JEFFREY BROWN: We reported earlier on the political maneuvering over taxes. We look now at the tax system more broadly, where the problems lie and what it would take to fix them.
For that, we're joined by two people involved in bipartisan efforts.
Alice Rivlin of the Brookings Institution is the co-chair of a debt task force at the Bipartisan Policy Center. She also served on President Obama's debt commission and is founding director of the Congressional Budget Office. Donald Marron is director of the Tax Policy Center. He has searched as a member of the Council of Economic Advisers for President George W. Bush and acting director for the CBO.
And welcome to you both.
Give me a quick sort of thumbnail on where there's general agreement as to the problems of our tax system.
Alice Rivlin, what -- A, B, C, what. . .
ALICE RIVLIN, former Congressional Budget Office director: Oh, there are so many problems, it's hard to know where to start.
JEFFREY BROWN: I know. Where do you start? Yes.
ALICE RIVLIN: It's too complicated, for one thing, much too complicated.
It takes people who have complicated economic lives a long time to fill out their taxes. The reason it's so complicated is, over the years, there have been special provisions of various sorts that have crept into the tax code which reduce the income that is subject to tax.
And that means that the rates that everybody pays are higher than they would otherwise have to be to raise the same amount of revenue.
JEFFREY BROWN: And these people look for ways to bring their rate down.
ALICE RIVLIN: They do. And it's perfectly legal. These things got into the tax code for various reasons.
For example, the deduction of mortgage interest was there to encourage homeownership, which people think is a good thing. But it complexifies the tax code. And it means that less income is subject to tax. And, therefore, you have to pay a higher rate.
JEFFREY BROWN: You picked complexity.
You want to pick another one, Donald Marron?
DONALD MARRON, Tax Policy Center: Oh, there are still so many left over.
JEFFREY BROWN: Yes, I know.
DONALD MARRON: I think the next challenge is that it's harmful to the economy.
The way we have it designed with relatively high tax rates combined with lots of tax preferences means that people think a lot about tax policy when they're making economic decisions. Sometimes, that makes sense when the policy pursues a good social economic goal. But I think a lot of that actually turns out to be wasted effort.
JEFFREY BROWN: Well, speaking of social goals -- you raised the deductions. A lot of these things were put in place for good reasons, at least well-meaning reasons. Right?
ALICE RIVLIN: They were. But some of them have very perverse consequences.
Come back to my favorite example of the home mortgage deduction. You wouldn't design a homeownership incentive to have it aid higher-income people more than lower-income people. But this one does, because higher-income people pay higher rates. And they have more expensive houses. So the benefits of the home mortgage deduction go very heavily to upper-income people and don't help middle-income people much at all.
JEFFREY BROWN: And then these things become ingrained.
DONALD MARRON: So they become ingrained.
And just to beat on the mortgage interest deduction for a moment, it also rewards you for going into debt, not for having a home. It's again not something that is designed to really pursue a good social goal. But then it has defenders, as you say. Whenever we hold events on the mortgage interest deduction, we can count on an audience filled of realtors.
JEFFREY BROWN: What would it take today to have -- everybody talks about real tax reform. Now, what does that mean? Do you want to start with, what would it take? What must be on the table?
DONALD MARRON: I think reviewing all the various tax breaks and looking at them very critically, deciding one ones to keep, which ones to go and which ones to redesign.
And I think any fair approach to that, Bowles-Simpson, Domenici-Rivlin, would say that you can get rid of a lot of them. And then you have a bunch of revenue that you can use for some combination of reducing deficits and lowering tax rates.
JEFFREY BROWN: We talked about the home mortgage. The other two most -- the biggest ones, right, would be for. . .
ALICE RIVLIN: State and local taxes are deductible. And that of course has variable consequences depending on where you live.
JEFFREY BROWN: Employer medical. . .
ALICE RIVLIN: Yes, exactly. The big one that most people forget about is that the contributions your employer makes to your health insurance are not part of your income. And that means that you have an incentive to choose health insurance over higher wages. And that's not always good.
JEFFREY BROWN: But these are very popular things, right?
ALICE RIVLIN: They're popular things by themselves.
But if you got rid of or phased out or phased down a lot of these special provisions, then you would have another popular thing, which is lower rates and a simpler tax code.
JEFFREY BROWN: Is that sort of an agreed-upon goal, lower rates, but a broader base? Is that the idea?
DONALD MARRON: That's the standard talking point of any public finance economist.
JEFFREY BROWN: Right.
DONALD MARRON: Obvious, there's a debate about how low you can go on rates, because one thing we haven't mentioned thus far is that another problem with our tax code is it doesn't raise enough revenue to pay for what looks like future government spending.
JEFFREY BROWN: But that's the standard talking point. But then what happens?
DONALD MARRON: Any tax reform like that is going to create winners and losers. The losers are much better at identifying themselves and organizing to oppose it than the potential winners are.
JEFFREY BROWN: That's also a standard talking point for politicians as well, right?
ALICE RIVLIN: Yes. It is.
I'm the eternal optimist. And I think, if you had a determination to do a serious reform, so that in a sense there were a lot of losers, but you came out with a much better code, then you could mobilize support for that.
But, as Donald says, it would be hard, because if it's a home mortgage, you have all the builders and lenders who are for it. If it's the health insurance, then you have all the insurers and the people who already have very generous health insurance compared to their wages who want to keep that, because they already have it, though they might actually, if given a choice, rather have higher wages.
JEFFREY BROWN: But you're suggesting a lot of losers, for example, meaning it's broadly felt?
ALICE RIVLIN: Well, yes. And there would be a lot of losers because you get rid of a lot of small deductions and quite technical things that we haven't even talked about, but which people have a stake in.
So everybody would gang up and say you can't do this and this to us. But if you were doing it to a lot of people and you got a better tax code in the bargain, it might actually fly and for the reason in part that Donald mentioned. We do need more revenue. We can't solve the problem of our looming deficits on the spending side alone.
All of the commissions and committees have come out and said we have to do both. We have to do less spending and raise some more revenue.
JEFFREY BROWN: That means looking at things like charitable deductions. That means looking at things like the retirement -- tax-free retirement benefits.
Do you buy that kind of broad pain or lots of losers approach?
DONALD MARRON: But, again, I mean, there are going to be winners in that you're going to end up with a better tax system.
JEFFREY BROWN: Right, but people won't feel it right away. Right? They will probably feel it more as losers.
DONALD MARRON: Well, that's right. Again, this is one of the reasons why these reforms usually pair these changes with some reduction in tax rates, so that you have a tangible benefit that you can offer people.
And again also putting America back on a better fiscal trajectory is something that will be good for all of us.
JEFFREY BROWN: Are you as sanguine as Alice Rivlin about the political politics of that, of the possibility of getting something. . .
DONALD MARRON: I try to be, but it's a little hard.
Over the last few years, I have come to appreciate more and more the ability of our system to push problems off for another year or another year. And so I wouldn't rule out the possibility that this is, you know, a long can-kicking process, even though I hope that we have an epiphany and do a big deal.
JEFFREY BROWN: And of course it's complicated, right, because by the end of the year, we have even more deadlines hitting us, right?
ALICE RIVLIN: Oh, yes.
JEFFREY BROWN: Right.
ALICE RIVLIN: At the end of the year, we have some kind of quintuple witching hour, when the Bush and Obama tax cuts expire. This thing that we have done with Medicare called the doc fix, that expires. The Alternative Minimum Tax expires. Everything happens at the same time, which is a crazy way to make policy.
But something will have to be done either to extend those provisions, at least for a while, or to fix the system, so it's more sensible, or both.
JEFFREY BROWN: All right, Alice Rivlin and Donald Marron, thanks so much.