Web Chat: The Deal on Taxes

On December 15, Brookings expert Adam Looney, policy director of The Hamilton Project, answered your questions in a live chat moderated by POLITICO about the problems with the U.S. tax system and what the deal being forged now between the White House and Congress says about the reform battle ahead.

A transcript of this chat follows.

12:30 David Mark: Hello everyone and welcome to the chat. Today we have Adam Looney on hand to answer your questions about the problems with the U.S. tax system and what the deal being forged now between the White House and Congress says about the reform battle ahead. Welcome, Adam.

12:30 Adam Looney: Hi thanks for having me.

12:31 [Comment From Tao Zhang: ] After getting the compromise from the President Obama on tax cut extensions for high income people, will the Republicans, in your opinion, also compromise on social security, medicare and other issues in the future deficit cut plan? If yes, how?

12:34 Adam Looney: Social security and Medicare are two important sources of spending pressure on the long-run deficit. In the next few years spending on these programs, plus other popular and important spending like defense, Medicaid and interest on the national debt—will exceed projected tax revenues. So I expect that any realistic solution to the long-run deficit challenge will require a combination of higher revenues and difficult compromises on programs like Social Security and Medicare.

12:35 [Comment From Siddarth Sridhar: ] Do you think that Republicans in this political climate, who signed the no new taxes pledge, can agree with House and Senate Democrats on a respectable mid- to long- term deficit plan that balances savings on both the tax and spend side?

12:41 Adam Looney: Addressing the deficit without new revenues will be very difficult—it’s not just a matter of cutting earmarks, foreign aid, or “waste fraud and abuse” the budget pressures are coming from very popular and important programs like social security and medicare.

I think one potential area of compromise is on tax expenditures. Tax expenditures operate like spending programs but are included on the revenue side of the budget. Tax expenditures include the implicit subsidies to mortgage interest or to employer provided health, as well as many smaller provisions that favor certain groups or certain activities. All told, there are more than a trillion dollars of “spending” each year on these programs. Reducing the size of these expenditures would improve the deficit but should also appeal to those who advocate for a more efficient and less intrusive tax system.

12:41 [Comment From Eric: ] What will happen if Congress does not clear the tax extensions by December 31?

12:44 Adam Looney: Most Americans will notice in their first paycheck–withholding rates will return to the levels last experienced in 2000. While Congress can go back and make changes retroactive to January 1st, under current law you’ll notice a change in your take-home pay.

12:45 [Comment From Will Amatruda: ] Broadening the tax base permits lower marginal rates [popular; aids economic efficiency] but can’t be done without ending tax expenditures which have powerful constituencies [e.g. mortgage interest deduction; employer provided health insurance]. It has been famously said that ending these, and others, will not be possible politically unless “everybody gets into the rowboat at the same time.” It happened in the ’80s with social security. Can it happen today, and if so, how?

12:49 Adam Looney: I’m hopeful that it can. You’ve identified two tax expenditures–mortgage interest and employer-provided health insurance–with strong constituencies, but both of these have been reigned in to some extent over time in previous tax reforms and in the recent health legislation.

Eliminating these entirely would indeed be difficult, but scaling them back could be more feasible. For example, this could mean reducing the amount of interest one could deduct on a second home or on a cash-out home equity loan.

12:50 [Comment From Tom: ] If we really wanted to spur job growth, is this the bill you would recommend? Or is it just a political compromise?

12:54 Adam Looney: There are elements of the tax bill that are particularly likely to help spur job growth–the extension of unemployment insurance, the payroll tax cut, the business expensing provisions, and some of the middle class 2001/2003 tax cut provisions. But other parts of the bill, like the reductions in the estate tax, are clearly more about political compromise than about improving job growth.

12:55 [Comment From Paul: ] Can you explain how extending the Bush tax cuts will impact the budget? It seems like it’s a pretty drastic loss of funds for the government.

12:58 Adam Looney: According to last year’s budget, extending the tax cuts would increase the deficit by about $3.7 trillion over ten years. Moreover, since it would be entirely debt financed in some sense those are just deferred taxes we’d be passing on to future taxpayers.

12:59 [Comment From Nadia (Arlington): ] If the tax cuts are only extended for another 2 years, won’t we have this same struggle again in the future? Why doesn’t Congress make a permanent decision?

1:01 Adam Looney: I think that’s right–we could be in store for a repeat of the struggle over the last few months. A more optimistic view is that this opens up the opportunity for a larger discussion of tax reform, which the nation really needs, at a time when the economy will be doing better.

1:01 David Mark: Thanks for joining us today.