The Biden administration has released a proposal to raise standards in nursing homes. Why one expert calls it the most significant development for the industry in decades -- and why it might still not be enough.
According to the U.S. Treasury the wealthiest 1% in this country pay about a third of their income to the federal government. Most in this group believe their contribution to federal coffers to be more than enough. Republicans seeking to become their party’s presidential nominee for 2016 largely agree. In fact most propose lowering tax rates for the wealthiest Americans. In contrast, Bernie Sanders, Hillary Clinton and others on the Democratic side favor raising taxes on the super wealthy to give middle and lower income workers a boost. Please join is to talk about economic growth and fairness in the U.S. tax code.
- David Wessel Director, Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution; author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget."
- Roberton Williams Sol Price Fellow, Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.
- Chris Edwards Director of tax policy studies and editor of DownsizingGovernment.org, Cato Institute.
- Jared Bernstein Senior fellow, Center on Budget and Policy Priorities; former chief economist and economic policy adviser for Vice President Joe Biden
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. In his bid for the 2016 Democratic presidential nomination, Bernie Sanders argues we need to sharply raise tax rates on America's super rich. His Democratic competitors largely agree, but most Republican candidates have the opposite view. Higher taxes on the wealthy, they say, will slow growth and hurt wage earners at all levels.
MS. DIANE REHMHere to talk about growth and fairness, David Wessel of The Brookings Institution, Roberton Williams of the Tax Policy Center, Chris Edwards of the Cato Institute and Jared Bernstein of the Center on Budget and Policy Priorities. I'm sure many of you have your own views. Share them with us. Give us a call, 800-433-8850. Send an email to email@example.com. Follow us on Twitter or Facebook. And thank you all for joining us.
MR. CHRIS EDWARDSThank you, Diane.
MR. JARED BERNSTEINGreat to be here.
MR. DAVID WESSELGood morning.
REHMJared Bernstein, I'm going to start with you. There was a piece last week in the New York Times by Patricia Cohen on what the government could do if taxes were raised on the top 1 percent. What was your reaction to that piece.
BERNSTEINWell, my first reaction was because there's been -- it was a great piece that everyone should read and I thought one of the points she made was particularly germane and salient. Because there's been so much income and wealth concentration, that is, most of the growth in the economy has gone to the top 1 percent and within the top 1 percent to the richest folks within that group, even relatively small increases in tax rates on the wealthiest households would yield billions and billions of revenue because, again, that's where the growth is going.
BERNSTEINNow, we face a revenue crunch in this country. It's one of the reasons why we're suffering with sub -- with an infrastructure that's not as good as it should be and why we are worried about budget deficits and meeting our national bills and all the rest of it. And so I think the key point from that article was with some very slight increases at the top, we would have the revenues we need to meet much of the needs that govern faces these days.
REHMDavid Wessel, tell us about this 1 percent. What do you need to make that category?
WESSELWell, according to Emmanuel Saez, who's an economist at the University of California, Berkeley, in order to make the top 1 percent, you have to have cash income, that is the kind of paychecks and stuff like that, of about $425,000 a year to make the 1 percent. Bob Williams at the Tax Policy Center, they do a different calculation where they count a lot of income that doesn't show up on your tax return, like the value of the health insurance your employers provide and stuff.
WESSELAnd to make the top 1 percent for that -- by that calculation, you have to have about $700,000 of income. So, obviously, it's a lot of money. And the reason that there's so much focus on it is that over the past 35 years, the gains have gone much more to the 1 percent than to the rest of the population. Emmanuel Saez calculates it between 1993 and 2014, 80 percent of the growth adjusted for inflation went to people at that top 1 percent and only 11 percent to the other 99 percent.
REHMAnd to you, Chris Edwards, as a whole, that group contributes about what percent of the total U.S. taxes?
EDWARDSActually, this is Tax Policy Center data, too. The top 1 percent actually pay 44 percent of all federal personal income taxes, which is absolutely remarkable. I think raising tax rates on that group would be very damaging because in -- to generalize, those folks are business people. They're executives. They're brain surgeons. They're venture capitalists, angel investors. These folks, in general, in my view, are the most productive and hard working people in the entire economy.
EDWARDSIf you tax them more, they will do less productive stuff, like working and investing and they'll do more unproductive stuff like tax avoidance and evasion. So we want these folks to work hard and when they work hard, they benefit all of us.
REHMOf course, we're talking about -- you mentioned personal income. Bob Williams, explain the difference between personal income and the rest of the income.
MR. ROBERTON WILLIAMSWell, personal income tax is the biggest single source of revenue for the federal government, but we also get a lot of money from the payroll taxes that support Social Security and Medicare. We get a fair bit from the corporate income tax. We collect a little bit now from the estate tax, although less than we used to collect. We have excise taxes and a few other miscellaneous taxes that add up the whole.
REHMSo explain for some of the assumptions that Patricia Cohen made in her article.
WILLIAMSWell, here assumptions were fairly simplistic, but not in accurate. She said, suppose we take all the income that goes to these top groups, the top 1 percent, and they get an average of about $2 million apiece. Suppose we taxed every bit of that at a higher rate than we currently do. Right now, they're paying about 33 percent of their income in total federal taxes.
WILLIAMSPersonal. Well, this is all income. All taxes.
WILLIAMSSo the full tax bill for all these taxes, about 45 percent of that is individual income taxes, but their share is a bigger share of that whole than just the 45 percent. But overall, 45 percent of taxes come from personal income tax. In any case, about a third of their income goes to all federal taxes. Her assumption said suppose we raise that to 40 percent, bumped it up by about 6 percentage points, how much money would we get in? And she said if we did that, we could bring about $160 billion a year.
WILLIAMSIf we went further and bumped it to 45 percent, we could bring in about $275 billion a year. That's a big chunk of change and would do a lot of -- give a lot of what Jared wants to bring in, to do the things we need to do to help balance our budget and do a lot of infrastructure development. But to do that, we have to tax everything, every bit of income, including these additional pieces that we measure that others don't such as the personal health insurance that -- the premiums for health insurance paid by your employer that build up inside your retirement account, all these things that are not now taxed. And a big part of personal income is not subject to tax.
REHMI want to ask, though, about the difference in personal income tax and corporate income tax, that is -- and what I'm trying to concentrate on is capital gains for the individual. Those are two different tax rates and I want to understand the difference in the taxation rate and how that would make a difference if you raise the capital gains tax to the personal income tax rate.
BERNSTEINThere are two aspects to the capital gains. First, capital gains realizations are voluntary. You don't have to sell your asset and have a gain so higher taxes and people may say I'm not going to realize this gain. I'm not going to sell that stock. I'm going to hold onto it longer. Lower tax rate, they might sell it more quickly and we saw some of that back in the '80s when we raised the tax rate a lot and people sold quickly to get out from under the coming new tax rate. We do tax capital gains that are long term, that is on assets owned more than a year, at a lower rate than we tax ordinary income.
BERNSTEINThe top rate now on capital gains is 20 percent rate, plus if you're a high income person, you pay another 3.8 percent for the Affordable Care Act. Top of 23.8 percent. In contrast, the top individual tax rate is 39.6 percent plus another 3.8 percent so you're talking north of 40 percent. So roughly twice as high a tax on ordinary income than it is on long term capital gains.
WESSELSo I'm not quite so enamored with this New York Times piece because it over simplified the thing. What it didn't tell you was in order to raise the amount of money you get from these very wealthy people, you'd have to raise their marginal tax rate, that is the tax they pay on each additional dollar of income quite a bit, like to the over 50 percent level. And we don't know at what point do higher tax rates actually discourage work or encourage tax evasion. Chris and I probably have a different view on what that is, but we know at some point, you start to -- it's not productive.
WESSELBut I think that you put your finger on a separate issue, which is so we tax ordinary income. That's wages, interest. We tax capital gains and dividends at a lower rate because the thinking was, the recent thinking has been that will encourage people to save and invest. In the famous 1986 tax reform act, we decided the opposite. We taxed everything at the same rate. So just one little fact, and I'm afraid there's gonna be so many numbers floating around this conversation no one will be able to remember any of them, but the joint tax committee of Congress has said, how much money would you raise if you tax long term capital gains and dividends at a 2 percentage point more than we do now? And they say over 10 years, that would raise about $50 billion. Not a ton, but that's real money.
BERNSTEINWell, one point that I wanted to maybe correct is that it's not necessarily the case that you'd have to raise marginal tax rates on the wealthy to collect more income. Now, it sounds like, well, how else could you do it? That's sounds obvious. In fact, what you could do -- and I think what you should do, because David has a point, is close some loopholes. Let me suggest a couple of them briefly. One is called step-up basis. All these things have confusing names so that no one will understand them, but this one's actually pretty simple.
BERNSTEINIt's a way in which people who die, expire, can pass on their capital...
BERNSTEINPlease, I'm trying to make this a little soft.
BERNSTEINIt's early Monday morning. I don't want to get into death right away.
REHMAnd what you're going to have to do is hold that step-up basis...
BERNSTEINOkay. I'll get back to that.
REHM...till after we come back from a short break and I'm sure many of you will want to join the conversation. Feel free to call us after a short break.
REHMAnd welcome back. Here in the studio, four people talking about the -- what The Washington Post titled Jared Bernstein's piece this morning, "The Elusive Goal of Tax Fairness." David Wessel of the Brookings Institution is here. He's author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget." Roberton Williams is here. He's with the Tax Policy Center. Chris Edwards at the Cato Institute. And Jared Bernstein of the Center on Budget and Policy Priorities was about to talk about step-up basis.
BERNSTEINRight. I'm sure our listeners are on the edge of their seat waiting to learn what this is.
REHMYeah. Right. You're right. Right.
BERNSTEINSo this is the deal where when someone who's rich passes away and they give their inheritance to their progeny, to their offspring, the value of that asset, if it has appreciated over time, is not taxed. That is, if your old Aunt Minnie dies and gives you stock that she bought for $100 and now it's worth $100,000, the government doesn't charge you for the difference as they would with a typical capital gain. It's -- they call -- they step up the value so that it doesn't get taxed at all. And I know someone wrote in with a question about wealth. Well that's a very good way that much of our wealth goes untaxed -- the wealth that people transfer to their kids.
BERNSTEINAnd that's one of the ways that you can get this kind of revenue without even raising marginal rates at all.
REHMAnd the question was, please distinguish between income and wealth. Chris Edwards, how do you feel about what Jared's talking about?
EDWARDSWell I would say, in general, the wealth is a very good thing. I mean think about Silicon Valley. You have people invent new products and technologies. They get wealthy. What do they do with that money? They reinvest it. They fund new startups and they put their money into venture capital. This is all -- Silicon Valley, for decades, has been a wealth generation machine. We were talking about capital gains. When a wealthy person in Silicon Valley, he makes a lot of earnings. He puts money back into highly risky ventures. His return, years down the road, is a capital gain. So if you raise the capital gains tax rate, you're going to get less of this investment in risky ventures. And I think that it's that investment that powers the whole economy over time.
BERNSTEINSo if I may, very briefly, respond. It's not that I don't like wealth and income or people with my view. Boy, we love wealth and income. The difference between Chris and I is he believes that higher tax rates on wealth and income will discourage all the kinds of behaviors that he was just describing. And I think that there's just very little evidence that moderate increases in the kinds of tax rates we're talking about would have those negative impacts.
REHMNow, Bob Williams, isn't defining wealth and income also elusive because the wealthy have ways to get around the tax laws?
WILLIAMSIn terms of taxes, the wealthy have a lot more flexibility in terms of arranging their affairs to avoid taxes. You or I are paid a salary, a check every week or two. And we can't avoid that, we're going to pay taxes on that.
WILLIAMSThe government finds out about it through their W-2s and so forth. People who are very much at the top end of the distribution are making decisions on a different basis. One, when they make contracts with their employers, they can arrange how they're paid, so they're not paid the same way on a weekly or bi-weekly or monthly basis. They can have deferred compensation that comes down the road. They also have the ability to time their capital gains income, when they decide to sell a stock or another asset -- I want to get the income this year because my tax rates are low, I'm going to put it off till next year because my tax rates will be lower then -- a lot more flexibility than we have.
REHMAll right. So now we come to the 2016 presidential race. What is Bernie Sanders proposing, David Wessel?
WESSELWell, I think that -- I think there are two issues here that the candidates are wrestling with, or maybe three. One is, how do we get more money from the government? If you want to spend more money, you have to raise it somewhere. And second -- and also, looking out, way into the future, 10, 15, 20 years -- either we're going to have to cut benefits for people from what they're currently been promised, or we're going to have to raise taxes, or both. And so the question is, where does that money come from?
WESSELThe second thing is, do you think it's a problem that America has become so unequal? And if you do, you tend to think that you ought to raise taxes on rich people and give that money to middle class and poor people in order to reduce the gap between winners and losers. So of all the candidates, Bernie Sanders is the most explicit about saying, I want to raise taxes on rich people and use that money to make -- give -- to spend on government programs and to give money to people at the bottom.
REHMBut how would you do that? How would you give money to people at the bottom?
WESSELWell, there's a number of ways you could do it. One is, we have something called the earned income tax credit, which gives low-wage working people a bonus if they -- if they're qualified. And we could expand that. In fact, it's interesting, a number of Republicans are interested in expanding that, because it gives people an incentive to work. You could make government benefits more generous to the very poorest people. You could reduce the tax rates on the middle class.
WESSELSo, for instance, my colleagues at Brookings -- Melissa Kearney, Bill Gale and Peter Orszag -- have calculate that, if you raise taxes on the top 1 percent a lot -- to like 50 percent marginal rate -- and gave all that money to people at the bottom, just send them a check, you would undo about somewhere between one-sixth and one-fifth of all the increase in inequality that's occurred in the United States since 1979.
REHMBut that's totally unrealistic, isn't it? I mean, if you...
REHM...increased taxes on the wealthy, say, to 50 percent, and that money went to the federal government for use on highway construction, for use on bridge repair, for all of that, creating jobs, wouldn't that...
WESSELYes. Yes. Right.
REHM...be the way you would want to go?
WESSELWell, there -- that's a -- you could -- there are different ways to do it.
WESSELYou could have a revenue-neutral tax bill that raised taxes on the rich and somehow reduced taxes on the poor. That would be one way to do it. You could also invest that money in infrastructure, as you suggest, or education or health care, and aim that at lower-income people, hoping that that would make their lives better and increase the rate (word?) the economy.
BERNSTEINBernie Sanders has actually been very explicit about how he wants to use this revenue and it's not giving money back. So it's not like the Brookings example you mentioned.
BERNSTEINFree college. Bernie Sanders wants to have -- if you go to a public university, your education would be free. It would be paid for by the revenue we're talking about. Child care, universal pre-K, those are the kinds of policies that he would pay for. And by the way, he introduces a new tax, which would largely fall on high-income people, a financial transaction tax, which is a very small tax on each transaction that you make when you sell a security, a bond, a derivative, things like that.
EDWARDSIt's interesting. Earlier, I think, Jared and Bob said things that contradicted each other. Jared said, if you raise taxes on high-income folks, it wouldn't change their behavior much. Bob seemed to say the opposite that -- which I think is correct -- that folks at -- high-income earners, executives, surgeons, those type of people, have highly mobile tax bases. You raise tax rates on them, they will shift their behavior substantially.
BERNSTEINWell, it depends on how much.
EDWARDSHold on, Jared. And corporations, too, at extremely mobile tax bases in the global economy, if you raise taxes on them, they will ship their profits offshore. And it's interesting, you know, Bernie Sanders and folks like him say, oh, these corporations, they move their profits offshore. He's right. He's absolutely right. They do. The mobile -- the corporate base is highly mobile. The solution is to lower the rate, in my view. So Mr. Sanders, in my view, doesn't have the solution to it. I have the solution, which is to lower the rate.
WILLIAMSI tell you, I don't think Jared and I are as far apart as Chris implies. Because while there is a change in behavior, the change is mostly in appearances and not in actual behavior. They're not working less, they're changing how they're being paid for the same work they're doing. So you're not really taking away from the economy as much as it would appear.
REHMAll right. And what about Republicans? What are they suggesting in the way of tax reform? David Wessel.
WESSELThe reason I'm pausing is I'm still trying to figure out exactly what Donald Trump's tax reform looks like. Jeb Bush has the most -- one of the most articulated plans. And he would basically reduce tax rates on a lot of people and broaden the base by closing loopholes. His critics say it would favor people at the top. He says it would increase economic growth.
WESSELOne interesting thing is a number of Republicans and some Democrats are targeting a loophole -- one of the many that Jared didn't have time to mention -- which is this thing called carried interest, as long as we're doing jargon here, which says that people who are in hedge funds and private equity funds get to count some of their wage income -- what a lot of us think as wage income -- as if it were capital gains and pay at a lower rate. I believe both Marco Rubio and Jeb Bush have talked about raising that one.
REHMHow do you like that one, Bob Williams?
WILLIAMSWell, that's a good one to deal with. The problem is, it's not as simplistic as either side makes it sound.
EDWARDSUnlike every other issue.
WILLIAMSOf course. Of course. And it doesn't bring in a lot of money. It's a few billion dollars a year, which is, again, not trivial, but it's not going to solve our budget problems. We need to go somewhere else to solve the budget problem.
REHMSo how many loopholes can realistically be closed, Jared?
BERNSTEINWell, with this Congress, maybe none. That's one of the problems we've had. And, in fact, it's -- I shouldn't be so glib because it's not just the Congress. Actually, there are members on both sides of the aisle who would like to lower the corporate tax rate and pay for that by closing some of the, I guess what you might call loopholes. Some -- industry would say, loophole? That's my job creation program. But things like accelerated depreciation, so that, when you buy a piece of equipment, you can expense, you can take off of your taxes the full cost right away. Those kinds of tax breaks would have to be closed. And industry opposes them. So between the politicians and the lobbyists, it's very tough to close these loopholes.
EDWARDSHere's how to think about tax reform. The bottom half -- 45 percent, according to Tax Policy Center -- don't pay any federal income tax at all. Think about tax -- so let's not change the code for them. Let's change the code for moderate and high-income people. If you look at people at the top, they pay statutory or legal rates up over 40 percent now. But their effective or actual rate is 25. So if you eliminated all the loopholes for folks at the top and you used the money to lower their rate, we'd get to 25, which is what a lot of the Republican plans do. That would be better for everyone. There would be less cheating. It would be a flat rate. They would work harder. It would be better for everyone.
WESSELWell, let's just -- when you -- so the mortgage interest deduction, that's a loophole?
EDWARDSYeah. I would get rid of that. I would get rid of the muni-bond exemption. I would get rid of the state and local tax deduction. I'd get rid of just about all of them.
WESSELNo, and, so I think, I believe two things. One is, it's really hard, as Jared said. And every effort to do this turns out to be a huge political controversy. Affordable Care Act has a tax on very expensive health plans and that stands a chance of being repealed. The president proposed, for about 15 minutes, limiting the tax breaks for upper-middle class people on college savings and that dissipated. The lesson there is don't go after a tax break that every member of Congress and every journalist in Washington takes advantage of.
WESSELBut I think, also, that, inevitably, we will do something. I don't know how we're going to get there but there is a growing consensus that the tax code is way over-complicated, not encouraging growth, encouraging a lot of wasteful effort of people coming up with fancy tax shelters. So that, I don't know when it's going to happen, but I would guess within the next decade we will do some tax reform.
REHMBob Williams, talk about what we know from history about the correlation between tax rates and economic growth.
WILLIAMSWe really don't know a lot. And the reason is, in different times we've seen different effects for tax changes. If you look to the early 1980s, there was a big tax cut under Ronald Reagan. It was quickly reversed. We saw the economy first slump and then grow very rapidly. That suggests that cutting taxes did cause the economy to grow somewhat. A few years later, Bill Clinton in office, we raised taxes substantially and we saw the most rapid economic growth we'd seen in decades. So here we had a tax rate and the economy got better. And then in early 2000, we had a tax cut and the economy suddenly didn't do so well. So, no clear correlation.
REHMAnd you're listening to "The Diane Rehm Show." So, are there any concrete answers out there that you genuinely believe could work, not only to diminish this widening gap between that 1 percent and the rest, and to help economic growth. Jared.
BERNSTEINWell, I think Bob Williams just said something that is really important, that everybody listening should come away with -- maybe the most important thing we've said today -- which is that, while we're squabbling and going back and forth, the way people do in this town, about very complicated changes to an already complicated code, at the end of the day, the tax code really doesn't have that much to do with growth and with investment at the level of moderate or smallish changes.
BERNSTEINI agree with Chris that, if you went from, you know, 40 percent to 80 percent at a marginal rate of top people, sure, you'd have some distortions. But that's nowhere near the debate. What the evidence shows is, if you go from 30 to 35 or 40 to 45, what you do is you collect more revenue, you don't hurt growth. And, in fact, given our revenue problems -- we've talked about infrastructure in particular -- I actually think that not investing in this country, both public capital, like infrastructure, but human capital as well -- education, child care, universal pre-K, I mean, that's -- the fact that we're not doing that is really a dark mark on our investment portfolio.
BERNSTEINSo I actually think that if we could collect some of the more revenue, as we've been talking about today, plow that into investment, that would probably pro-growth.
REHMHow's that sound to you, Chris Edwards?
EDWARDSI think the single biggest thing we can do for the economy is to cut the corporate tax rate. I love Donald Trump's 15 percent corporate tax rate. I would note that north of the border in Canada, they just had a big federal election. The conservatives were swept out of office. A left-of-center liberal government came into office. The new prime minister wants to hike taxes on wealthy people but he's keeping Canada's low 15 percent corporate tax rate. Because he knows it would be -- it's suicide for companies today, in the global economy, to have high corporate tax rates. So I think cutting the corporate tax rate is the most important thing we can do for economic growth.
REHMWhat do you think, Bob Williams?
WILLIAMSWe have a very high statutory corporate tax rate. That is, the tax rate that people see on -- or the corporations see on their returns is 35 percent. But, in fact, most corporations don't pay anywhere close to 35 percent. It depends a lot on the makeup of the corporation, how they invest, what kind of thing they're investing in. Housing, for example, is taxed at a very, very low rate -- perhaps a negative rate. Whereas, companies that invest in buildings tend to pay a fairly high rate. Overall, the corporate tax rate is not anywhere close to the 35 percent that people say has to be cut.
REHMAnd what about offshore corporations?
WILLIAMSThere's certainly -- moving offshore is a way to delay your federal taxes and, at times, you can actually avoid a lot of the tax you otherwise pay. For -- a company that makes money overseas pays federal taxes, U.S. taxes, on that money only when they bring the money back to the United States.
WILLIAMSIt's called repatriation.
WILLIAMSEstimated $2 trillion sitting offshore right now of unrepatriated earnings.
WILLIAMSTwo trillion. That's a lot of money.
EDWARDSBob, very quickly, you know, it is the statutory or legal rate of 35 that drive the profit-shifting offshore. It is not -- you're right, the effective rate on investment is lower. It is the statutory rate that drives the tax avoidance and evasion. And that's why we should lower it.
BERNSTEINYou know, I think we probably would all agree on this point, by the way. I wouldn't mind a lower statutory rate at all. The problem, once again, is you can't get there unless people are going to close some of the loopholes, including the foreign earnings one that Bob just mentioned.
REHMAll right. Short break here. And when we come back, your calls, your email. I look forward to speaking with you.
REHMAnd welcome back. Here's our first email from David in Dallas. He says, a perspective of many people on the right, we heard a lot of blow and bluster about infrastructure investments, childcare, budget balancing, et cetera. What we believe we actually see when taxes are raised is the money being squandered to pander for votes. How do you feel about that, Bob Williams?
WILLIAMSWell, I don't think that's true. I think there certainly is waste in the federal government, just as there's waste in any business in any personal financial thing. We don't do everything perfectly. I don't think it's necessarily the case, and certainly if we gave money, more money to the states to help develop the road structure or to build up our infrastructure that's crumbling, that would be a very good thing and would be money well-spent.
WESSELI actually think that this goes to a big problem, which is there's a huge amount of distrust of Washington out there in the country. Congress' ratings are lower than they've been in generations. And so it's very hard to convince people that if the government raised more money in revenues, that money would be well spent, for instance that we would do infrastructure projects that really have a reasonable chance of being success, as opposed to let's do one in the district of every member of the House Commerce Committee.
WESSELSo I think the lack of trust in politicians and in Washington, which we see manifesting itself in Ben Carson and Donald Trump's popularity, makes it harder to tell people we're going to raise taxes and use the money well.
REHMAll right, let's go to Mark in Dallas, Texas. You're on the air.
MARKGood morning, Diane.
MARKAnd I, like everybody else, I don't want to pay taxes, either. You know, my perspective is that we spend it all on bombs to kill, you know, brown people. But regardless, I hope next time you have a tax study you'll have an actual hardcore economist on instead of the opinionators because I'm pretty sure if you look at the data around the world, and not just the U.S., I understand that trickle-down economics is sort of an article of faith among the right, but the fact is that, you know, a rising tide does not raise all boats.
MARKYou wind up with broader income inequality. The countries with the -- less of a, less of a gap...
REHMOkay, now tell me--tell me your particular question. We've got to move on.
MARKWell, why don't we look at what actually works around the world and implement policies akin to those, rather than just saying I think we ought to cut taxes?
BERNSTEINWell, if I may speak to Mark's question, Mark, I mean, I've been trying to espouse that view here, and I may not be a hardcore economist, but I'm some kind of economist, and I've been referencing in particular the research that shows if you increase taxes, as some of us are discussing, a moderate amount, you're not going to have anything like the negative effects that the supply-side, trickle-downers espouse.
BERNSTEINAnd I actually think Mark's not alone. I think a lot of people recognize this. If you go to other countries, for example, in Sweden, for example, in Denmark, in Scandinavia, in Germany and France, I'm not saying those countries are necessarily models for us, but to get to his question, they collect a much larger share of their GDP in taxes, and they spend it on things that people want and need, and they do perfectly well in terms of growth, in terms of productivity, in terms of unemployment outside of periods of recession and mistakes like we've seen in recent years.
EDWARDSHere's a fun fact that the panelists would know about. It was surprising to me when I saw the study come out a few years ago, the United States has the most progressive or graduated income tax system amongst all the industrial countries. This was a study by the OECD based in Paris. We have the most progressive or graduated system of all the industrial countries, including the Swedens and Denmarks and others.
EDWARDSA lot of European countries, even beyond income taxes, they have consumption-based taxes that are more proportional across the board. So it's not the case that wealthy people in America, you know, get away with murder compared to other countries, not at all.
BERNSTEINBut we still have more inequality, even after taxes, than those countries do. so we're dealing with a different situation.
WILLIAMSAnd we do have the low -- one of the lowest tax rates among developed countries. We're at about 25 percent of total income, total GDP going to taxes, versus the average for developed countries of around 36 percent. So we're well below other countries in terms of how much we take in revenue.
REHMSo Bob, in your estimation, if we were able to close all the loopholes and of course we've already heard that that's impossible, but what's the estimate of dollars that could be brought in?
WILLIAMSIf we stripped the income tax, both the corporate income tax and the individual income tax, down to a bare bones, so you have a standard deduction, and you have tax rates, and that's about it, we could get about $1.3 trillion a year more revenue. Most of that, about a trillion dollars a year, would come from individual income taxes, $200 or $300 billion from corporate income tax and other taxes. But that's going to a point where we'd get rid of everything, every special deal.
WILLIAMSYou would no longer have the deduction for mortgage interest, you'd no longer have the deduction for contributions, you'd have none of these special -- what glued as loopholes or preferences that people say, that's part of the regular tax system, I'm not going to give that up.
EDWARDSYeah, you know, it's a loophole if you take it. It's a credit or exclusion if I take it.
REHMYeah, right, right, right. All right, to Rob in Chicago, Illinois. You're on the air.
ROBYeah, hi. Just wanted to make a comment. I'm a former stockbroker, and some big customer passed away, and they were worth about $50, $60 million, and they just -- all they do is you grant her annuity trust, they end around the inheritance tax, and it just seems to (unintelligible) than you are changing the tax code. I mean...
WESSELExactly. This is one of the things we've discussed already, the idea that you can structure inheritances so that they completely avoid taxes. Our estate tax is particularly toothless. It actually only touches the top 0.2 percent of estates, and that's not 2 percent, that's 0.2 percent, because the deductions before the tax kick in are something like $10 million for couples.
WESSELSo I think that if we were able to do some common-sense kinds of reforms, I think the question to Bob a minute about everything, well that's, of course that's not going to happen, and we might not even want that to happen, But some common-sense reforms would certainly start there, I should say.
REHMAll right, to Sarasota, Florida. Eliot, you're on the air.
ELIOTYes, hi, thanks for taking the call. I would like to just have a comment or two about the conservative view about taxes and so forth. Number one, when the conservatives say, well, the rich one percent pay 48, 44 percent of the total taxes, how about the fact that they make about 80 percent of the income? Secondly, I don't understand the conservative viewpoint about not wanting to raise taxes in order to do things like infrastructure or raise wages because that creates people who are going to earn money and pay taxes, which goes right back to the government.
ELIOTIn addition, they buy things, the products that the corporations make. So that goes back into the economy. So from a conservative viewpoint, you would think that they would want to have people with more money who are able to spend on the products that create the wealth for the wealthy people.
WESSELWell, I think first, conservatives aren't as convinced that when the government spends money it does quite as much good as you or I might think. But let me just mention one fact. So this is Bob -- Bob Williams' Tax Policy Center. The one percent get about 17 percent of all the income before taxes, and they pay about 28 percent of all the federal taxes put together, and they end up with about 14 percent of the after-tax income.
WESSELSo they do have a lot of money, but when you look at the whole tax structure, all the taxes that Congress has thought up over 200 years, the one percent pay about 28 percent of all federal taxes, income, payroll, corporate and so forth.
EDWARDSA couple times the issue has come up, why don't we raise taxes on rich people, spend more on infrastructure. I think that's sort of a bait-and-switch argument. If you look at the federal budget, and you see the federal government spends on, only three percent of the $4 trillion federal budget is spent on capital investment, highways, roads, dams, that type of thing. The vast majority of what the federal government spends on is consumption. In other words, that doesn't help generate economic growth. So I don't...
WESSELSo do you think we should spend more on physical capital infrastructure?
EDWARDSI think states should spend more on physical capital. The federal government can't do...
WESSELIt's okay if they raise taxes to do it?
EDWARDSSure, I would be much more in favor of state governments raising money for their highways than the money being channeled through Washington. I think it would be much more efficient.
WILLIAMSBut the federal government actually is supporting that. The fact that we don't tax interest on municipal bonds means that roughly half the cost of -- or a third of the cost of the infrastructure development that's funded by those bonds in the states is covered by the federal government in the terms of lower revenues.
BERNSTEINYou can also deduct your state and local taxes from your federal tax bill.
BERNSTEINSo that's another big subsidy.
REHMTo Gene in Dallas, Texas, you're on the air.
GENEGood morning, and thanks for taking my call. One comment, and then a question. The gentleman from the Brookings Institute mentioned the idea that if we were to raise the taxes on these rich, he mentioned, you know, investors, brain surgeons, all these people, that they would then begin to produce less because they wanted to pay less tax, which would imply to me that their desire is rather to rape the country than to build the country. If they can only get and keep -- they have no interest in building the country.
GENEBut if Bernie Sanders' points is tax the rich and then use some of those taxes to give free education, give free child service to those who cannot now afford it, which would then build them up to put them in the top one percent, the kind of cycle, theoretically, would be that eventually everybody would become that one percent, making it 100...
EDWARDSI think the idea that all rich people do is rape the country is absolutely absurd and repugnant to me. I think if you look at who are in the top one percent, again, it's very, very productive people. Corporate executives get a bad name these days, but they work extremely long hours. They are extremely important to the economy. Angel investors and entrepreneurs, they're crucial for the economy, and you tax them more, you're going to get less productive activity.
WILLIAMSSo just before, so that was Chris Edwards from the Cato Institute.
REHMYeah, who said that.
WILLIAMSAnd I don't want the Brookings Institution to take credit for Chris' arguments.
BERNSTEINI've got to say, I think we make a big mistake on both sides, the caller and Chris, when we start to attribute qualities to people we don't know anything about. The people in the -- all we know about the people in the top one percent is that they've got a ton of money. We don't know whether they're wonderful, angel investors or demonic.
WILLIAMSYou just have to read the newspaper, Jared. The Wall Street Journal's got stories about these folks every day.
WESSELThey don't say they're bad.
BERNSTEINThe point, the newspaper won't help you here. What actually helps you here is economic research on people's responses to tax increases. Now that research suggests that if you double tax rates at the top, you absolutely would generate the kind of problems Chris would worry about. But if you go from 40 to 43, from 43 to 47, you're not going to have the kinds of distortionary effects that Chris suggests. And in fact what you'd get is the kind of revenue you would need to make the investments we're lacking.
REHMDavid Wessel, what about President Obama's veto of legislation on military spending, saying he wants to use that money in other ways?
WESSELWell, I don't think that's exactly what the president said. What the president said was, Congress passed some laws, and the president signed them, that put ceilings on annually appropriated spending. The Republicans in Congress are interested in raising that ceiling on defense but not raising it on domestic spending, which includes the spending on things like infrastructure and education that we've been discussing.
WESSELSo I think the president's view is, if we're going to raise the caps on spending, we ought to do both the military and domestic spending.
REHMAnd you're listening to the Diane Rehm Show. So what happens when he vetoes this legislation? Would there be any compromise, considering the current Congress, Bob?
WILLIAMSI think the current Congress has got a lot of gridlock built into it right now, and it's hard to imagine much, if anything, getting by, although you never can tell for sure. We'll see what happens.
BERNSTEINYou know, Bernie, it was Paul Ryan and Patty Murray, so a conservative and a Democrat, liberal Democrat, came together a few years ago to lift those caps a little bit, and so it is possible.
WESSELIt's probably more likely with Paul Ryan than it was before.
EDWARDSNot necessarily the new Paul Ryan.
EDWARDSWe will see.
REHMI think one more question we have to deal with is the percentage of our current spending going toward our debt, Bob Williams.
WILLIAMSI'm not sure -- since we're running a deficit, that means our spending is actually building up the debt rather than...
EDWARDSSo we are borrowing -- we are spending more money than we take in every year.
EDWARDSIn the last fiscal year, the federal government spent about $435 billion more than it took in, and as a result, it added to the debt, and I'm guessing here that the interest on the debt probably is somewhere about eight or nine percent of all federal spending now. And when you look at projections for the future, you'll see that because we have a big debt and because interest rates are not going to stay at this low level forever, over time more and more of our federal spending will go to interest.
EDWARDSOver the next 10 or 15 years, it'll probably double as a percentage of the federal budget.
REHMYou said earlier that -- you mentioned Paul Ryan. Might in fact he be a bridge between Republicans and Democrats to get something done on tax reform, Jared?
BERNSTEINI think it's possible. Certainly it's an area he's said he'd like to get into. The problem is that a year or two ago, a top Republican who used to have the job Ryan has now, proposed, Dave Camp is his name, proposed a kind of a tax reform that I thought was kind of bipartisan in nature, and it immediately died because Republicans didn't like the fact that, guess what, it closed some loopholes and raised some revenue. So it's going to be very tricky.
EDWARDSI think the problem with tax reform in recent years is that the current president is simply not interested in tax reform. I think, for example, we could have had a major corporate tax reform, and President Obama occasionally talks about that. I don't think he's serious, though, I really don't. I think he could have got a lot of goodwill in the business community, done a lot of great stuff for the economy, if he did corporate tax reform. Republicans are in favor of it. But he hasn't stepped up to the plate.
WILLIAMSI think the biggest problem there is that Democrats don't want to agree to a corporate-only tax reform because then they lose their chit in calling for individual tax reform. They want to do both pieces together because that's a package that they might able to get through. Do corporate by itself, you may not ever get to the individual side.
WESSELTax reform means winners and losers, and that's why it's so hard, because the losers always are better organized than the winners. I think there's very little chance anything happens until after the next presidential election, if then.
REHMDavid Wessel director of the Brookings Institution, Roberton Williams of the Tax Policy Center, Chris Edwards of the Cato Institute, Jared Bernstein of the Center on Budget and Policy Priorities. I don't know where we're going to go with this, but it sure is frustrating listening to all of you. Let's hope that something gets done sooner rather than later. Thanks to all of you for being here.
WILLIAMSThank you for having us.
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