raise taxes on the businesses that create the jobs?
BERNSTEINOK. I can answer that. I mean, in the Clinton years, once again, we created about 25 million jobs, OK? That's actually a fairly typical economic recovery. Then we got to the George W. Bush years, where, I would argue, we implemented many of the ideas that Steve was just espousing: lower tax rates, particularly favoring those at the very top of the income scale. That's got us into the problem we have right now. The fact that we're collecting so few revenues, our deficits are so large.
BERNSTEINDuring those years, we created 5 million jobs, OK? Twenty five million, five million, so while Steve continues to hammer on this point that if you lower taxes for those at the top -- very few small businesses, by the way, are in that top group, about 2 or 3 percent -- the evidence is just, you know, strikingly the other way.
REHMOK. I want to move to what the Republican challengers are saying on this tax proposal, Norm.
ORNSTEINWell, on which tax proposal, Diane? On, overall...
REHMWell, generally speaking.
ORNSTEINWhat we know is that Rick Santorum, for example, has proposed dramatic tax cuts in combination with embracing, making permanent all the Bush tax cuts. Santorum's tax cuts would be for almost everybody making over $40,000, but it would mean a drain of revenues of close to $1 trillion a year over and above what the Bush tax cuts would have.
REHMDo you agree with that approach, Steve?
MOOREYou mean, about the revenue loss?
MOOREYou know, I haven't looked all that closely at Santorum's plan. I know one of the things he does is significantly increase the child deduction. He would move a lot of people off the income tax rolls entirely. He wants to move back, I believe, to the 15 and 28 percent rates that we had in the late 1980s. Look, I'm in favor of cutting tax rates as much as possible, as part of a broad tax reform plan.
REHMEven with the kind of job growth you heard Jared talk about.
MOOREWell, I mean, this isn't quite fair. I mean, Jared was very involved in the president's economic program, and there's been...
REHMAnd Bill Clinton's.
MOOREThis president, President Obama's program, and it's been a catastrophe. I mean, we've had the worst, by far, not by a little bit -- by far, the worst recovery from a recession since the Great Depression. We still have, you know, 8 percent unemployment. We -- if you count real unemployment, there is about 20 million people unemployed in this country.
ORNSTEINLet me just talk a bit about Mitt Romney's tax plan...
ORNSTEIN...which cuts taxes dramatically for those making over $250,000 a year, even over and above beyond and beyond what the Bush tax cuts are, and actually raises taxes and cuts out some of the safety net that he had talked about protecting for the poorest among us. It would actually raise taxes a bit, raise the tax rates for working poor people. Now, along with that, Santorum has promised to cut the budget $1 trillion a year over the next five years and balance the budget within five years.
ORNSTEINMitt Romney has said that he wants spending to drop to 17 percent of GDP. It's currently 24 percent of GDP with taxes not rising to more than 20 percent. But he's also said he will balance the budget, which means taxes at 17 percent of GDP. Right now, they're just over 15 percent. So what we have is if this is -- the president's budget is a campaign document, the promises that Romney and Santorum made, which they reiterated at the CPAC, the Conservative Political Action Conference, this last week, are basically beyond unrealistic.
REHMAll right. Let me ask about some of the specific infrastructure programs the president hopes for, Jared.
BERNSTEINActually, one of them, I think, we've talked about on this show before. He, once again, proposed some of the ideas that were in his American Jobs Act. I think this was some good ideas for the current economy right now, which is getting better, but isn't out of the woods by a long shot. We still need some fiscal boost here. And, by the way, the payroll tax we talked about earlier, helps in that regard, payroll tax cut.
BERNSTEINOne of the ideas is to Fix America's Schools Today. We call it FAST, and this is to help public schools across the country work down their maintenance backlog in the interest of energy efficiency. And then there's about $250 billion in there paid for, in part, by savings from the wars because they're winding down more quickly than the Congressional Budget Office assumes, so there's some budget savings there. And that's for transportation. That's for roads and bridges. So those are programs that, I think, are actually quite important to getting our infrastructure up and running.
REHMWhat do you think about that, Steve Moore?
MOOREI just -- I don't -- first of all, I don't think the federal government should be involved at all in building schools. That's what...
BERNSTEINIt's actually repairing, not building.
MOOREWell, building and repairing schools. I just think that's the responsibility of -- that's why we pay our local property tax. But I -- what I object to kind of, Diane, is this idea that we have all this money we can spend.
MOOREI don't think people in Washington get it. I mean, this is a big, big financial crisis that we've created with these enormous deficits, and I don't think either party right now, quite frankly, is really serious about dealing with these enormous deficits. I mean, when I first came to town, we talked about the budget and the deficits in the billions of dollars. Now, we're talking about it in the trillions of dollars.
ORNSTEINDiane, you know, there's a dilemma, first of all, that all of our major countries face right now. When you have a downturn caused by a financial crisis, you have the need to deleverage. You have enormous debt, but you have a deep downturn. And you need to make sure you keep an economy moving and having growth in the short run, and then make a smart pivot to dealing with the debt.
ORNSTEINIf you look at what Britain has done, which is to throw out Economics 101 and say, we're going to build confidence by making deep cuts and have tax increases now, it's not working. In fact, it's like bleeding the anemic patient. You look at what Angela Merkel is demanding of the other countries in Europe, and it's stifling growth and worsening the problem. So we have that dilemma here. The president's taken one approach.
ORNSTEINI do think that what Republicans in Congress have shown, and the presidential candidates, is that deficits are of less significance to them than in many ways either protecting the tax cuts, the Bush tax cuts -- all of them, including for the rich -- or some other priorities. Let me just make a -- one additional note on the jobs issue that we've been talking about. You know, our corporate tax rate is the highest, but the effective tax rate is not because we've got all kinds of breaks in there.
ORNSTEINWhat President Obama has proposed -- and I think there's a consensus on this -- is we need to lower the rate. He said, but let's do the same thing that we usually do with tax reform, which is to cut out all the deductions. And what corporations have said is, no, no, no. We want to lower the rate, but we want to keep all of those basic breaks in their entirety. And we now have another debate because the president is proposing a series of additional corporate tax breaks to try to encourage jobs to come back home.
ORNSTEINWhether that's effective, we don't know. What we do know is corporations are making higher profits than they ever have before, and they're not creating jobs. So it's got more to do with other factors than just tax rates.
BERNSTEINThat's a great point. Corporate profits, actually, in the most recent quarter, were the highest they've ever been on record as a share of national income. So for all this complaining about taxes, they're actually doing very well.
BERNSTEINLook, it's one thing to throw around billions and trillions. I think we need to lay down something that hasn't come up in the conversation yet. In this budget -- and we can have a good conversation about whether this budget is a campaign -- political document enacted. But just looking at the numbers, this budget achieves a sustainable debt-to-GDP ratio by around 2017.
REHMI don't know what that means, Jared.
BERNSTEINI'm going to explain that. By 2016. Yes. Probably a lot of -- listeners don't know what that means either, and I'm going to explain it. It's kind of the Holy Grail of fiscal rectitude, fiscal stabilization. What it means is that no longer is your debt growing faster than your economy. For a few years now, the debt has been growing faster than the economy, and that means every year the debt is a larger share of the economy. And that's the definition of unsustainable.
BERNSTEINIf your debt is growing faster than your underlying economy, ultimately, it will explode. So the first thing you have to do is get that debt-to-GDP ratio on a stable path. This budget actually achieves that.
REHMJared Bernstein of the Center on Budget and Policy Priorities. And you're listening to "The Diane Rehm Show." Now, what about health care reform and that effort in this budget, Stephen Moore?
MOOREWell, I think this is -- this gets to the crux of the matter of what I object to in this budget. I think almost everyone agrees that, you know, the big boulders, the drivers of our debt are health care and the big entitlement programs like Social Security and welfare programs. And what I object to about this budget is there's virtually nothing that deals with those. And, you know, Norm, when you were talking about the problems in Europe -- and we all know those are very substantial -- I mean, I diagnose the problem a little bit differently than he does.
MOOREI think the problem in Europe is they have these enormous cradle-to-grave entitlement programs. They've created a very expensive entitlement welfare state, and they have very high taxes to pay for, and the whole system is crumbling. My point is we should be looking at Europe and saying, my God, we don't want to go over that same cliff. Let's deal with these entitlements before we have people rioting in the streets, like they have in Athens, Greece.
ORNSTEINWell, certainly, I'm a little disappointed in this budget in that sense, that the president does not specifically take on, in a big way, the problems of Medicare and Medicaid. What's also true is that there's been -- he sent a very clear signal during the negotiations over a grand bargain with Speaker Boehner.
ORNSTEINAnd the Democrats -- Democrats like Chris Van Hollen, the chair -- the ranking Democrat on the House Budget Committee, and Kent Conrad, the chair of the Senate Budget Committee, made it very clear that, as part of a larger deal that will include revenues, cuts in defense and discretionary domestic spending and big changes in those entitlements, they would move very much in that direction. The budget doesn't do much on that front.
ORNSTEINWhat I've also been disappointed by, though, frankly, is that there is a significant amount of that in the Affordable Care Act. And, to me, the critical provision is this independent board that would actually do what Congress has failed to do repeatedly. Whenever there are changes proposed in Medicare that might bend the cost curve, Congress has come in and countermanded them to basically mollify seniors and providers.
ORNSTEINAnd so the whole point of this is to take this out of their hands and give it to a group of independent people who have to go through a political process, but then Congress would vote on it up and down, it's like a base closing kind of thing. And that's one that Republicans, all the presidential candidates and congressional leaders have vowed to eliminate as quickly as possible, which I think is a -- is unfortunate.
BERNSTEINActually, the budget has -- and I'm looking at table S-3, if you're following along at home -- $446 billion in deficit reduction for health and other mandatory initiatives. Now, I think that Norm has -- and others have a point if they're saying that doesn't solve the problem. They're absolutely right. I can't imagine a single budget that solves this problem. What this does -- and I actually give the president a lot of credit. He's gotten way out of a lot of Democrats' comfort zones here. He has put Medicare and Medicaid cuts on the table. Those are entitlement cuts.
BERNSTEINMany Democrats quake at the idea of such cuts, and they're of a significant magnitude: on the Medicare side, something like $300 billion-plus in cuts over 10 years, on the Medicaid side, less than that. Frankly, Medicaid is a pretty tightly run program, and it's hard for me to see how you take bucks out of Medicaid without hurting beneficiaries.
MOOREIf we're going to get serious about the deficit, the single most important thing we have to do is repeal Obamacare. I mean, we can't -- we've got enormous...
BERNSTEINThat would increase the deficit.
MOOREWe -- look...
BERNSTEINThat would increase the deficit.
REHMLet him finish.
MOORELook, Obamacare's CLASS are going to explode. You can't put $30 million more people on the government rolls, which is essentially what Obamacare does it. It's about 30 more -- million more people in the Medicaid and other government-subsidized care, and expect for that to reduce the deficit. If you really believe that, Jared, I know that they've kind of cooked the numbers...
BERNSTEINIt's the CBO.
MOOREBut -- yeah, but they just -- they cooked the numbers. They used, you know, 10 years of revenues for eight years of benefits. But the point is, I think that's the number one priority for the country's fiscal situation...
REHMNorm, where do you come out on this argument?
ORNSTEINI actually think that putting more Americans on the rolls is going to, in the long run, not only benefit the society, but actually save money. Having people who don't have insurance is not cost-free to the government or the society. What I'd hoped would happen is that we would get a bipartisan agreement that would also bring in some additional cost savings, including things like defensive medicine. And there are still more areas we could turn to there, but we've got some good starts.
REHMNorman Ornstein of the American Enterprise Institute. Short break and we'll be right back.
REHMAnd it's time to open the phones. First to Baltimore, Md. Good morning, Garth, you're on the air.
GARTHHi, Diane. Thanks for having me on.
GARTHI go to a -- yeah, Stephen Moore, he's a very humble guy, but I have to say that (unintelligible) Republicans when they make those comments about how if you raise taxes, you know, it's going to hurt investment and jobs and all that, and if you cut taxes, of course, that will lead to investment and more jobs because of these job creators or whatever. But the point is, as far as I -- what I understand is studies have shown quite the contrary, that there really isn't any evidence for that.
GARTHBut it's put out there as a truism, which, in many cases -- and many Democrats sort of concede it -- and as a result -- and we have seen it sounds sort of logical, but I think the evidence is to the contrary.
REHMAll right, Garth. Thanks for your call, and you're absolutely right. Stephen Moore is a very affable man. Go right ahead, Steve.
MOOREWell, first of all, I'm going to do a self -- shameless self-promotion and recommend this gentleman read my book called "The End of Prosperity" where we really go through the whole history of what's happened with tax changes over the last 50 years. And I think the evidence, myself, is pretty clear that -- look, I'm not saying taxes are the only thing that matters. There's a lot of things that matter.
MOOREBut I think in an ideal situation, you want a tax system that has a broad tax base and the lowest rates you can get that are the least distortionary. And I think it's more important now than ever because we are living in a global world where people can invest their money in India or China or Japan and China. And I just keep saying that if we move towards being the highest tax rate country in the world, I just can't see how Jared thinks that's going to put us in a strong competitive situation.
BERNSTEINWell, I mean, we're very much one of the lowest tax countries in the world...
MOOREI'm talking about rates.
BERNSTEIN...if you actually look at what people pay in their taxes. That's what really matters, the effective tax rates, what people pay. And as a nation, we're quite low relative to other advanced economies. Look, I've been having this argument with Steve for as long as I've known Stephen.
BERNSTEINI guess maybe we'll never resolve it. The only thing I can cite is what the caller, I thought, picked out of -- just kind of a common sense evidence. If you actually think about the times when the economy was applying these kinds of supply sides, Steve Moore ideas, it generally did a lot worse, except for one dimension. Inequality got a lot more concentrated. Income became a lot more concentrated at the top.
BERNSTEINYou had -- what happens when you had cut taxes for people at the top is that they have a lot more after-tax income, and that's about it. And we've seen it time and time again.
MOOREWell, we had a lot of growth...
BERNSTEINI don't know...
ORNSTEINJared, we don't know what...
MOOREWe did have a lot of growth in the -- I mean, we had a huge...
BERNSTEINI don't know what it will take for us to learn this lesson.
MOOREWhat about the 1980s?
REHMAll right. Let's go to Orange City, Fla. Good morning, Russell.
RUSSELLGood morning, folks. Happy Valentines Day. I love you all.
RUSSELLI have not heard the words redistribution of wealth in this conversation yet, but I would like to bring it up and say that it's this comment that keeps being thrown out. Wealth is something that he already has and to redistribute that would indeed be an immorality. What really needs to happen is a massive realignment of the primary distribution of gross domestic product. It is the gross domestic product, not the gross amalgamation of 300 million individual products.
RUSSELLAnd from the end of World War II till about 1980, we had a pretty decent balance and distribution. And in that time, we paid off the debt that we incurred in World War II and grew the largest, most successful middle class in the history of the world by reinvesting a big portion of our GDP back into the country.
REHMAll right. Jared.
BERNSTEINI actually think that that's a great point. What the caller is talking about is that all of this inequality, that's become such an important issue these days because of the excessive concentration of income and wealth at the very top of the scale to levels we really haven't seen since the late 1920s, takes place before taxes. That's what the caller is talking about. This is what he called the primary distribution. He means the market outcomes, your wages, the asset appreciation you get if you hold capital gains or dividends.
BERNSTEINAnd I think what the caller is suggesting is you're never going to, like, fix that through redistribution. There's never going to be a tax system that sort of equalizes outcomes. That's nothing we should ever aspire to. What you want is a system that equalizes opportunity, and that, I'm afraid, we're still pretty far away from.
REHMAll right. Here's an email from Jason in Kalamazoo. He says: "Mr. Moore keeps referring to the catastrophic effects of the tax increase on the wealthiest of our society. Can he point to an example of this in recent history? I don't remember the Clinton, George H.W. Bush or Reagan's tax increases devastating our economy."
MOOREYeah. Well, I mean, I think if you look at what happened in the 1970s, the economy was in ruins, the worst -- you know, the worst period for the economy since the Great Depression. And we had -- you know, this is where I disagree again with Jared. I mean, we had big tax rate reductions. The top tax rate went down from 70 to 28 percent, which is a huge reduction of tax rates, and we doubled the tax revenues. There was a -- there was so much growth that happened in the economy.
MOOREAnd one of the things that I find troubling about the president's proposal is I thought the idea we were going to -- is that we were going to try to reform the tax system by bringing rates down. And the president says he wants to reform the tax system, but he wants to raise the tax rates up.
ORNSTEINLet me take a position that's slightly between the two of these wonderful gentlemen. The first is, when we went to a 36 percent top tax rate to 39.6...
ORNSTEIN...during the Clinton years, Armageddon did not occur. And, in fact, we had some very robust growth. At the same time, in an ideal world, you would have lower rates, and you would have a broader distribution of responsibility and burdens. And you could do that while still having a progressive and a highly progressive tax system. It would be nice if we could get tax reform. In my ideal world, we would eliminate a payroll tax, which is a tax on jobs and have a carbon tax to replace it.
ORNSTEINI think we ought to have a consumption tax over the long run to replace a good share of the income tax. And these are not ideas that necessarily divide liberals or conservatives. Part of the problem we have is, as we cut budgets, the temptation is to add more tax incentives and disincentives as ways of accomplishing policy goals that you can't do through the budget. And so you inevitably encrust this system.
ORNSTEINBut we have an opportunity, if we could get over the dysfunctional tribal politics that we have right now, to actually create a tax system that could be a model for the rest of the world instead of one that's imperfect at best.
REHMSteve Moore, which parts of the president's budget will you see Republicans supporting?
MOORENot a lot of it. I mean, I think it's a fundamental -- I think there's a fundamental philosophical disagreement between the Republicans and Democrats...
REHMSo how do we move forward between now and November?
MOOREOh, I really don't think a whole lot is going to get done before the election, but I think this -- the reason we're having this discussion about the president's budget is this is what the election is about. Do people want higher tax rates? Do they want Obamacare to take effect and put all these -- more people on government health care? Do they want almost no reforms in the entitlement programs? Those are going to be the issues that are decided.
MOOREAnd I hate to use the term, but I do think the theme of this election will be Republicans are going to be talking about growth and saying that the president's proposals on the economy have been a disaster. And Democrats are going to say we have to redistribute income from the rich to the poor.
BERNSTEINI actually think Republicans may embrace not so much in this budget. As Norm said earlier, things are going to change a lot. They may embrace the spending cuts. Remember, there are some pretty deep spending cuts here. And for every dollar of deficit reduction -- and there are over $4 trillion of deficit reduction in this plan. For every dollar of deficit reduction, 60 cents comes from spending cuts. Forty cents comes from tax increases.
REHMAll right. To Elkhart, Ind., good morning, Randy.
RANDYHi. In Ireland, multinationals built tens of billions of dollars worth of factories. Their tax rates are between 12 and 15 percent for corporate taxes. Do you think that if we lower our tax rates, corporate tax rates, by half that those international corporations are going to go to the government of Ireland and say, hey, America just cut in half its tax rates. If you can't do the thing, you're going to lose jobs, jobs, jobs as we slowly move out of here.
REHMWhat do you think, Jared?
BERNSTEINNo. I don't think they will for a second. I actually think that the president is trying in this budget to tap something that's kind of important in the spur of what Randy just brought up, and that's insourcing. That is what we're starting to see a little bit more of now -- and it's at the level of anecdote -- is companies that were abroad, these multinationals, coming back. And he's trying to create some tax incentives in this plan to hasten that return.
REHMJared Bernstein, he's at the Center for Budget and Policy Priorities, Steven Moore of The Wall Street Journal's editorial board and Norman Ornstein of the American Enterprise Institute. You're listening to "The Diane Rehm Show." Norm.
ORNSTEINI wanted to come back to the question of what Republicans might do here, Diane. In -- probably, in the next three weeks or so, we're going to get a Republican alternative budget that's a little more realistic compared to the presidential candidates who are just off the charts. That's Paul Ryan's budget. Now, Paul Ryan's already laid out his markers in previous years' budgets.
ORNSTEINThey include very substantial, additional tax cuts spread out over a period of time, much deeper cuts in discretionary spending, and things like turning Medicaid into a block grant with a substantial cut to give it back to the states and, of course, in 10 years, taking Medicare and changing it into a program where there's competition. Now, you know, over the 10 years in between, by the way, he embraces the $500 billion in cuts in Medicare that were a part of the Affordable Care Act.
ORNSTEINBut he's made a change in his Medicare program, and that is to say, not only will there be private competition on exchanges, but Medicare can also compete here. This is something he's done with Ron Wyden. Now, if you want a spirit of compromise, I think what the president should say to Paul Ryan, is this is a wonderful idea. Let's extend it to everybody. Because, in effect, what Paul Ryan has now embraced for Medicare is the public option. If it's good for those over 65, why wouldn't it be good for those under 65?
BERNSTEINIt's an interesting idea. I mean, I think the Affordable Care Act, which is, you know, very much legislative. I think (unintelligible) we talk about this is if it's still sort of up in the air. It -- contrary to a point that was made earlier, according to the Congressional Budget Office -- and that is the score keeper. I mean, if we throw out the score keeper, we're kind of just at the mercy of different partisan's numbers -- saves over $1 trillion from the deficit over the course of the next -- a couple of decades.
BERNSTEINNow, we'll have to see how that unfolds. I totally agree that that -- you know, that that may or may not be the case, but that is on the books.
REHMAll right. Steven, what do you think about the Ryan proposal?
MOOREYeah, I'm so glad Norman mentioned it because I forgot to, and I think that is going to be the Republican alternative. And it is a pretty bold, daring document that says we got to make some pretty deep cuts. We got to grow this economy by making our tax system more competitive. It does take on these big boulders of entitlement. So I think it's a gutsy proposal, and those are going to be the two kind of polar opposites, the Obama budget and the Ryan budget.
REHMAnd do you see room for compromise?
ORNSTEINIn most of these areas, in the short term, no. And by the way, the Romney budget cuts spending much more severely if you accept his pledges than the Ryan budget does. So that's also going to be out there and presidential candidates may dominate. Where you could have a compromise down the road, presumably, is on the health care front. Once you open up the idea that you'll keep Medicare, and it will have to compete on the same exchanges as the ones in the Affordable Care Act for those under 65, you at least have an opening for a discussion about how you can create a broader health care.
BERNSTEINI agree with that.
BERNSTEINYou know, one thing about Ryan, though -- to understand about Rep. Ryan's budget, it cuts about $3 trillion in spending from low-income programs, and it turns around and just kind of delivers those savings to those at the very top of the income scale.
REHMDo you agree with that, Steven?
MOOREWell, I think, that -- look, then what it does with a lot of the low-income programs, like the welfare programs, is it turns them back over to the states, which I think is what we'd have...
REHMBut the states are broke.
MOORENo. But the -- actually, Medicaid is what's bankrupting the states. Medicaid is the biggest boulder of state budgets right now. And it's all dictated by Washington. A lot of the governors are saying, give us the authority of those programs, just give us a block grant of money, less money, but let us spend the money the way we want to. That seems like a good deal for taxpayers and states.
BERNSTEINSo -- block granting is a great way to kind of surreptitiously cut these programs. One area we saw that, by the way, is what you call welfare, and that was called temporary assistance for needy families.
BERNSTEINThat was turned into a block grant. And for 15 years, that block grant has been frozen as the economy has grown, as poverty has gone up. And we have found that this program TANF has become terribly unresponsive to recession, whereas other programs that are run by the Feds, like food stamps, have been very responsive. So it's just a backdoor way to cut the heck out of what we're talking about there.
ORNSTEINMedicaid is an issue that has gotten much less attention than Medicare. And I think it will get a lot more attention. The single, largest component of Medicaid is long-term care for the elderly. As this goes back to the states, you're going to see very, very severe cuts in nursing homes and other facilities. At the same time, we've had, of course, a sharp increase in the roles of those on Medicaid because of the high unemployment.
ORNSTEINAnd that high unemployment is going to continue for a significant period of time. I'm not sure -- you know, the president's budget is based on assumptions before we got these latest and more robust job numbers that proposed, that suggest that we're going to have unemployment well over 8 percent for a substantial period of time. But we know we're going to have higher unemployment, and we know that we've got lots of people in their 50s and 60s who've lost jobs, who are probably not going to find other jobs.
ORNSTEINYou start to cut back on the basic benefits in some of these programs, and Medicaid, the main cut has been in providers. And doctors aren't even taking Medicaid patients, so that's the real problem.
MOOREAll right. You know -- but, you know, Diane, you said something very interesting a minute ago. You said, the states are broke. And I guess my response to that would be Washington is broke. I mean, this is the problem. I mean, we can't continue as a nation to borrow $1 trillion year after year after year.
MOOREAnd even if you take what I believe are to be fantastic assumptions under the Obama budget, even if you agree that every one of these cuts are going to take place, which I don't think they ever will, the deficit never falls below $600 billion for as far as the eye can see. That's not a serious document.
BERNSTEINI actually -- Steve and I had a point of really substantial agreement here...
BERNSTEIN...which is that you're absolutely right. We cannot run budget deficits of this magnitude forever, and one reason we won't is because a lot of these have to with the Great Recession. The point is what we're going to do about it. And there is simply no way we can get on a sustainable budget path on spending cuts alone, Diane. Common sense and everybody knows it's going to take spending cuts and revenue increases both. That's the kind of balance that's going to take us forward.
REHMFascinating. It's going to be just absolutely fascinating to watch this debate between now and November. God, it's a long way away.
REHMJared Bernstein, Steven Moore, Norman Ornstein, thank you so much.
ORNSTEINThank you, Diane. Thank you.
BERNSTEINThank you, Diane.
MOOREThank you, Diane.
REHMAnd you are a very affable fellow, Steve.
REHMThanks for listening, all. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Monique Nazareth, Nikki Jecks, Susan Nabors and Lisa Dunn, and the engineer is Tobey Schreiner. A.C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is email@example.com, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.
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