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MARGARET WARNER: Has the time come to dump the progressive income tax and move to a flat rate? That’s the recommendation of the National Tax Reform Commission, a group appointed by Republican congressional leaders last May to come up with a fairer tax system. Today the Commission issued its report. Among its key recommendations: Create a single tax for all Americans, instead of the current five-tier system; include a “generous” but unspecified personal exemption to protect low-income Americans; let workers deduct their Social Security and Medicare payroll taxes from their income taxes; require a 2/3 majority vote in Congress to raise that single tax rate in the future. We hear first from the Commission’s chairman, Jack Kemp. Mr. Kemp is a former member of Congress and Secretary of Housing & Urban Development in the Bush administration. He currently serves as co-director of Empower America, a conservative advocacy organization. Welcome.
JACK KEMP: Thank you, Margaret.
MARGARET WARNER: Why are you saying that it’s time to scrap the entire income tax system, which has been based on progressivity for decades and decades?
JACK KEMP: Oh, just about every President, from Harry Truman to Jimmy Carter to John F. Kennedy and Ronald Reagan, called the current tax code a disgrace. The Cold War is over. It’s a perfect time on the eve of the 21st century to take a look at what type of a tax we ought to have to unleash the great potential of the American people and the American economy. We’re not growing fast enough. We’re at 2.3 or 2.4 percent growth. I think we’re flirting with almost a recession, if we’re not careful. That’s another issue, but it’s–it’s one we have to watch out for, and we’re suggesting to simplify, make it fairer, have a single rate, put a maximum rate on. I prefer about 19 at peacetime. I don’t think people ought to pay more than 19 at the federal level. And then, as you said, have a generous exemption for the poor, allow for the deductibility of the payroll tax and leave in the interest on a mortgage if the financial institution pays tax on the interest of the mortgage–that they earn from the mortgage–the homeowner can deduct the mortgage, leaving charitable contributions. We could have a fairer, simpler, lower, pro-growth, pro-family tax code. I think it’s the one thing upon which Democrats and Republicans ought to agree. We’ve got to get America moving again.
MARGARET WARNER: Before we get into some of these specifics, I do notice that you’re going farther right now than your Commission report did, that is, talking about the 19 percent, saying that you would endorse maintaining the home interest exemption. Why didn’t you look for it–
JACK KEMP: We did leave it in.
MARGARET WARNER: You did?
JACK KEMP: Yeah.
MARGARET WARNER: Officially.
JACK KEMP: Yeah. Both that and the charitable contribution.
MARGARET WARNER: All right. Well, let me ask you this. Who will pay more in taxes, and who will pay less under a flat tax?
JACK KEMP: Well, let me explain. You get a bigger economy and a bigger economy with more people working means more people paying tax. It is theoretical, as well as empirical, to suggest that a lower rate would expand the economy. Kennedy did it in the early 60’s, Reagan did it in the early 80’s, Coolidge did it in the 20’s, Truman did it in the 40’s. So we believe if you look at the history of the tax code of America, revenues as a percent of the economy have been roughly 19 percent of GNP for almost forty or fifty years, whether the rates were at 90 or at 28, as they were under Reagan, so the answer to getting more revenue is to double the size of the economy. The way to double the size of the economy is to lower the rates and reduce the regulatory burden on the men and women to create jobs, i.e., entrepreneurs.
MARGARET WARNER: All right. But let me ask you this. If let’s say the flat tax rate were 19 percent, the people right now at the lowest end only pay about 14 percent. It does appear just comparing the rates, that the wealthy would have their tax rate drop dramatically, while people at the low end could see it increase.
JACK KEMP: You wouldn’t want to increase the tax on low-income people. When I was at Housing & Urban Development, I recognized right at the outset of my four-year tenure at HUD that the poor in this country are over-taxed, because they hit the payroll tax. That’s why we think it should be deductible. I supported the earned income tax credit as an offset against the payroll tax. It seems to me that we can have a system that’s fair, simple, and pro-growth if we allow for the deductibility of the payroll tax and have an exemption for the poor, bring–ending the tax on capital gains, Larry Summers will tell you, would lose revenue. It does lose revenue for capital gains. But think of the jobs that would be created in America if there were a zero tax, as there should be on the formation of the capital necessary to move this country into the 21st century.
MARGARET WARNER: But aren’t you heading–I mean, would there be the possibility, though, that people who are wage earners would be paying a higher tax rate than people who say, very wealthy people, lived off interest income?
JACK KEMP: I can’t say that every single taxpayer would get a tax cut, but I can say it would reduce the burden on the working family because right now a business can deduct the payroll tax, but mom and pop or working families cannot deduct it, so allowing for the deductibility of the payroll tax, which is 15.2, under Kennedy, it was 4 percent, today it’s 15.3. It keeps going up and up. It’ll have to go higher to save Social Security, some say. That is a real burden on the working poor and those trying to work their way off welfare. The only answer, in my opinion, is (a) to create more jobs and allow people to deduct that payroll tax; that would reduce the burden on the middle class as a whole, albeit you can’t figure out what everybody is paying. If we only wanted to escape taxation, rich people could put every single dollar they earned into tax-free munis and pay zero tax.
MARGARET WARNER: Today?
JACK KEMP: Today.
MARGARET WARNER: Today.
JACK KEMP: So getting the system set at a rate at which people are willing to maximize their output and still take the risk necessary to move this country into a technological and information age economy seems to me to be a way to both raise more revenue and to create more jobs for the American people.
MARGARET WARNER: And before I switch to Mr. Summers, what would be the impact of this on the budget deficit?
JACK KEMP: Well, I’m sure Mr. Summers, with all due respect, will say that this will explode the deficit. But, again, I would say if revenues are 19 percent of GNP, no matter what the rate is, why not set the rate at 19, expand the pie, and get a bigger pie, thus more revenue. If we double the size of the American economy to $12 trillion, we’d have an extra trillion dollars both to reduce deficit and debt, plus save some of the social programs that are so important to both Democrats and Republicans. So to me, growth is the issue. The only way to get growth is to reduce the tax on both labor and capital, the factors of production.
MARGARET WARNER: Okay. Now let’s get another view. It comes from Lawrence Summers, Deputy Treasury Secretary in the Clinton administration. Mr. Summers, you don’t like this. Why?
LAWRENCE SUMMERS, Deputy Treasury Secretary: Margaret, I think a flat tax is a bad idea whose time should never come. Fundamentally, a flat tax is unfair. It’s got to raise the same amount of revenue if you don’t want to explode the deficit. We know that it cut taxes a huge amount at the high end. It cut taxes for people who clip coupons. That money has got to made up some way, and the only way it can get made up is by raising taxes on the vast majority of Americans who are in the middle class and who get most of their income from wages. There’s a fundamental fairness issue that you just can’t escape within the flat tax principle.
MARGARET WARNER: Well, are you saying that if let’s say it was a 19 percent rate–that that–even with the deductibility of payroll taxes, which we just heard Mr. Kemp endorse–that that would amount to a tax increase on middle class and lower income Americans?
LAWRENCE SUMMERS: Well, you know, it’s interesting. The Kemp Commission report didn’t really come up with a specific proposal. Republicans have made a big fetish in recent weeks of CBO scoring. But we haven’t really seen a flat tax proposal that adds up on CBO scoring and doesn’t produce a huge increase in taxes on middle income Americans. So I think you can talk about flat tax ideas that might reduce some people’s taxes, but those won’t be the ones that are deficit neutral. And when you’re talking about deficit neutral and you’re talking about a big reduction in taxes on rich people, there has to be a make up somewhere and that make up has got to be in the middle income.
MARGARET WARNER: All right.
LAWRENCE SUMMERS: It’s just arithmetic.
MARGARET WARNER: What about Jack Kemp’s point though? He believes that this will, in fact, so expand economic growth that we can cover the deficit without having to raise taxes on lower and middle income Americans. Is that possible?
LAWRENCE SUMMERS: Margaret, I get a sense of deja voodoo listening to that suggestion. That was exactly the argument in 1981 when people said that it would raise revenue and we wouldn’t have big budget deficits.
MARGARET WARNER: You’re talking about the Reagan era tax cuts.
LAWRENCE SUMMERS: The Reagan–the huge Reagan tax cuts. And, you know, of all the debt that we have right now that people are worried about, 75 percent of it came since those 1981 tax cuts which people said would turn out to raise revenue. Sure, there’s some incentive effects of taxation. Those are recognized in the models that people use to calculate what–the revenue impact, but to suggest that somehow we can have tax cuts on the rich that pay for themselves so we don’t have to raise taxes on middle income families, that just goes against all of our history. Yes, it’s true that there were some revenue increases after 1981, but those came because we had to, because of what we had done, have a whole set of tax increases on working families.
MARGARET WARNER: Let me ask you about a couple of basic premises of this Commission. One is that the current tax system just should be totally scrapped. Do you agree with that, or do you think it can be modified around the edges?
LAWRENCE SUMMERS: No one’s satisfied with the current tax system, but I think we have to work now to improve it. The President’s Middle Class Bill of Rights is an important set of steps that will provide tax relief for middle income families today; that will support the most important kind of investment that we make in our country, investments in our children’s education. That’s the way to go in the changing tax system.
MARGARET WARNER: So basically you work with the current tax code but change it in certain ways?
LAWRENCE SUMMERS: We’ve got to look at all aspects of the tax code, and if there’s a radical proposal that’s fair, then we should–and make the tax system work better–we should certainly–
MARGARET WARNER: All right.
LAWRENCE SUMMERS: –look at it, but I’m against any proposal that raises taxes on people’s health insurance in order to cut taxes on other people’s stock options.
MARGARET WARNER: And the second major premise seems to be that the idea of one rate fits all is the fairest. Do you agree, or do you still like the progressive income tax system?
LAWRENCE SUMMERS: We’ve had a tradition for 75 years in this country of progressive taxation. Every major country in the world has a progressive tax. It’s fair that there be a higher rate on higher income people. It’s especially fair right now in this country because of what’s happened. Market forces for a whole variety of reasons have led to a situation where we see the top 1 percent of our population nearly double their incomes over the last 20 years, where middle class families have remained essentially stagnant. At a time when that’s true, the worst thing in the world would be to further exacerbate those inequalities by cutting taxes at the high end in order to raise them at the middle end. We certainly shouldn’t be reinforcing that trend towards inequality.
MARGARET WARNER: If that’s fairer, and you’re right the country–we’ve been doing this for decades, a progressive system–why do you think polls show that actually a majority of Americans now like this idea of one rate fits all?
LAWRENCE SUMMERS: Well, I think it hasn’t really been explained. I think the Americans show that they are dissatisfied with the current tax system because they want their taxes to come down and that’s what the Middle Class Bill of Rights will do. That’s what we’ve been working on at the IRS. It’s now true that 20 million Americans have such a simple tax system that they can file it with their telephone just by pushing the buttons on the telephone. That kind of thing is the way forward. When people understand that the Republican flat tax means that they’re going to have to pay more than $1,000 of extra taxes on a standard health insurance policy that their employer gives them, but then others are going to see their stock options go tax free, I don’t think that’s the direction that the people want to go with our tax system.
MARGARET WARNER: All right. Sec. Kemp, having heard this–
JACK KEMP: It’s so sad to hear the Asst. Sec. of the Treasury defend the current tax code and to say that there’s a Middle Class Bill of Rights that let’s you fill out your taxes on the telephone. That is pure, unadulterated demagoguery, and Larry knows it. The tax rate on a working family of $30,000 is 15.3 percent on the payroll, the seven point, what, five six or six five on the employer’s side and the seven point six five on the employee, and a 15 percent income tax, that is 30 percent at the federal level, not to say what it is at the state and local level. So the families of America are overtaxed right now. The poor are overtaxed. We overtax capital and labor, and, Larry, with all due respect, is defending the current system. That’s the trouble with this Treasury Department. They don’t understand incentives.
MARGARET WARNER: All right. So where do you think this is going politically then?
JACK KEMP: I think it is the hottest issue in the country today, and knowing President Clinton as I do, it won’t be long before he comes out for a national tax reform commission to take what Summers just said and revamp it and I’ll bet you as we sit here tonight, they are thinking at Treasury about a simplified–maybe not a single rate–but they’re going to do something, and I know the President well enough to understand that he knows the system isn’t fair. And one other thing that has to be said, just quickly, we raised taxes on people in 1990 under the Bush administration, I was opposed to it, and it didn’t raise revenue. The Clinton administration have taken the rates up to 40 percent. Revenues have not gone up, Margaret. They’ve gone down as a percent of the economy.
MARGARET WARNER: All right. Let me get back to Mr. Summers. Is the President going to respond to this challenge to create this bipartisan commission that both Mr. Kemp and also Speaker Gingrich suggested today?
LAWRENCE SUMMERS: You know, Jack’s come with the traditional Washington way. We had one commission, and it suggests that there be another commission. Our focus is on reducing taxes now for middle income people. That’s what the President’s proposed. He’s proposed it in a balanced budget. He’s proposed it in a balanced budget that’s got arithmetic that the CBO and everybody else accepts. It’s very interesting when you talk about demagoguery that the Republican commission hasn’t proposed any arithmetic, any plan that’s been ordered by anybody; they just talk about the idea like there’s a free lunch and you can cut taxes for everyone. That’s not the way to help working Americans.
MARGARET WARNER: Okay, gentlemen, we’ll have to leave it there. Thank you both very much.