TOPICS > Politics

President Plans Major Overhaul of Tax, Spending Systems

February 26, 2009 at 6:25 PM EDT
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President Obama's budget plan outlines large-scale changes in tax policy, calling for $318 billion of tax increases over the next 10 years for the wealthiest individuals and families combined with tax cuts for the middle class. Analysts discuss the impact of the changes.
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JUDY WOODRUFF: Next, the debate over taxes and spending in this budget blueprint. Jeffrey Brown picks up that part of the story.

JEFFREY BROWN: And to pick up on some of the big changes we’ve just been hearing about, we’ve invited back two economists we heard from earlier this week for a budget preview: Robert Greenstein, director of the Center on Budget and Policy Priorities, and Douglas Holtz-Eakin, former director of the Congressional Budget Office and economic adviser for John McCain’s presidential campaign.

Doug Holtz-Eakin, start on the spending side, the scale of it. Is it viable?

DOUGLAS HOLTZ-EAKIN, former director, Congressional Budget Office: Well, I think this budget is politically and economically risky, and precisely because it doesn’t have enough spending reduction. If you look at what you’ve got, you’ve got about $2 trillion in deficit reduction.

That comes from $1.5 trillion in Iraq and Afghanistan reductions that are largely illusory. They pretend we would have spent $170 billion a year for a long time, and we’re not.

And then a $700 billion increase in revenues from a cap-and-trade program that has never even come close getting through the U.S. Congress. So that’s the deficit reduction, not obvious it’ll come to fruition.

And then the rest is about $1 trillion of tax increases on high-income individuals and businesses to fund $1 trillion in tax cuts that are already on the books from the stimulus bill, with “Making Work Pay,” Earned Income Tax Credit, things like that.

So you’ve got a dynamic where they’re counting on things that are either illusory and hard to make happen politically — cap-and-trade and tax increases — to fund things that are already there. They didn’t cut spending. And that makes all the deficits that are presented best-guess estimates. The risks are all the upside.

Spending cuts across industries

JEFFREY BROWN: All right. There's a lot on the number. But start in the general -- with the general hugeness of the spending. Is it viable?

ROBERT GREENSTEIN, Center on Budget and Policy Priorities: Well, I think Doug must have looked at a different budget than the one I read today. This budget is full of courageous proposals, including courageous spending cuts.

It has over $300 billion over 10 years in cuts in Medicare and Medicaid by taking aim at excess subsidies for the health insurance industry, overpayments to pharmaceutical firms. It goes through Medicare and Medicaid area by area. It is the most courageous budget in that area I've ever seen.

It has $16 billion in cuts for agribusiness and wealthy farmers. It has billions of dollars of cuts for banks and other middlemen that make money off of student loans in an inefficient manner.

There really is a lot of courageous stuff here that will be challenging to get through Capitol Hill.

JEFFREY BROWN: All right, let's pick up on what we heard on the revenue side, because what's getting most attention here is the idea of raising taxes on the wealthier Americans. You think it's a good idea what they've put on the table?

ROBERT GREENSTEIN: We have these huge long-term budget problems. Raising taxes on the wealthiest Americans, most of what's in this budget is letting the huge Bush tax cuts for the wealthy expire.

Currently, people that make over $1 million a year are getting $150,000-a-year tax cut each from the Bush tax cuts. We can't afford that.

What this does is it lets the Bush tax cuts expire. It has an additional tax increase on the top 5 percent of Americans to help finance universal health insurance, alongside the financing from the Medicare savings that I mentioned.

And it closes a series of egregious tax loopholes from Wall Street traders who exploit loopholes to pay taxes at a lower rate than many middle-income Americans, from corporations that shelter profits overseas to evade taxes, from oil industry that gets particular tax breaks beyond what is necessary. All this tax -- so-called tax increases in this budget come either from people over $250,000 a year, the top 5 percent, or from closing egregious tax loopholes that should not be in the code to begin with.

Budget would increase taxes

JEFFREY BROWN: All right. How do you see that?

DOUGLAS HOLTZ-EAKIN: Putting aside the philosophical differences about using the income tax for redistribution, I think these tax increases run into two problems of logic. The first is that, when this stimulus bill was passed, a lot of the spending occurred past 2010 into 2011, 2012, 2013, and that was defended by saying, "Gee, the economy might still be weak. We can't possibly stop spending."

Well, they're now going to turn around and whack it over the head with a big tax increase. Those two shouldn't be around at the same -- they don't make any sense.

The second is, our fundamental problem over the long term is spending. And we won't tax our way out of that problem. There's no economist who believes we can raise taxes enough to cover our long-term spending bill.

This budget gets us off on the wrong foot, because where it does cut spending, it turns right around and spends it again on something else. It doesn't on net put any controls on spending. And spending is the ultimate fiscal discipline. That's what we need.

ROBERT GREENSTEIN: I think that's simply not right. The central long-term fiscal issue facing this country is rising health care costs. If health care costs didn't rise faster than the overall economy, we wouldn't have a long-term fiscal problem.

What this budget does is, first, it recognizes that a necessary, but not sufficient condition to slow the rate of growth of health care costs is to have universal health care coverage, so insurance companies aren't spending billions cherry-picking and shifting costs, trying to not pay for various people.

What the budget does is it says, for the first 10 years, universal coverage, we're going to insure 45 million more people, is going to cost money, but we're going to marry that with a series of changes in Medicare and the rest of the health care system that slow the rate of health care cost growth over time.

In the long run, putting the two together saves money. And in the short run, before the health care cost savings fully kick in and you do have extra costs, they're fully paid for by reductions in Medicare and by one of the tax increases on the top 5 percent.

Concerns over growing public debt

JEFFREY BROWN: Let me ask you something...

DOUGLAS HOLTZ-EAKIN: But let me pursue this, though.

JEFFREY BROWN: OK. Go ahead.

DOUGLAS HOLTZ-EAKIN: I mean, suppose you take Bob's argument at face value and here's the danger. What he's saying is we're going to spend more on health care. We're going to spend more on health care in the next 10 years, perhaps a lot more. And it'll be fine in, quote, "the long run."

But even under this budget, which doesn't spend as much on health care as it would require for universal coverage -- so if we go that far, it's even worse -- we're going to see debt-to-GDP ratios going up. We're going to layer on top of a sharp spike in public debt an even larger increase.

And we're supposedly going to arrive at 2013 with an economy that is recovered, which means a global economy that's recovered, and our international creditors are going to have to start scratching their heads. We may never get to his long-run health care reform, because people will pull the financial plug.

JEFFREY BROWN: You use the word...

JEFFREY BROWN: Wait a minute. Wait a minute. You used the word "philosophy" a few minutes ago about the question of redistributing wealth. You heard Peter Orszag say this is not such a thing. Do you think this is?

DOUGLAS HOLTZ-EAKIN: Oh, it is. I mean, there's no question. This is a trillion dollars in tax increases that are going to be businesses, through deferral and other sorts of arcane things, and on high-income individuals explicitly, raise their rates, tax their dividends and capital gains, diminish their charitable and mortgage interest deductions, and use it to fund "Make Work Pay," Earned Income Tax Credits, American Opportunity Credit, low-income tax rates, refundable credits for some people that don't even pay income taxes. So there's no question what that is.

Measures to redistribute wealth

JEFFREY BROWN: Do you dispute that?

ROBERT GREENSTEIN: You know, if we're going to take Doug's premise, then we should start by saying that, over the last eight years under President Bush, we underwent a massive wealth distribution from ordinary Americans to the richest Americans.

All this does, with one exception, is to take us back to where we were for people in the very top of the income scale prior to the Bush presidency.

You know, most Americans were doing very well economically in the late '90s. I did not recall that the richest Americans were suffering terrible problems before George W. Bush took office.

And on Doug's health care point, this does not add to costs in the next 10 years. We will have some more costs in health care in getting to universal coverage. Every dollar of those is paid for in this budget. And then, on top of that, over time, we slow the rate of growth of health care costs.

JEFFREY BROWN: All right.

ROBERT GREENSTEIN: We ultimately will need to do a lot more to address the fiscal crisis. But as a first step, this is really a more courageous set of proposals than I've seen any other president propose in several decades.

JEFFREY BROWN: All right, we're getting into more detail on our next segment on health care, but, very briefly, you've both been around Washington budget politics. There's a lot to fight -- there's a lot of fight to come on all this, right?

DOUGLAS HOLTZ-EAKIN: Certainly. And that's actually one of my concerns. This is a budget that says everything has to break the administration's way. And they've picked battles that historically have been lost. So this budget won't come together if you look at traditional political history, and we'll end up with trillion-dollar deficits, not half-a-trillion. And that's dangerous.

JEFFREY BROWN: Are you worried about that, as a political matter?

ROBERT GREENSTEIN: I am worried, but let's be clear: The president has committed that all of these various initiatives -- addressing global warming, universal coverage -- he insists they be fully paid for.

I think what'll happen is, if the vested interest -- this budget takes on vested interests more than any in years -- if the vested interests beat President Obama, we won't get universal health insurance, we won't address global warming.

It's not that the deficits will go up. These two things are tied together. But this budget is remarkable in the way it takes on Wall Street traders, agribusiness, energy companies, one vested interest after another. It will be a huge battle.

JEFFREY BROWN: OK, Bob Greenstein, Douglas Holtz-Eakin, thanks very much.