RAY SUAREZ: This week, a special program that affects every one of you, taxes.
We want to start with some big numbers. In 2011, the federal budget was $3.6 trillion. But federal revenues were only $2.3 trillion. Most of that money comes from taxes. Individual income taxes, followed by social security taxes, Medicare taxes, corporate taxes, gasoline taxes, and the rest.
Despite all those tax collections, the U.S. still had a budget deficit of nearly $1.3 trillion during the last fiscal year.
Of course, much more rapid economic growth would mean more tax revenues and help close that deficit. But unless and until that happens, we’re left with two ways to make the budget whole: Cut spending or raise more money from taxes. Today, our focus is on that side of the equation, taxes.
Specifically, how we can raise more money and make the tax code fairer for everyone. Joining us from left to right in every sense, Eliot Spitzer is the former Democratic governor of New York, Dorothy Brown is a Professor of Law at Emory University, specializing in federal tax law. Bruce Bartlett was a former Policy Analyst in the Reagan White House. He helped draft the nation’s last major tax reform in 1986. He’s written a new book called “The Benefit and the Burden.” And Dan Mitchell is a Senior Fellow at the Cato Institute and previously served as an economist for the Senate Finance Committee.
Guests, thank you all for being here. The federal government loses or foregoes collecting more than $1 trillion a year by offering 250 different deals that lower tax payments, excluding employer contributions for health care, not taxing Medicare benefits, the child tax credit, excluding contributions to retirement plans.
If we got rid of all of these, would we end up with a fairer system?
DAN MITCHELL: Get the government out of the business of picking winners and losers, industrial policy, get rid of the loopholes that we all agree are loopholes, bring the rates down, you’re going to have a more efficient tax system, the system will be less corrupt, less complex– it’s just a win-win situation.
ELIOT SPITZER: You’re right. If– if we could wipe the slate clean, there’d be enormous dislocation to many people. And understand, so homeowners across the nation who have a mortgage who deduct that interest and don’t– and therefore don’t have to pay– tax on a fair bit of their income, will suddenly say, “Wait a minute, I have more taxable income.”
If we paired it with the theoretical argument we could then lower rates, it would be healthier, there would be fewer disincentives, fewer dislocations. So yes it would be the right thing to do.
DOROTHY BROWN: Economists generally agree that the mortgage interest deduction does not cause anyone to buy a home. We are rewarding people for doing what they’d already do. Put aside the fact that renters get nothing. Talk about craziness, we not only allow you a mortgage interest deduction for your first home, we allow you a mortgage interest deduction for your second home, up to a $1 million total.
ELIOT SPITZER: The problem is at this moment, with the housing market still at the very bottom of the trough, some people think we’ve hit the bottom, who knows, let’s hope we have. If you were to take away the mortgage deduction, everybody who owns a home would see the price drop as a consequence. Because it is capitalized in.
DAN MITCHELL: The one thing that’s very important to look at, there are countries like Australia, like Canada, like the U.K. that have either no or much lower tax preferences for housing. And they still have homeownership rates —
DOROTHY BROWN: Comparable to ours.
DAN MITCHELL: –that are equivalent–
BRUCE BARTLETT: Yeah, the price– the prices increased even faster in some of those countries than they did here.
RAY SUAREZ: The highest tax rate ever reached 92 percent in the early 1950s. Now it’s 35 percent. But given our huge deficit, should that rate go much higher, at least temporarily, until we’re no longer financing a third of our central government’s spending with borrowing?
DOROTHY BROWN: I would say no, no, no, no, no.
RAY SUAREZ: Why?
DOROTHY BROWN: The answer in my opinion isn’t raising tax rates. It’s eliminating loopholes. It’s eliminating exclusions. The 35 percents’ already high. I — I — to me it makes no sense to allow privileges to certain groups, for example homeowners over renters, when they both have housing costs. So — and therefore tax other people. It doesn’t make sense.
RAY SUAREZ: So keep the current rate schedule, get rid of the loopholes, Governor —
ELIOT SPITZER: Well– well look, I think what the professor says is right. If you had to create a hierarchy, you would say first thing you do is close the loopholes, broaden the base. That may not be sufficient and it may not happen. Practically, if you cannot get people to agree on what’s a loophole and what’s a legitimate incentive. That — that is often an ideological debate.
If we had to go from 35 percent to 39.6 percent, that’s fine with me as a matter of philosophy, as a matter, because not that many people are paying the 35 percent, the 39 percent at the upper reaches. If we could reach some level where people who were earning over $2 million a year, over a $1 million a year have to pay 39 percent, that’s fine. That does not in any way offend my sense of fairness.
DAN MITCHELL: I– one thing that’s very important to understand is there’s a difference between tax rates and tax revenue. And the 1980s are a good example. In 1980, when we had a top break all the way up at 70 percent, people making over $200,000 a year paid $19 billion to Uncle Sam.
Reagan brought the top rate all the way down to 28 percent, those people making over $200,000 a year, they suddenly paid $99 billion. You got five times as much revenue at a lower rate. But there’s no question that people respond to changes in tax rates. There is a very high economic cost when you impose these higher tax rates, because people just decide, “I’m not going to work, save and invest as much.”
RAY SUAREZ: So if we go all the way back to those days, those dimly remembered days of 1996, 1997, 1998, weren’t rich people still trying to earn more money and be even richer?
ELIOT SPITZER: There is surprisingly little economic study of this. But you asked the question, at what point does the marginal rate actually dissuade somebody from working. I have not seen anything that suggests that you cannot tax people– let me say it affirmatively. You can tax people up to 40, 45 percent.
BRUCE BARTLETT: Oh, much more than that.
ELIOT SPITZER: Without — that’s — I said — I said there’s nothing suggests in the 40s, you dissuade people. You can probably get into the 60s. Because as you pointed out, people still want to get wealthier.