Transcript
RON NESSEN: Good morning. I want to welcome you to Brookings. I'm Ron Nessen and I want to welcome you to our forum this morning on the current tax policy debate. This, obviously, is timed for the weekend when a lot of Americans will be paying their annual income tax. Our intention today is really to have this discussion broader than just the current debate on Capitol Hill over tax-cut legislation and to really examine some wider issues of tax policy, including fairness, progressivity, whether the budget surplus allows a tax cut, what kind, what size, and as well as some other taxes, including estate taxes, and so forth. And we have a very knowledgeable panel and a very knowledgeable moderator.
I want to—before turning it over to the moderator, Alan Murray—I want to welcome especially those who are watching or listening to this forum on the live webcast on the Brookings Website. If you want to send in questions by e-mail, if you're watching the webcast, you can do that. And our panelists will try to answer them as time allows. I want to welcome Mike Armacost, President of Brookings. Do you want to say anything, Mike? (Laughter.) Have you filled out your returns? (Laughter.)
For those watching the webcast, you can e-mail your questions to: communications@brook.edu and we'll try to have the panel answer those questions, as well as those from the audience here. Just one last reminder, the Brookings website does have a great deal of background information on tax policy, tax issues, the current debate over the tax cut. And you'll find all of that at www.brookings.edu.
And now, here to moderate this forum and to introduce the speakers and the panelists is Alan Murray, the Washington Bureau Chief of the Wall Street Journal.
ALAN MURRAY: Thank you, Ron. And thank all of you for pulling yourselves away from your 1040s to be here this morning.
Elections do make a difference and anybody who doubts that only needs to look at the 65 senators who gave their support to a $1.2 trillion tax cut last week, which was about three quarters of what President Bush wanted and will most likely be the low-water mark for tax cuts. It now seems pretty clear. We're going to have a tax cut. It is going to be roughly the size that President Bush wanted and I would guess we'll have roughly the kinds of components that President Bush wanted. But, just because, just because the political debate has been largely settled, there's no reason for us not to still have a debate here at the Brookings Institution.
To look at the questions, first of all, should we be having a tax cut this year? If we should be having a tax cut, how big should that tax cut be? How real are these—particularly given what we've seen in the last six months in terms of our economy and in terms of the spending proclivities of congress—how real are these ten-year estimates of budget surpluses? If we don't have a tax cut, is there any reason to think that any of those surpluses or a significant portion would be devoted to debt reduction? And perhaps most important of all, if we are going to cut taxes, whose taxes should be cut and to what end? We'll explore the Bush administration's contention that it has designed a tax cut that deals with the biggest problems in the code because it deals with the areas where people face relatively high, marginal tax rates. I hope somebody will help me understand how it is that if a 39% marginal tax rate is such a great disincentive to entrepreneurial activity, how it is that the 39% tax rate has coincided with the greatest burst of entrepreneurial activity in world history? And if this isn't the right combination of tax cuts, then what is? Is there a better combination of tax cuts to stimulate the economy? Is there a better combination of tax cuts on equity grounds?
A great panel here to discuss that. We're going to start out by giving ten minutes to Bill Hoagland who runs the majority staff of the Senate budget committee and will speak for the 50 republican senators, which is a daunting task, as we know, if you watch them try and speak for themselves over the last few weeks. (Laughter.)
After Bill finishes his comments, then we'll turn to Bill Gale who is a senior fellow here at the Brookings Institution, the Joseph Pechman Fellow at the Brookings Institution, and has written a lot on these matters. When he has finished his time, then we'll have a panel discussion that will bring in Belle Sawhill, also a senior fellow here at the Brookings Institution and Co-director of the Welfare & Beyond Project; Bill Frenzel who is a guest scholar here at Brookings, was a member of congress for 20 years from Minnesota and the ranking member of the Senate budget committee. You've noticed so far I've introduced three Bills and a Belle. Bill Gale suggested that Sperling and I also just go by Bill to make it easier for everyone, but, I think I'm going to pass on that.
Gene Sperling, you know, is the former Director of the National Economic Council in the Clinton administration, served in various posts in the Clinton administration, is now also a guest scholar here at Brookings. We'll have a discussion among ourselves after the initial presentation, then we'll open it up to questions from the audience and from the people who are watching the webcast.
So, Bill Hoagland, let me turn it over to you.
G. WILLIAM HOAGLAND: Thank you, Alan.
Thank you for this invitation to participate in this forum. I feel somewhat very much out of place with these real experts up here. I also, to be really honest, feel a little bit outnumbered politically, except for my friend Bill Frenzel down here.
I have three 'S's for why I want to describe my support for tax reform: simplification, spending, and savings.
On the first 'S'—simplification. Let me begin by confessing up front here that I have not yet filed my 2000 federal income taxes. But, I will make the deadline this weekend and it'll be thanks largely to Intuit's Turbotax software. And that situation helps me kind of try to make my first point. The federal income tax code, from my perspective, is unbelievably complex, even for the small average taxpayer, such as myself. The one great disappointment to me, at least, coming out of this current tax policy debate, has been the lack of focus on simplification and putting some transparency back into the system. I'm just a Hill staffer. I deal with these issues on a somewhat regular basis.
I do not have a complicated income stream: a salary, thanks to the American taxpayer; some interest on savings, not much; some dividends on a few mutual funds; and an average tax rate I admit up front of 25%. And yet, I truly don't think that I could fill out my 1040 anymore without the aid of these software packages and I will also admit that I'm putting an awful lot of faith in these software packages, that they're doing the right calculations for me.
I refuse to hire a tax accountant or a tax lawyer to do what I think the average American ought to be able to do on their own. And while the current debate focuses on reducing federal income taxes—and I think that's okay, of course—I believe the debate might be fundamentally different if the focus was on tax reform with simplification. It obviously is a classic public policy trade off. But, I fear for many taxpayers that it will be a close call as to whether their reduced taxes in the end will be worth the continued headaches and costs of added complexities to the code.
All right, before I turn to the other two 'S's, a little update. I will boldly predict, as Alan already has, that the current debate is leading to federal income tax cuts for the American taxpayer; tax cuts are on the way; they will be enacted and a down payment, I predict, will be coming from the congress as early as Memorial Day. Now, how can I be so sure? A little history, not ancient, most of you already know this. It was about a year ago that Vice-President Gore in his campaign for the presidency proposed tax cuts that netted by my estimates $300 billion over ten years—and as a side, not a lot of simplification.
In January of this year, the Senate democratic leadership in Senate proposed tax cuts of $750 billion, more than double Vice-President Gore's campaign proposal. Early last week, the so-called centrist coalition, led by Senators Breaux and Snowe, proposed $1.250 trillion tax cuts over ten years. And then last Friday, the Senate budget resolution passed, as Alan has said, 50 republicans, 15 democrats supporting, and by the way, three of those democrats that supported that tax cut of the 15 are members of the Senate Finance Committee, including the ranking member, Senator Baucus. And that proposal that we passed last week, we will say—I will say—is $1.3 because I include what we believe to be the impact in fiscal year 2001.
Now, also, of course, the House has already adopted its budget blueprint. That assumed the President's $1.6, but more importantly the House has already passed HR3, Rate Reductions, HR6, Marriage and Family Relief, HR8, Estate Tax, and these three bills alone already add up to $1.5 trillion in tax cuts over the next ten years.
And probably more importantly, where I can be so confident there will be tax cuts this year, is that budget resolution that we passed last week—budget-geeky kind of stuff here—did include a tax-cut reconciliation instruction—something that was rather controversial—but that tax cut reconciliation requires that the Senate Finance Committee report back by May 18th the first tranche in tax cuts and that by having it in reconciliation, for those of you who understand the Senate procedures, guarantees that that particular tax cut will not be filibustered in the Senate.
Now, my counterpart in the House Budget Committee and I have been meeting, will meet this afternoon, will continue to meet over the recess, and make recommendations for out bosses when they come back from this Easter/Passover recess around April 23rd. And surprise, surprise, I think God invented conference committees to split the difference. And from my perspective, that's a very simple $1.450 trillion, almost identical to that which the House has already passed.
Now, we can argue, and we will argue I'm sure over many things, about the design of the tax cut, the fairness, to the rate cuts, the distribution benefits. But, I hope Bill Gale and I can at least agree that the difference between $1.3 and $1.6 or $1.5 in a $300 trillion economy over the next ten years is so insignificant as to be, quite frankly, silly.
On my second reason for supporting tax cuts: 'S'—the second 'S'—spending. One of the major reasons we need to have a tax cut is simply to control long-term spending. Now, I had the opportunity, as they say "up close and personal," last week to see what happens in a 50-50 Senate with a projected surplus, which I believe is real, even when we exclude the Social Security and Medicare surpluses, it is red meat for the elected official, and a very bipartisan red meat, at that.
We began the week, last week in the Senate, by Senator Domenici laying down President Bush's outline. Stated very simply, that had assumed a surplus of $5.6 trillion over the next ten years less Social Security, less $1.6 in a tax cut, less interest on that tax cut, less about $200 billion for a spending initiative, even excluding the HI trust fund balances, and we left on the table nearly a half a trillion dollars, $500 billion, in what was called contingencies. In a very bipartisan manner, the Senate proceeded to cut the tax cut, increase taxes and increase spending.
Now, those of you that have been following this debate know that the Senate changed the President's 4% spending increase in discretionary spending—and we did—press hasn't got it right yet, it's 8.3% that we increased it to, more than doubled it. But, what might be lost in this, not so obvious, is that was only for 2002. And it only added—only—$28 billion to a $1.9 trillion spending package. And it was in areas of defense and education, veterans' benefits, conservation and justice. But, that's not the real story. The real story is what we budgeters like to refer to as mandatory spending, entitlement spending, not one-year spending, but multi-year spending.
The Senate increased mandatory spending over the next ten years by $445 billion for such things as agriculture, special education to become a new mandatory program, and other programs. And almost dollar for dollar reduced the President's tax cut proposal. Further complicating this, the Senate also said that we should dip into that half a trillion dollar contingency fund to the tune of about another $222 billion over the next ten years for Medicare, prescription drugs, additional to that which the President proposed, Medicare for home health, the states' payments, and more military and veterans' compensations.
Now, those who argue that we cannot afford a tax cut because we need to be worried about its impact on its years beyond 2011, when the increasing demands of the post-war baby boomers, the Bills and Bills here, hit the public trough, so to speak. You need to explain to the American taxpayer how it is that creating nearly $700 billion in new mandatory spending—And by the way, spending that is probably, most of it, directly related to the same demographic problems that we want to talk about—how it is that that does not represent a threat to our fiscal future, while cutting taxes is. I argue it will, that it does represent a real threat to the future and if we continue on this path, it can only mean higher taxes on a higher base as get out in the future.
Finally, let me close out here, my time with the third 'S'—savings. We all know, I think, the US household savings rate is miserable, in fact negative, and personal debt is at a record. Good economists here at Brookings and around have many explanations, as I understand. Why should you save when your stock portfolio is increasing? Why save when the government has promised that every one of your needs be met in retirement? But, I also subscribe to the theory that with increasing personal debt and with high taxation, many families' disposable income is such that they simply cannot save. Simply stated, the less government takes away in taxes from families, the more they will have to pay off their personal debts, increase personal savings, increase investment, and add to private sector growth in the future.
The issue of who should get these tax cuts, how it should be distributed, I'm going to leave here to my other panelists. But I can only conclude that a tax cut now—front-end loaded, as the one the Senate passed last week, in fact we doubled the President's tax cuts for 2002 from about $27 to about $58 billion—front-end loaded, as much as possible, but tied to reductions in marginal rates for the long-term savings, investment, and growth that are necessary to meet the challenges of the aging population, while at the same time reducing elected officials' temptations to spend the surplus on government programs that, quite frankly, some of them are questionable in my mind. I think it's the right thing to do and I think, therefore, it will be done.
Thank you.
MR. MURRAY: Bill, hang on just for one second while you're up there. You're three 'S's are a little bit different than what you might call President Bush's two 'E's: eliminating economic distortions by lowering marginal rates and providing economic stimulus that's slowing down. How do you personally see the significance of those two goals?
MR. HOAGLAND: Well, I think congress obviously takes a proposal from an administration—even though congress is ostensibly of the same party as the President—and we modify the President's proposals. And I think things have changed from the $1.6 we put on the table almost—circumstances have changed. And we've modified those. And so I do think that the issue is that we have modified it in such a way as for economic-efficiency purposes I don't have any trouble with the reduction of the marginal tax rates. I think that is a part of it. But tying the marginal tax rate reductions to a stimulus of some sort in the near term, I think is the nature of the legislative process to address the current different circumstances that were at the time that the President made his initial proposal.
MR. MURRAY: Okay, thank you.
Bill Gale?
WILLIAM G. GALE: Thanks very much. It's a pleasure to be here. It's especially a pleasure to follow Bill Hoagland who is one of the very most principled and honest and intelligent people on the Hill and is always a valuable resource for people like me and I presume, for people like the media, also.
Let me start out by very briefly responding to the three 'S's, not to pick on the three 'S's, in particular, but I think it's an example of a bigger problem, which is that the Bush tax cut is an answer in search of a question. And the answer stays the same, but the questions and the justifications keep changing over time.
So let's start with simplification. You have in your handout a policy brief that I just wrote that argues that the Bush tax cut would make the tax system more complicated and substantially more complicated. It would do that by throwing an additional 15 million people under AMT by introducing charitable deductions for non-itemizers, which was tried in the 1980s and created all sorts of compliance problems, and it would do that by introducing a raft of targeted tax credits, which are almost exactly like the ones that Al Gore had proposed in structure and that were heavily criticized by the Bush campaign in during the election season. There's not question on net the system would become more complicated with the Bush tax cut.
Let's turn to saving. There's also no question that national saving would fall. If you cut, every dollar you reduce in surplus is a reduction in government saving. Only a tiny fraction of that is going to be saved in the private sector. Probably a slightly larger fraction will be saved because the Bush plan is tilted toward high-income households who save more, but on net national saving will go down probably by about between one third and two thirds of the net tax cut.
Let's talk about restricting spending. I agree that huge tax cuts are not affordable. I also agree that huge spending increases are not affordable. But, it doesn't make sense to claim that we should have unaffordable large tax cuts to avoid unaffordable large spending increases. There's a better way to deal with all of that. And that's to show the budget surplus in a meaningful way. And that would show that these items, both of them are unaffordable, and it would, I think, choke off much of the debate about everything from Americans being overcharged to how much money we have to give on tax cuts.
So, in the rest of my talk, I want to focus on three or four issues. The first is the overall budget picture. That was what I was going to talk about first. I think, it's absolutely essential to understand the overall budget picture before we start throwing around trillions of dollars in tax cuts. The second is to discuss the tax cut from the perspective of equity, efficiency, and simplicity. The third is to talk about other reasons for tax cuts. I was going to focus on several, but I'll focus on this restricting the size of government issue that Bill raised. And the fourth is what do we do now?
You have another policy brief in your folders that I co-authored with Alan Auerbach on the budget outlook and tax policy. And the basic gist of this policy brief is that $5.6 trillion is an official number, but it's essentially meaningless in terms of its economic content. First thing, $3.3 trillion of that $5.6 trillion surplus represents the build-up in pension funds for Social Security, for Medicare, and for government pensions.
No firm would consider pension funds as money available for current operating expenses. In fact, firms are not allowed to. State governments typically cordon off their pension funds. Households typically don't think of their pension funds as money they can spend on current consumption or vacations. And the federal government shouldn't either. So, if you change that, you're down to $2.3 trillion. That is, 60% of that ten-year surplus is just a pension reserve. And since we don't count the liabilities of those pension plans, it makes no economic sense to count the assets of the pension plans. So, immediately we're down to $2.3 from $5.6.
And then if you have what you might consider realistic versions of current policy—the baseline is just a baseline, it's not a forecast, it's done in a mechanical manner—if you assume that congress is going to fix the already existing AMT problem, and you assume that discretionary spending per capita, per person, is going to stay constant, you'd knock off another $600 billion. You'd get down to $1.7 trillion. That's the amount we have to play with over the next ten years. But, even that's misleading because it's just a ten-year figure.
If we did the budget right, if we included the liabilities of these pension funds, we would actually show a long-term deficit. And Alan and I go through that in the paper. But, just to be clear, the bottom line here is if the government kept its books like a business, or in any, sort of, generally accepted accounting manner, it would show a deficit right now, not a surplus. And if that were the case, then we wouldn't be talking about whether we should have a $1.5 trillion or a $3 trillion dollar tax cut. We'd be focused on the fact the government is in debt.
What's ironic is the administration in the same budget where it says that social Security is in long-term deficit and Medicare is in long-term deficit, and then turns around says we can afford a tax cut, because when it looks at Social Security and Medicare it's looking at the long term, when it looks at the tax cut, it's only looking at the first ten years, that's obviously inconsistent, and it would be much better if all of government looked at itself on a consistent basis.
The President's tax cut—I agree with Bill the difference between $1.3 and $1.6 is not anything to get tremendously exercised about. But, I do want to add the cost is going to be a lot more than whatever that number turns out to be. But, say it turns out to be $1.45—or just round it to $1.5 trillion—you still have the interest cost on that, which is going to be another $300-400 billion. And you still have the new AMT problem that's created on top of the baseline AMT problem, which is another $300 billion, just for the House Bill that was passed alone. So, already you're talking about $2.2 trillion devoted to the tax cut, the financing of the tax cut, and the unfounded liabilities with respect to the AMT the tax cut creates.
Well, how does the President get around this? He's only got $1.7 over ten years and this tax cut costs $2.2 trillion. Well, if you look at the budget, the President doesn't fix the baseline AMT problem; he doesn't fix the new AMT problem that his own tax cut creates; he takes $400 billion in government pension reserves and spends it on current spending or tax cuts; he takes $500 billion in the Medicare trust fund and spends it on current Medicare spending, rather than leaving it in the trust fund to accrue; he cuts discretionary spending per capita, which would be at basically 50-year lows, which is already at remarkably low levels relative to history and would be at 50-year lows by 2011; And in the long term, as we show in the policy brief, he triples the size of the long-term budget deficit.
So that's the tax cut in the context of the budget picture. Let's think about the tax cut from the complexity, equity, and efficiency. Complexity, I already mentioned. The President's cut would unambiguously make the system more complicated. The administration has been completely obstinate that it will not fix the AMT problem. Paul O'Neill says, "Oh, that's just a problem for high income tax payers," which is not only factually incorrect, it's remarkably irresponsible of the Treasury Secretary to say.
So let's turn to the equity issues. I think any responsible analysis of the Bush plan shows it's tilted toward high-income households. The dollar figures, of course, are huge—the amount going to the top 1%. If you look at the percent of the tax cut going to the top 1% or 5%, it's bigger than the percent of taxes that they pay. If you look at the percent increase and after-tax income, that's bigger at the high end than at the low end.
The administration has had two responses to these facts. One is that they've denied the obvious facts with a series of incredibly disingenuous examples and outright lies. They basically have said in the budget submission, the most help goes to those who are most in need, yet anyone under $20,000—a married couple under $20,000—is getting a zero-dollar tax cut. So it's an interesting definition of "most in need." They've used examples where a family that gets a $20 income tax cut is considered to get a bigger tax cut than a family that gets a million-dollar income tax cut through some finagling that we can talk about, and so on.
Their other response has been to say—has been exactly the opposite. They say, "Oh, well, of course, the rich have to get bigger tax cuts because they pay most taxes." So, first, they deny it and then they say, "Of course, it's got to be true." But, in fact, you can cut taxes without massively tilting the tax cut to the wealthy. Trimming back the administration's proposal could easily do that. Belle Sawhill has a proposal that would do that.
So the question isn't—I want to be clear on this—the question isn't do we hate rich people? Are we trying to suck every penny out of them? The question is the government has a couple of trillion dollars; say $1.7 trillion, over the next ten years. What's the best way to use that money?
Let me put it differently. If you had that money to fix any public policy problem you could, how would you spend it? Would you devote the bulk of it to giving cash back to the richest group of people in the history of the world whose incomes have gone up dramatically faster than everyone else's incomes in the last 20 years? If the answer is yes, then you're a supporter of the administration's plan. If not, you think that there are other aspects, other uses that would be better.
I talked about the economic effects towards saving. I'll just mention—another place the administration's been incredibly disingenuous has been the argument that their plan has an anti-recession tax cut. The original plan, of course, had zero tax cuts in 2001, so it's very difficult to see how you could fight a recession with a zero tax cut. And the fact that the House and the Senate have looked at immediate stimulus packages sort of belies the notion that the President's plan is an anti-recession cut.
Let me talk about this issue about whether government is too big And if so, how do we shrink it? First thing I want to say is even if government is too big, that provides no justification for a tax cut that's tilted toward the wealthiest households in the country. You can restrict government just as well with a tax cut going to low and middle-income households than with a tax cut that goes to wealthy households. In fact, if your goal is to restrict government spending, which typically goes to middle and low-income households, it would make more sense to have a tax cut that were targeted to those people, rather than a tax cut that's targeted to the very wealthiest households.
So, if the goal is to restrict government spending, if that's accepted as a logical goal, as a reasonable goal, then the tax cut, logically, ought to be targeted at the people who otherwise would have benefited from that government spending, which is low and middleclass households.
The second issue, though, is—government spending now is quite low, as a proportion to the economy. Discretionary spending is at its lowest level since 1962, and probably before that. The only reason I go to '62 is that that's where the CBO table ends and I've never checked earlier. Domestic discretionary spending is also low relative to its value the last 20-30 years. And under the Bush plan it would fall to its lowest level, I think, in about 60 years, possibly since WWII.
But, the real issue here is if we do want to restrict government spending—when it's already low relative to historical norms—there's a better way to do it. And that is to report the budget accurately. And rather than pretending that we have trillions of dollars to play with, we should report the numbers in a way that shows that we don't have the money available. It would be much better to be honest about how much we have, than to give away in tax cuts money that we don't really have.
So, the argument that we should restrict government, is really an argument that we should reform the budgetary procedures And in particular, a simple way to do that would be to have the government not spend the Medicare trust fund, not spend government pensions, and not spend the Social Security trust fund. The administration is basically planning on spending or using for tax cuts about $900 billion of government pensions and Medicare reserves. And so if we really want to restrict the size of government, the way to do that would be to move these retirement accounts off budget.
My last point, what do we do now? I think the most important thing we can do is try to come up with a new policy framework. I think it was a very bad development for the development of good policy that the administration plowed ahead with its tax cut before it even had a budget framework in place.
Basically, politicians understandably want to balance the budget. But, the budget they are currently trying to balance has little economic content. So, they're being led to make systematically wrong decisions in order to balance a budget that is not the one they should be balancing.
And so the first thing we need to do, I think, is develop policy rules, a way of thinking about a new framework, a new budgetary language that would include, for example, excluding the retirement trust funds from the budget, allowing congress only to allocate a portion of future surpluses—as Robert Reischauer has suggested they should be allowed to be allocated, but, a declining proportion of future surpluses because of uncertainty involved. And a third issue has to do with—policy should be phased in only under very short timeframes, let's say three years.
The estate tax repeal that the House passed is an abomination to anyone with sort of a sense of decent budget accounting. Basically—let me take a step back. If you didn't do anything to the estate tax for ten years and abolished it in the eleventh year, that would count as a zero-budgetary cost, because the budgetary costs only go through ten years. So what the House did was phase out the estate tax very slowly, and then in the eleventh year there's this huge cliff—elimination of it. And so the cost in the next ten years are gigantic relative to the costs in the first ten years. And a way to introduce honest budgeting is to force people to phase in programs very quickly so that you can't play that kind of game.
The other kind of game that people play is to propose a temporary tax cut or a temporary spending increase. And I think those should also be disallowed unless it's some sort of emergency situation. But if you're going to propose a tax cut of $50 billion this year, that only counts as a $50 billion cost against a credit. But if you propose the same thing next year, that also only counts as a $50 billion charge against the surplus. But if you're actually going to do that for all ten years, you should be forced to pay for that up front, the $500 billion tax cut.
So I would like to see faster phase-ins and elimination of the use of temporary policies. I expect, particularly with the AMT, that you're going to see temporary fixes every year for the next several years. But I think if we could get our policy rules in place that—along the way I lined up—that there would be plenty of room for discussion of what kind of tax cuts and who should get them.
In terms of what specific policies we should do, I agree completely we should try to simplify the tax system. The policy brief lays out a number of ways we can do that. That'll help high income, low income, middle-income households, but it's not at all what the Bush administration has proposed and, frankly, it's not what the Democrats have proposed either. And so maybe the most positive thing or the thing we agree on most so far is that simplification needs to be raised in terms of its visibility as a tax policy option. What's remarkably striking about that is probably everyone up here will agree on that. Probably, everyone you got on a panel like this the last ten years would agree on it. And yet the tax system keeps getting more complicated. Why that's so and what we can do about it is a very interesting question.
Thank you.
MR. MURRAY: Bill, stay there just for a second. I want to draw you out a little bit because I feel like you have been holding back. You haven't told us how you really feel. (Laughter.)
On the question of economic stimulus, obviously the original Bush plan didn't have anything in it for immediate economic stimulus because it was done a year and a half ago when there wasn't an immediate problem. But, is there a role for tax cuts to play in a counter cyclical policy right now?
MR. GALE: Let me just say it's obvious to you and me that there was no stimulus part to the package. But the administration pushed the package as a stimulus plan very hard in December, January, February.
MR. MURRAY: But they also said that they were open to refiguring the package to get more of the tax cut in the first year?
MR. GALE: And that is, in fact, exactly what they did in the Senate.
MR. MURRAY: The question I'm asking is is there some value to a counter-cyclical tax policy right now?
MR. GALE: I was trying to clarify the premise of the question. I think that you're talking about a $10 trillion economy. You're talking about a growth rate that's coming down from 4% to zero, roughly speaking. You're talking about $4-5 trillion drop in stock market wealth. And then you're talking about giving each family $300. You know, I just don't see—certainly the direction would be right.
MR. MURRAY: We're now talking about $85 billion in the current year. What does that come to? $500-600.
MR. GALE: Well, this is an interesting situation in terms of the temporariness of the proposals. $85 billion can make a difference. I mean, that's almost 1% of GDP. How much difference it will make is open to question. The experience in the past has been that most of temporary tax cuts get saved. And there's no reason to think that wouldn't be the case now. So, but in terms of a stimulus, what you want is people spending the money. So certainly it's in the right direction, but it's hardly going to turn the economy around.
MR. MURRAY: Okay. Thank you.
All right, let's bring the panel in here. Since Bill Hoagland feels he's outnumbered, Bill Frenzel, I'm going to let you go first and comment on what you've heard here this morning.
BILL FRENZEL: Thank you very much, Al. See, Bill goes first in the original two, and I go first with this three. Simply, it's the old biblical phrase the best shall be first. (Laughter.)
I figure I was hired for this operation because I am pretty curmudgeonly about taxes. And they needed somebody that was to the right of Bill Hoagland and they couldn't find a good one, so I was asked to step in. And I don't mind being an onion the petunia patch. (Laughter.)
My first thought about taxes—I was aghast to find out that Bill Gale might not like this bill, shocked, I might say—is that the President is right. Taxes are too darn high. We're paying whatever it is, 22% of GDP, the highest rate of taxation in the country's history. Why? Because the bandits like to spend it. And I think the tax cut may be too big, it may be too little. The President says it's just right. Both the Bills agree we will come in somewhere between $1.3 and $1.6. It's probably quite close to $1.45. That's okay with me. I don't know whether it's too big or too little. I do not remember—we have raised taxes many times while I was in congress, and we even cut them a few times. Nobody at that time worried much about a trigger. And we made larger tax cuts in the Reagan administration before I came around; we made larger tax cuts in the Kennedy administration, which were, of course, affected ultimately by Lyndon Johnson.
But I think the fact is obvious and I think Bill Hoagland has stated it correctly. Whatever we don't cut in taxes, the congress will spend. Now, this isn't a new theory and it doesn't always work because we cut taxes in times of deficit. And it didn't encourage the congress to be very frugal. And this may not either. On the other hand the Congress last year raised discretionary spending, I think, Bill by more than 8%
MR. GALE: Fourteen percent.
MR. FRENZEL: Historically, low by Bill Gale's standards, outrageous by my standards—an exercise in bacon gobbling that defies any sense of reason. And then again.
MR. GALE: I was talking about the level of spending in relative terms, not the interest.
MR. FRENZEL: I understood that. Bill, I'm one of those seriously misleading speakers. (Laughter.) If I'm not smart like you, what have I got? Perception is the only thing that works.
And Bill Hoagland says we're going to have another 8% this year. What in heck for? We're going to put some more concrete in Bud Schuster's district, I'll bet. (Laughter.) This is all this good spending stuff that we're going to give to poor folks. Bill says the tax cut's going to do that. What is the military going to defend poor folk more vigorously than rich folk? Is the cement that's poured going to be for poor folk? It's just pork and I don't see anyway to prevent them from spending, maybe other than giving a little bit of it back. The tax burden is too high. It ought to be reduced.
Next point is do we need a stimulus now? Alan asked this question. In my judgment, I don't think that's terribly important. We don't have enough numbers yet to know how consumer spending is going down. We're confident that it will go down a little bit. But, the problem out there is in business investment and business profits. And Ms. Belle, of course, doesn't deal with that other than that it affects a lot of small businesses, which file as individuals.
Next question is simplicity needed? Bill said everybody in the room would be for that. I guess I'll stand up and say a good word for complexity. The purpose of a tax system is raise the revenues you need for government. And the second highest goal is to make sure it's fair. And other goals that are important are that you may want to stimulate some kind of activity, get out of recession, encourage saving, give to charities, own a home, have a pension system, whatever you want to do with your tax system—admittedly, we do too many things.
But in a highly complex society, I think those people who dream about a simple tax system are a little bit like friends in the congress who believe they're going to send one postcard to the Treasury every year, and that's going to take care of them. It isn't. Congressmen do not get elected on nothing. They get elected on promises. But if you cleaned the tax code down to a flat tax applying to everybody, within five years it would be just like it is now, because we would all put stuff into the tax code. Why? Because it works. It's an effective stimulus and there are good ways to use it.
With respect to the AMT, I think Bill has been a little strong in asking the President to cure that which the redistributionists have given us. I'm not sure that's his job. And while I agree that the AMT will be pecked at and needs to be improved, I sit here and pay it, and I'm not looking for any immediate relief, Bill, I'm not going to bet any money that it's coming.
I'd like to say one other thing about whether our tax code is progressive enough. Bill, again, suggested that we should give money apparently to people who didn't pay any taxes. That's funny. I thought this was a tax cut. And I do not believe that there is anything written in heaven or handed down to us from on high that says every time we have a tax cut we have to make the income tax code more progressive. When I was in congress we tried to neutralize it. We tried to keep the burden the same through the various levels of income. And if we succeeded—no remember, this is a democratic congress all the time—we thought that was a reasonable tax cut. Now we have a new standard. It is that we got to take care of other people who might well be taken care of through welfare programs—and we do it through refundable tax credits, such as the ones that are on the books now, which apparently give us a 30% error rate or some people would call that a fraud rate. The bigger you make those programs, the more is going to happen to your error rate or your fraud rate.
And I don't think it's necessary. I think if the tax plan gives us a tax code that is no more regressive or not less progressive than the one we got, that's pretty good tax code. I think we're really quite progressive now. And I don't urge the flat tax, but I do think 39.6% is too high.
I got one good thing to say to Bill. I'm for having Warren Buffet and Bill Gates pay all the estate tax they want. (Laughter.) In fact, I'm going to even let them pay a little more than a 100%, so that the government will get an overhead charge for taking the trouble to collect it from them. And I think it's obvious that's why the cutbacks are going to occur in the estate tax and in the fact that the high rates are probably not going to get down to 33%, and maybe that's not bad as long as we move in the right direction in both of those.
But I think the country is going to be happy with the tax cut. I rather suspect that both parties are going to think it's a pretty good idea. When it's passed it's going to have a pretty heavy majority in both houses.
Thank you, Al.
MR. MURRAY: Thank you.
Gene Sperling, we've had a lot of talk about taxes, a lot of talk about spending, we haven't had a lot of talk about debt reduction, which was the core of Vice-President Gore's campaign platform. What do you want to add to this debate?
GENE SPERLING: I think that it is a mistake to take the view that it's impossible for us to have an overall commitment towards debt reduction that you kind of have to give back the money as fast as possible, that you can't afford to prevent people from spending what you can't afford. In fact, to give you an example, Bill Hoagland and I will both remember, that in the beginning of '98 as surpluses emerged, virtually everybody had their plan how they were going to spend. And I think even some of Bill Clinton's critics would have to admit that when he stood up at the State of the Union and said "Save the surplus for Social Security," it had a very powerful impact on both sides.
And I'll tell you a secret. Our biggest concern coming out of the box was not necessarily the Republican Party's tax cut. Our biggest concern was the dynamic will go as follows. Democrats, together with Bud Schuster, would spend the surplus on the new highway bill in March and April. Once the surplus had been spent too much on spending, that would then free the Republicans to say if you're using the surplus for spending, why not tax cuts? And we may never have even got a surplus out of the box.
The fact that we had a policy that focused everybody on a commitment that the Social Security surplus would be saved for debt reduction became bipartisan and became a constraint on both sides. I remember Alan Greenspan said to the president once: "Your best contribution last year was you started a political competition on who could be the most for using the Social Security surplus for debt reduction.
So, I do think it is a mistake for us to kind of look out of projections and where we're going to save too much. I think we've done well by having some fiscal discipline and trying to see if there's ways of having constraints on both sides.
On the tax breaks, I do think—without getting into the language on tax cut for the rich vs., you know, Medicare, Social Security—I mean, you look at the numbers, there is a value choice being made here, which I don't think the American public would agree with as much, which is that the difference between a more moderate tax cut and one that could draw democrats in and one that Skinner's opposition is basically what you're giving to the upper rates.
So let me be explicit. Taking President Bush's tax cut from 15% to 10% costs $310 billion. His doubling the child tax credit is $192 billion. Now, you could rearrange that the way Belle Sawhill and I would like and do more for people at the bottom, but the point is that core tax cut, which would be an across-the-board tax cut that would go to everyone would be $500 billion. George Bush could be reaching across the aisle using that as his core and being a great conciliator. But then you're adding $262 billion for an estate tax. You're adding probably another $350 billion, not even for the 28% rate, but for cutting the 39% and 36% rates. So that extra $600-$700 billion that you're spending basically on tax cuts for well-off people is probably the difference between bringing the congress together, being able to have a respectable cushion.
And so it is quite a significant value choice that I would disagree with, that it is such a problem to bring down those rates. That is such a high national priority that that should come before bringing together the congressmen in a bipartisan agreement, having a cushion for debt reduction, and dealing with problems such as prescription drugs or child poverty that I think come at a much higher rate.
For those of you looking at your tax forms now, that 39.6% rate comes in at money that you make over $297,000, after you've taken all your deductions and everything. So everybody should be extremely concerned about all those who are paying that amount of taxes that is over your $297,000. That should be at the top of everybody's anxiety list for our nation.
We do have, as Bill said correctly, a higher tax burden overall. But that comes—and I think this is not in dispute—that comes from the fact that the top 10-15% are paying a lot more taxes based on the 1993 tax increases. But those people also have much higher after-tax incomes. So I'm not going to be apologetic about the fact that one's vision in '93 was that you would ask the most well off people in society to contribute to deficit reduction. The deficit reduction, if it works, would benefit them disproportionately. That was the hope. And that's actually exactly how things worked out.
There's very little evidence, as you suggested, Alan, that that actually has been a disincentive. So for the average taxpayer in our society, they're having the lowest tax rate as percentage of their income in 30-40 years. So, again, when you're talking about the tax burden, you're talking again as if you think the number one problem that we face is the upper-income bracket.
And so I actually disagree with Bill Gale slightly when he says that a tax cut is an answer searching for the question. One knows what the answer to the question is. This administration has decided they can't argue that publicly. They very much believe that you should give tax cuts to the most well off in our society—I'm not even going to say to reward contributors—I think there's an economic theory they have that if you want to free up wealth in the hands of people who are the make the most money and therefore are the most successful, that is their business, that is Ronald Reagan's supply-side vision.
And what's interesting is they aren't willing to argue that publicly. So, therefore, when you're not willing to argue your true case publicly, you jump around to whatever seems best—stimulus one moment. Usually, George Bush sounds like Bill Clinton trying to say it's really just a targeted tax cut for people making $50,000. And the place where they're starting to be a little honest, I think, is this notion of starving the government in the future.
My final comment would be that I think again if you really wanted to make the case that we really wanted to do a big tax cut to make sure that we kept government spending down and that really was your consistent view, then at least you could have an honest debate. But I don't think the Bush team is willing to come out say that they don't want a big defense increase ultimately. They're just putting that off until they're done.
MR. MURRAY: Okay. Let's stick with that just for a second, though, Gene. Yes, you're right that President Clinton's Social Security first line was a brilliant tactic for keeping down both spending increases and tax cuts for a while. But it also seems pretty clear, as Bill Hoagland and Bill Frenzel were saying, that whatever good effect or whatever effect that had disappeared some time last year. And that in the appropriations process last year and in the Senate budget deliberations this year, the discipline was gone. I'd also point out that this was—I've been in Washington for 20 years—this election was the first election in those 20 years where neither candidate—and I've scoured their speeches and scoured their campaign platforms. Neither candidate proposed eliminating a single federal program. Now, there must be one out there that isn't working.
So there is a perception that the discipline is gone. And if not with tax cuts, how do you get the discipline back?
MR. SPERLING: Let me agree and disagree. I do think that there is a danger that with the surplus that we do stop scrutinizing programs. And yes, having a little pressure—I can remember in '95 Al Gore going around almost with the threat that your department might be eliminated as a way of getting reform. And I do think that is a worry. And I don't think that's simply because we have a surplus that means no program could ever be cut and that it's not good to create some mechanism to have that type of reviewing coming back.
Where I would disagree with you is let's not exaggerate. The save the Social Security surplus has worked significantly. Over these four years, there's going to be $600 billion in debt reduction. The notion that as you have more money, that you would add a little more on important needs, like AIDS or education or school construction, as you have more as a one-year commitment in appropriations is not inappropriate. It may make sense to that on a yearly basis.
That's different from in 2001 making a long-term commitment when so many things can change. And it's also different, Alan, than simply hiding the ball. And I think the problem, I think, what Bill Gale was pointing to, is that I don't think the Bush administration ever says they don't want a middle class prescription drug plan. I don't think George Bush is going to run for reelection in 2004 having spent less on defense than Al Gore promised, particularly when he's likely to face a centrist. One way or another, a democrat is going to be pretty bullish, probably, on defense spending. And Bill's right, we shouldn't put all the burden on President Bush. He's got to fix it. We certainly didn't do everything we could.
But, it does make sense to at least budget for it and understand that that is a cost. And I think that the true Pete Domenici-Bill Hoagland mentality, which unfortunately isn't quite ruling at the moment, would be that you would at least want to be aware of what your full costs are likely to be over a ten-year period, even if you're not going to deal with all of it this year. And instead it's more draining the cost, And I think, really to hope surpluses get bigger next year or that you actually create a situation where you have to scale back government in the future.
MR. MURRAY: Okay. Belle Sawhill? Do you want to jump in?
ISABEL V. SAWHILL: Well, there's a lot to jump in on at this point. Let me go back to simplification. I thought it was very interesting that Bill Hoagland chose to talk about that first. Because, as you suggested, Alan, there hasn't been a lot of discussion, at least in the administration, about that objective. And it's, I think, an objective that the public deeply cares about, but which past experts for many years have been interested in seeing more of.
And probably one way to think about this is kind of a lost opportunity to do some simplification, to do some base-broadening, and lower rates. Any time you try to simplify the tax code, you create a bunch of losers. And you have to have some money, and quite a lot of money typically, to help the losers accept what you're trying to do. So, I do think that's a missed opportunity.
I was reading recently they new CBO volume that comes out every couple of years that puts forward a bunch of options on how you can save money, either by cutting programs or raising taxes or forming taxes in various ways. And one of the proposals they often have in that book—it's there again this year—is the proposal to limit itemized deductions to just the 15% bracket. Guess how much money that saves over ten years? $1.2 trillion. So think of how much tax relief you could pay for, if you were willing to do that kind of simplification, which would also, by the way, be more progressive, if that happens to be something you're in favor of, as well.
Okay. On the cry and this whole argument about the purpose here is to starve the government, I just want to point out one more time here that I don't think government spending is out of control. Federal spending proportionate to GDP was 22% in 1991, it's 18 now, and it's projected to go to 15% by the end of this decade. As Bill pointed out, discretionary spending is at an all time low, it hasn't been lower. It hasn't been lower since we first started collecting the data. And there isn't a lot of pork. I mean, pork gets lots of attention, of course, Bill Frenzel but pork is by definition pretty much within that discretionary slice of the budget, and that's now a very small slice.
So to the extent that government is out of control, it's out of control because of the commitment that we've made for Social Security, for Medicare, for other entitlement programs that go out into the future. And the way to fix that, I think, is not to cut taxes, but to do serious reform of those programs. And one of the things that I think the President talked about during the campaign that he still needs to follow through on is how are we going to bring our revenues and spending and those large entitlement programs into balance over the longer run?
On the equity issue, obviously fairness is in the eye of the beholder. And there are value choices to be made here. But I don't agree that the current tax plan is neutral. It depends what your definition of neutral is, I suppose. But my definition of neutral would be a tax bill that did not change the after-tax distribution of income in this country. And this tax bill makes the after-tax distribution of income in the United States somewhat more unequal than it is now, and this coming after three decades in which there has been growing in quality and in which many of us believe we have too much in quality.
Now, I was in a cab coming back from a forum on the Hill yesterday—or maybe it was the day before in which I had been talking about taxes—and so the cab driver asked me what I was doing up there cavorting with the evil representatives that he and others presumably sent to the congress. He clearly did not approve of my being up there. And I tried to explain to him what we had been talking about. And he said, "Oh, well, the tax cut, well, what do you think about it?" And I got into some of these issues of the help for the wealthy. And he says, "Well, I don't care about those guys getting the Lexuses, that's fine." He says, "I'm going to get my muffler. I'm completely happy and appreciative to have my muffler. So, what's wrong? Everybody is going to get a muffler." (Laughter.)
So I, of course, had to point out to him that not everybody was going to get a muffler because if you look at taxpayers in this country, three quarters of them pay more in payroll taxes than they do in income taxes. So there are a huge number of people who are not helped at all by this tax proposal. In fact, if you look at all families with children in this country who have incomes less than $75,000 a year, under the Bush proposal 41% of them, 41%, would get no help whatsoever. And this is because they don't owe income taxes, but they owe a lot in payroll taxes.
No, the House of Representatives did make some progress in—if you want to call it that, I would call it progress—in helping out that group. They said if you have payroll taxes that exceed what the government gives you in the form of an earned income tax credit, then you ought to be able to use the $1,000 child tax credit against some of your payroll tax liability and not against your income tax liability. And they also, unlike Bush, denied the child tax credit to those with incomes above $110,000 a year if they're married filing jointly.
So this modestly tilted the tax bill away a little bit more towards the bottom. I would hope that the Senate would go even a little further than that, And as somebody mentioned earlier, my colleague Adam Thomas and I have a proposal that would do that. And right now, as a result of what the House did, instead of there being 41% of families who are left out of the tax bill with incomes under $75,000 a year, there are only 36%. But if you did what we're talking about—and I won't go into the details here unless someone's interested—we could cut that down to 18%. Those would be families who are working full time, but are still getting no relief from this tax bill.
So I leave it there because I've probably gone on too long. Although, I have a lot more to say about some of the tax cut questions and the questions you raised about the stimulus effort.
MR. MURRAY: And we may be able to get that out in the questions.
I want to open this up to questions. Before I do that, I want to try one very quick thing here. We've talked about how spending is now just a little bit over 18% of GDP and taxes are around 22% of GDP. I'd like to ask each of you quickly—and we're talking about a ten-year budget window—each of you quickly to say in your ideal world where should we be with those numbers ten years from now. What percent of GDP should be devoted to spending? What percent of GDP should be devoted to taxes.? And if you feel compelled to given an explanation for your answer, you have to keep it to one sentence, although that sentence can be as complex as you want it to be. (Laughter.) But beware, as President Bush has learned, you might get lost if—
MS. SAWHILL: —Lots of semicolons, right?
MR. MURRAY: And I'll start with Gene Sperling. (Laughter.) Give everybody else some time to think. Take your time.
MR. SPERLING: The 18% is a significant decline since the 80s and the end of the Reagan era. So this is on the way down. My answer is going to be indirect in the flowing way. I think that I'm—
MR. FRENZEL: —That was a colon. (Laughter.)
MR. SPERLING: —I'm much more of a believer of what we spend than the amount. I would be very generous in eliminating child poverty and dealing with some of our most significant education and poverty issues. And I'd like to see other parts—I'd be happy to see other parts of the government go down. So I'm more concerned with the composition than the exact amount. I think the place we're at right now is, you know, could be fine depending on the composition. But, also it depends on how much the economy grows. I will say, Alan—this is the last thing—that in looking at this, I do think looking at how much things grow in terms of inflation in the population is at least very important because John Kasich used to—when Bill Hoagland and I used to be in negotiations, John Kasich used to go, "This is the craziest idea, you mean if the economy grows and grows, let's make government bigger?"
MR. MURRAY: Okay, just give me the numbers, Gene. The numbers are what? 20 and 22?
MR. SPERLING: No, I think it has come down to 18, I think it has come down to 18.
MR. MURRAY: What's it going to be 10 years from now?
MR. SPERLING: I think that that could be a comfortable range if we were making the right compositional choices.
MR. MURRAY: Okay. Bill Frenzel.
MR. FRENZEL: I like the 18%. I think in the post-war period, we've gotten along pretty well. If the economy is growing fast, maybe it ought to be even less than that. However, in the real world, Alan, we're not going to do that because Bill's playmates and my former ones aren't going to stand for that. And you're going to be above 20% no matter how much any of us regret it.
MR. MURRAY: Belle Sawhill?
MS. SAWHILL: I really want to refuse to answer the question on the grounds that part of the problem with this whole debate has been that we've been too focused on a number. I mean, the whole Bush proposal has been focused so heavily on this $1.6 trillion. And you know, now we're going to shove whatever policy we come up with inside that number. And since, as Bill mentioned earlier, the administration has very much underestimated the cost, they're going to be shoving a very large policy into a relatively small although absolutely big number. What Gene says we should be in favor of.
MR. MURRAY: If you do the policy right, where are the numbers 10 years from now?
MS. SAWHILL: I want enough of an excess of taxes over spending to help pay down the debt gradually, 29-18, whatever. I don't know. I don't find it a useful exercise to get too focused on numbers.
MR. SPERLING: I'm not going to help you out here, Alan.
MR. MURRAY: Bill Hoagland, you want to answer, or do you just want to go to the questions? (Laughter.)
MR. HOAGLAND: 19-18.
MR. MURRAY: Thank you. Who has a question?
QUESTION: I've heard even Republicans say that they think the tax cut is actually at the end of this process is going to be lower than even what comes out of the conference in the budget resolution. So I'm wondering—because they say that in the Senate every time there was a choice between more spending and tax cut, more spending won. So, I wondering why you think we're at the low watermark now on the tax cut and why we should think it isn't going to get smaller when it's finally passed?
MR. GALE: Again, it's only because all the conferences I participated in over the years, the easiest way to get it done quickly is to split the difference. And I believe that we will come out of there at splitting the difference. I should also say to Bill Frenzel, I didn't mean to imply that we were going to come out at 8% growth in discretionary spending. I think we also split the difference on spending, so we end up at 6% on spending, split the difference on taxes, and we move along as quickly as possible. I realize it's pretty simplistic, but that's the reason why I believe let's get this done quickly, to keep moving, to keep things moving along quickly, splitting the difference is the easiest way to keep the process going.
MR. MURRAY: If you look at history, you can't underestimate the possibility that they increase both, the size of the tax cut and the spending.
MR. FRENZEL: Alan, I think that is a very legitimate possibility. They pay each other off to get more democrats to give them more refundable tax credits, et cetera. And it's not impossible for that thing swell. I think Bill Hoagland has the most likely scenario. But the other is surely a possibility.
MR. SPERLING: I just want to agree strongly with Bill Frenzel that what we're talking about is the first round of this debate. And there are all these tax bills stacked up behind the President sort of waiting, to sort of get their turn on the runway. There's whatever business breaks the businessman comes up with?.
And you know, basically, the $5.6 trillion surplus that people see—everyone thinks that their idea's a good one and the surplus is the way to finance it. And the President has been very effective at keeping the debate limited to his plan, so far. But as soon as whatever agreement is reached, then all bets are off, and everyone will come in with additional plans.
QUESTION: I have a question for Mr. Murray.
MR. MURRAY: I just ask questions, I don't have to answer them.
QUESTION: A hundred years from now, do you think somebody will say that the tax cut for the 1%—42% of the tax cut will go to the top 1%, but only 10% goes to the bottom 50%? Because I see and have heard this argument over and over as far as the lack of progressivity in tax, I mean—this argument that so much of the money goes to the top 1%, while the people at the bottom get so little doesn't seem to be a new argument. Is it ever going to change?
MR. FRENZEL: No, as long as you're going to have an income tax, and particularly, as long as it's going to be a progressive one, you're going to have arguments on whether it's progressive enough. And I don't think we'll ever see the end of that. As I said earlier, I believe in progressive taxation. I do not believe in levels of taxation quite as high as are now applying to the top brackets, but, on the other hand, if the President doesn't get his wish in the top bracket, the world is not going to come to an end. People won't stop working.
I remember my colleagues used to say, if you cut taxes, people will work, save, and invest. And as I recall, I worked a lot, as hard before as I did after when I got my tax cut. (Laughter.) No big deal.
QUESTION: I have a question on the economy, Economics 101. What kind of evidence is there, if there is any, on what stimulates an economy more? A tax cut or a distribution of federal money, let's say, for teachers' salaries, school construction—the area I'm interested in? Or, on a macro level, what is the proper percentage of discretionary or government spending as a proportion of Gross National Product? Is it 18%? 20%? 25%?
MR. MURRAY: We tried the second one, but?. Who wants to take on the first question? Gene?
MR. SPERLING: I think what concerns a lot of people on the stimulus side is very much the timing. In terms of the composition, there a little bit of politics probably winds over the pure economics. From a pure economic point of view, I suppose if the government actually spends the money, you more, sort of, getting a full-dollar stimulus.
If you're doing for the tax cut, you probably want to put the money—this is for stimulus' sake—in the hands of people likely to spend it as much as possible. That's why when the republicans went to stimulus as a rationale, Tom Daschle saw an opening and jumped and said: "Great! If we want a stimulus, that's an argument for giving the tax cut as much as possible because more lower-income people have a higher propensity to spend the money, as opposed to save it." So in the short term, that tends to, I guess, maybe push a little bit more towards a kind of democratic agenda.
Now, where politics wins over, neither side wants to argue spending a stimulus. And where the economists get concerned is timing. Right now there's a huge debate as to whether we're having a U-shaped or a V-shaped recovery. And the V-shape means we're coming back quick.
On the notion that you'd be coming back quicker, you would want to get this stimulus done, as Bill said, right now. Right now. And Bill Hoagland said—and whether Bill Gale's right, there's not a huge amount. I actually think anything that kind of helps confidence and psychology could be good. But if we're studying the tax cut as a stimulus, as a failure five years from now—and Alan's writing a column on it—it would be everybody got held up, they couldn't get it done by the August recess, and the stimulus came on September 30th just when people, some people, are predicting we'll be back at 3.5% growth. So a well-intentioned stimulus now, if you had more of a V-shaped recovery, could end up being actually an inflationary tax cut at the time.
I think among Democrats, conservatives, timing becomes the practical concern a lot of people have for the ability of getting the timing right for a tax cut, as an effective stimulus.
MS. SAWHILL: Can I jump in?
MR. MURRAY: Yes, quickly. Very quickly.
MS. SAWHILL: A lot of economists would argue that a tax cut by itself is not going to be very stimulative at all, particularly if it's temporary. But even if it's permanent, if there's no monetary policy that goes along with it and accommodates it—in other words, no change in monetary policy—you may just end up raising interest rates, so that although people have more take-home money to spend, with higher interest rates that cuts off another type of spending, including home building and car buying.
MR. MURRAY: That would be true of a spending-increase stimulus, as well, wouldn't it? If it's not accommodate?
MS. SAWHILL: No, no. This is an argument against using fiscal policy either on the spending or the tax cut side. That's right.
MR. MURRAY: Bill Hoagland? Quickly, spending, stimulus versus tax.
MR. HOAGLAND: How quickly we forget. Do you remember 1993 when President Clinton came in and the first part of his package was a stimulus package for about $15 billion on the spending side for warming huts and various other things. If you're trying to stimulate the economy, do it on tax side, do it quickly. Everybody should file their 1040s, get their name into the IRS. We'll take your name, we'll divide it by $85 billion and send out about $600-700. My friends on the Hill will get mad at me because I just say send it out. If you want it out, get it out quickly, if you're talking about stimulus. But, don't run it through the bureaucracy, if you're trying to talk about a stimulus.
MS. SAWHILL: I agree with that.
MR. FRENZEL: We've tried to stimulate by spending. We have simply raised overtime in the construction trades and created projects, which were completed five or six years later, and have nothing to do with the recovery.
MR. HOAGLAND: I just want to be clear. I wasn't advocating that. I just said the—getting the dollar out quickly.
QUESTION: Thank you. I want to begin by saying I tend to agree that if the money stays in Washington, that it will tend to be spent by Washington. Witness the $85 billion out of the surplus that's going to go to a tax cut this year.
I'd like to turn now to Medicare and Social Security. We constantly hear that the demands are going to exceed over the next 10-20-30 years the amount of money in the trust funds. And the answer seems to be, well let's lock-box those trust funds. But, if the demands do exceed the revenues that are in the trust funds, do we need more money in those trust funds? Do we need to find another way to get the money in there, and should that be a way to spend the surplus?
MR. HOAGLAND: The first issue is that the Social Security and the Medicare financing to date is part of the tax cut debate. The defense-spending increase should be part of the tax cut debate. All of this is part of the government budget. That's point one.
Point two is that even if the trust funds for Social Security and Medicare left alone—that is we don't get the sifting out of the funds that has been proposed—even if they're left alone, there is not enough money in there under current projections to pay for Medicare and Social Security over the next 25 years, And certainly not enough to pay for it after that.
So the lock box is sort of the very, most basic first step that can be taken. But the point is that accumulating the funds that are promised already to Social Security and Medicare is not sufficient to solve this problem. So, under current projections some combination of reductions in benefits, increases in taxes on those programs, or transfers from the rest of the budget, have to take place.
MR. MURRAY: Yes, that's a good point, Bill Hoagland. I just would quote Charlie Stenholm, who is as close to political no-man's land as anybody yet in the US Congress. He says you can do a big tax cut or you can do social security reform, but you can't afford to do both.
MR. HOAGLAND: I don't necessarily agree with Congressman Stenholm, though, he's always very much on the mark most of the time. I think that you can do—you're absolutely correct. Whatever we do will not solve the problems of Social Security and Medicare in the long run. You still have to on top of this use Medicare and Social Security reform—no question about it. My only priority is that these are not unrelated in the sense that if you're talking about a future where you're going to have to have more funds in that Social Security trust fund or in the HI trust fund to meet the commitments that are coming from the post-war baby boom blow-up, what you're going to have to do is you want to start from a lower base in terms of taxation. You want to start from a base of lower debt because I think we're going to go up. I don't think there's any way out of this that's going to require more revenue—at least start from a lower base. If you cut the taxes now and you have the growth and the economy growing into the future, it will help us have the base upon which then we can afford the resources to meet some of those commitments if we're also reforming.
MR. FRENZEL: I'm with Hoagland. But, clearly the systems are not going to sustain themselves. We can't reverse demographics. And we can't keep the cost of health from going up. We they are going to do that. Both of those systems are going to need more money. The sounder we make ourselves now, as long as we continue to terrorize each other by this third rail of politics so that everyone's afraid to muss with them, the next best thing we can do is put ourselves in the soundest position possible right now.
MR. MURRAY: I'm afraid we're out of time here. Does somebody have a very, very quick question? You're keeping your hand up, is it going to be a quick one? I guess the problem isn't the question, the problem is the answer. (Laughter.)
Go ahead.
QUESTION: Any assessment on the lobbying efforts, particularly the coalitions that have formed? I heard the vision last week regarding just Senator Jeffords, how much to praise him or, you know, whether to praise him at all. It seemed like his change caught people by surprise. It also appeared that his vote was really for sale.
MR. MURRAY: Bill Hoagland. I think that's yours. (Laughter.)
MR. HOAGLAND: I don't think a United States Senator, with all due respect, I don't think a United States Senator's votes are for sale. Senator Jeffords feels very strongly about a particular policy, it happens to be special education; it is an important issue in his mind. I don't thing he's for sale. I think he was honestly disturbed about how we were going to go about funding special education, whether there is a federal commitment to fund 40% of special education in this country. And I don't hold that against Senator Jeffords for what he did last week.
MR. FRENZEL: And if you look at his filings of net worth, you'll find if he's for sale, he doesn't get much. (Laughter.)
MR. MURRAY: That's the last word. Thank you very much. (Applause.)
[END OF EVENT.]