TOPICS > Economy

How Do Tax Cuts, Hikes Fit Into Obama’s American Jobs Act?

September 13, 2011 at 12:00 AM EST
President Obama continued to make a case for his American Jobs Act on Tuesday, but GOP leaders remain skeptical. Judy Woodruff discusses the tax aspect of the president's plan to spur job creation with two former top economic advisers, Austan Goolsbee and Martin Feldstein.
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JUDY WOODRUFF: Next, the president’s jobs plan and questions about its potential impact.

Tonight, we look at the centerpiece of the bill, tax cuts and tax credits.

The president continued to make the case for it today, but leading Republicans on Capitol Hill remained skeptical.

President Obama returned to the road today, this time Columbus, Ohio, selling his jobs plan and pushing Republicans to buy it.

PRESIDENT BARACK OBAMA: Yesterday, there were some Republicans quoted in Washington saying that even if they agree with the proposals in the American Jobs Act, they shouldn’t pass it because it would give me a win.

(BOOING)

BARACK OBAMA: This isn’t about giving me a win. This isn’t about giving Democrats or Republicans a win. It’s about giving the American people a win.

(CHEERING AND APPLAUSE)

JUDY WOODRUFF: The president formally sent his $447 billion plan to Congress on Monday. More than half of the total would pay for extending or expanding Social Security payroll tax breaks for employees and employers. The actual payroll tax rate would drop from 6.2 percent to 3.1 percent.

The bill would also give employers a $4,000 tax credit for hiring the long-term unemployed.

BARACK OBAMA: If we get Congress to pass this bill, the typical working family will get $1,500 in tax cuts next year.

(CHEERING AND APPLAUSE)

BARACK OBAMA: Fifteen hundred dollars that would have been taken out of your paycheck will go right back into your pocket. But if Congress doesn’t act, if Congress refuses to pass this bill, then middle-class families will get hit with a tax increase at the worst possible time.

JUDY WOODRUFF: To give the middle class that break, the president wants wealthier Americans to pay more. That would include a limit on an assortment of tax deductions to save $405 billion. Another $40 billion would come from closing loopholes for oil and gas companies, plus $18 billion from new taxes on hedge fund and private equity managers.

Top Democrats like Senate Majority Whip Dick Durbin defended the tax proposals today.

SEN. RICHARD DURBIN, D-Ill. majority whip: I think that it’s fair to limit the tax cuts for the wealthiest, so that we can provide tax cuts for working families. That, to me, is sensible. It’s not only morally right; it’s economically right.

JUDY WOODRUFF: But Republicans and some Democrats rejected those same ideas two years ago. And today, House Speaker John Boehner said they’re still not popular.

REP. JOHN BOEHNER, R-Ohio speaker of the House: When you look at what we saw in the president’s pay-fors yesterday, we see permanent tax increases put into effect in order to pay for temporary spending. I just don’t think that’s really going to help our economy the way — the way it could.

JUDY WOODRUFF: The leader of Senate Republicans, Mitch McConnell, insisted the plan is really just a political ruse.

SEN. MITCH MCCONNELL, R-Ky. minority leader: All he’s doing is just proposing a hodgepodge of retread ideas aimed at convincing people that a temporary fix is really permanent and that it will create permanent jobs, and then daring Republicans to vote against it.

JUDY WOODRUFF: As the war of words heats up, President Obama will take his jobs campaign to the Raleigh-Durham area in North Carolina tomorrow.

We get two takes on the tax aspects of the president’s plan from notable economists. Austan Goolsbee is a longtime adviser to President Obama and served until last month as the chair of his Council of Economic Advisers. He’s now returned to the University of Chicago. And Martin Feldstein is a professor at Harvard university. A longtime conservative thinker, he was the chair of Council of Economic Advisers in the Reagan administration.

And, gentlemen, we thank you both for being with us.

MARTIN FELDSTEIN, Harvard University: Good to be with you.

AUSTAN GOOLSBEE, former chairman of the Council of Economic Advisers: Thank you.

JUDY WOODRUFF: Professor Feldstein, I’m going to talk with you.

Let’s talk about the tax cuts in the president’s plan first. This notion that he would cut the Social Security payroll tax in half for employees, expanding it, and then extending it to employers, what effect would that have on jobs, do you think?

MARTIN FELDSTEIN: It would have a very small positive effect, the part that households get, that employees get. The part that employers get I think would basically be just saved, added to retained earnings. So that would have almost no impact at all.

JUDY WOODRUFF: Why don’t you think it would have a greater impact on employers?

MARTIN FELDSTEIN: Oh, because you’re talking about a 3 percent of payroll reduction. So if you’re going to hire somebody and pay them $30,000, it’s $900 a year. That’s tax-deductible against their corporate rate. So it’s $600. So, for $600, they’re not going to make the decision to make a permanent hire.

JUDY WOODRUFF: Austan Goolsbee, you were in this White House until not so long ago. You’re hearing what Mr. Feldstein is saying. What do you say?

AUSTAN GOOLSBEE: Well, look, I think there’s pretty wide agreement that the payroll tax cut for the workers is — at a moment like this could be an important demand effect.

I think there’s differing views. I would like to think that if you address the cost of labor and you sort of reduce the after-tax cost of hiring people, I think the amount of billions that it adds up to will make a difference to some companies.

I think it tends to perhaps be a bigger impact on smaller businesses than on big ones. And then another part in the jobs bill is continuing and expanding tax incentives for companies to do investment. I think those three things are what you want to do. You don’t want to just pick one because what — your view of the world might not be correct.

You want to try cutting taxes for hiring people, cutting taxes to put in people’s pockets, cutting taxes for investment, and try to do that as a package. I think it could be pretty positive.

JUDY WOODRUFF: So, Martin Feldstein, so what if you put them all together, you look at it all as a package? Does that make it any more helpful?

MARTIN FELDSTEIN: So, I have looked at what the various forecasters say this might do. And the most optimistic ones say that it will add between one and two million jobs over the next two years. And that sounds like a lot, until you realize that that’s about $200,000 per job, $200,000 per job.

So it’s just not a good use of money that — of course, it has to be paid for. And we haven’t talked about that yet, but it’s not a good use of money to spend $200,000 to create a single job.

JUDY WOODRUFF: And we’re going to talk about that in just a moment.

But, Austan Goolsbee, what about that? That’s a pretty high price tag.

AUSTAN GOOLSBEE: Well, I don’t think I totally agree with that exact number.

But I would say that at a moment when you have got an unemployment rate as high as it is and we have lost eight million jobs, whatever you could do to get two million jobs strikes me as a perfectly good thing that we ought to be considering doing.

You know, the Professor Feldstein and I have at a lot of times agreed on the need for different kinds of direct injection or tax cuts that can be used to help facilitate the growth of the economy. I think, if you look at this package, it’s pretty broad-based. It’s a bunch of things that if this were three years ago, a lot of people would be saying — would be asking, was that a Republican plan, because a lot of this stuff was — were Republican ideas or were bipartisan ideas three years ago.

JUDY WOODRUFF: I think the point I want to ask you, picking up on what he said, is, is the situation not desperate enough in terms of needing jobs that, even if it just adds up to some jobs and they cost a lot, it’s worth it?

MARTIN FELDSTEIN: It’s just — I don’t think it is worth it.

And, moreover, if you’re going to finance this, then the financing is going to have negative effects on employment. So when we talk about the forecasts that say this could add a couple of million jobs at a cost of $200,000 per job, that’s on the assumption that you’re not offsetting it by higher taxes on businesses and on high-income individuals.

JUDY WOODRUFF: Well, in fact, the president is proposing — we now see this week he put out the details.

He wants to limit itemized deductions for people who are on the wealthy side, people earning over $250,000 a year as a family, $200,000 as an individual, in other words, limiting deductions for home mortgage interest, state and local property taxes and charitable deductions.

MARTIN FELDSTEIN: So, my feeling is that we are going to need more revenue and that eventually Congress will find a compromise on that issue. And there are two ways to get more revenue.

One is to raise tax rates, marginal tax rates, on individuals. That would be a mistake, because that would hurt incentives. That would hurt growth. That would hurt employment. On the other hand, taking away some of the spending that’s built into the tax code, like the subsidies for mortgage borrowing or the subsidies for other things, to me, that makes sense.

But I think the way the president has approached it — we’re only going to do it for high-income individuals and we’re going to use that money for more spending, rather than deficit reduction or rate reduction — I think that’s a mistake.

JUDY WOODRUFF: How do you see it, Austan Goolsbee?

AUSTAN GOOLSBEE: Well, look, I see it that the economy is in a tough spot. We’re facing these borderline-catastrophic events coming from Europe. And we have got to start growing in this country.

And one important way to do that is — it’s not spending to be cutting the payroll tax to be encouraging investment. And if we’re doing that by eliminating some of the tax expenditures and loopholes that we have argued for years would be good to get rid of, I don’t see — I view that as a win, not a loss.

MARTIN FELDSTEIN: We need that money eventually to reduce the deficit. And we could use it also…

JUDY WOODRUFF: The money that would come from taking away those taxes?

MARTIN FELDSTEIN: From broadening the tax break — or limiting them. I wouldn’t take them away. I would put a cap on them. I would limit the size of them.

But that’s money that could be used to reduce budget deficits over time to get our debt ratio down. And so to use it for a very inefficient new spending program, a new set of job stimulus of the sort that the president has proposed, I think, is a mistake in use of that money.

JUDY WOODRUFF: Austan Goolsbee, he’s saying that it’s just a cockeyed use of the money.

AUSTAN GOOLSBEE: Look, he is. But just to put in perspective, when the economy is bad enough, even Professor Feldstein, you know, in late 2008 was saying, let’s have $300 billion of direct stimulus.

I think there is a question of, do you view this moment as one in which it warrants action, that the government would be doing things to try to get the private sector to help stand up? And I think that it is such a moment.

And if you decide that it is such a moment, then the question is, do you want to do that in a way that’s paid for over the 10-year budget window, or do you want to not do it in a way that is paid for? If you think you should do something and you think it should be paid for, then the way it should be paid for is using things that we should have gotten rid of a long time ago, like direct subsidies for oil and gas companies, and getting rid of loopholes that shouldn’t have been in the tax code to begin with.

JUDY WOODRUFF: Which is another — which is another part of what’s being proposed.

MARTIN FELDSTEIN: But focusing on — just on high-income individuals means that it would be very hard ever to expand this to the rest of the population.

JUDY WOODRUFF: Why is that?

MARTIN FELDSTEIN: Because then it would be a tax increase for non-high-income individuals, for middle-income individuals, exclusively for middle-income individuals. And the politics of that would be impossible.

So we really need to have everybody share in raising additional revenue through broadening the tax base.

JUDY WOODRUFF: So, the concept behind this, or at least part of the concept of making the well-off pay a little bit more in order that the middle class get a break, more money in their pocket, small businesses create jobs, you’re saying that’s not a trade-off.

MARTIN FELDSTEIN: You know, this is not a one-for-one thing. This is not, we’re going to temporarily raise the tax on high-income people in order to temporarily lower it for the rest of the population. Nor is it, we’re going to permanently increase for it high-income individuals in order to permanently reduce it for the others.

It’s, we’re going to permanently raise taxes on high-income individuals by broadening their tax base in order to finance a one-year set of programs to try to stimulate the economy in a very inefficient way.

JUDY WOODRUFF: Quick final word, Austan Goolsbee.

AUSTAN GOOLSBEE: Look, I think the economy — we’re facing tough headwinds from the international sphere. We ought to be doing some things to try to help get the private sector stood up.

I think there has been and should be continued bipartisan consensus that it be tax cuts of the form to people, to businesses to invest and to hire, and that’s what this seems like it is, and that, if you can get rid of loopholes that should have been gotten rid of before to pay for something like that, you ought to do it.

JUDY WOODRUFF: All right, gentlemen, we’re going to leave it there. And we thank you very much, Austan Goolsbee, Martin Feldstein. Thank you.

MARTIN FELDSTEIN: It’s good to be with you.