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Many economists think reform of America’s tangled tax code is long overdue. With a so-called fiscal cliff looming and candidates looking to appeal to voters, now may be the perfect time to float new ideas and changes. So why aren’t we hearing much about tax policy on the campaign trail or at the conventions?
- John McKinnon Reporter, Wall Street Journal
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington and from the studios of the GROUNDCREW in Charlotte, N.C., welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. We are in Charlotte for the Democratic National Convention.
MR. KOJO NNAMDILater in the broadcast, do money and food go well together? Charlotte, as an indicator of how regional culture, is evolving. But first, many a campaign has been won or hamstrung by promises revolving around one tiny word with enormous implications, taxes. As one of only two things said to certain in this life, arguably better than the other, paying taxes is something virtually all adult Americans have in common. But, oh how our opinions on how they should be collected and spent differ.
MR. KOJO NNAMDIHere to help us consider what each party's economic policy plans would mean for the average middleclass earner is John McKinnon. He is a reporter who covers stats and fiscal policy for the Wall Street Journal, from Washington, D.C. John McKinnon joins us in studio in Charlotte. John McKinnon, thank you so much for joining us.
MR. JOHN MCKINNONThank you.
NNAMDITax policy is something many voters care about because, well, it hits us in our pocketbook, but it's an issue that you don't necessarily hear a lot about directly during campaigns and during conventions. Why is that?
MCKINNONI think just because it's so complex. Both campaigns prefer to put things in terms that voters can grasp more readily, such as jobs or growth or quality of life.
NNAMDIWell, one of the things we grasp very easily is when we see a movie like "Thelma and Louise." Everybody remembers the last scene in that movie. And so when they hear the phrase, Thelma and Louise Economics, please explain what the so-called fiscal cliff is because everybody remembers how that movie ended and what it might mean for taxpayers come January.
MCKINNONThat's right. In that movie Thelma and Louise of course go off the cliff at the end. And there seems to be a likelihood that the U.S. is going to go off the cliff as well at the end of this fiscal year. Both sides say they generally don't want to do that, but increasingly Democrats in particular are saying we're willing to go off this fiscal cliff. That simply refers to the expiration of all the Bush-era tax cuts at the end of this year and also the effective date for a bunch of budget cuts that Congress agreed to last year.
NNAMDIIf those two things happen at the same time we will be seen as going off a fiscal cliff because what effect is that going to have on the average middle-income taxpayer?
MCKINNONIt's going to drive up tax rates. It's going to raise the effective tax rate for virtually every American. And the amounts could be very significant by middleclass standards, hundreds or even thousands of dollars for people in the upper middleclass to higher incomes. It could be tens of thousands, even hundreds of thousands of dollars. So all those things will combine to create a drag on the economy, a drag on spending, a drag on probably job creation.
NNAMDIHow does each party, Democrat and Republican, plan to address this looming change?
MCKINNONWell, there's one very simple difference between the two parties' approach on this, whether you're going to allow the Bush tax cuts to expire for people making over $200,000, $250,000. Democrats, of course, want to let those tax cuts expire. Republicans want to extend those tax cuts for wealthier Americans.
NNAMDIAnd thus we have a stalemate.
MCKINNONRight. There could not be a clearer difference between the two parties. And neither one, at least for now, is going to budge, particularly before the election. After the election something's going to have to get worked out.
NNAMDIWell, some Democrats seem to be suggesting that if the President is willing to take it up to a million dollars then even if the Republicans don't budge, at least the Democrats would have, I guess, debate advantage.
MCKINNONRight. They call it the Buffett Rule sometimes. And it's a variation on the theme, whereby the Bush tax cuts would basically expire for folks over a million dollars. Another way of doing it would be to impose a minimum tax level on people making more than a million dollars, like 30 percent.
NNAMDI800-433-8850. In case you're just joining us, we're talking with John McKinnon. He is a reporter who covers tax and fiscal policy for the Wall Street Journal from Washington, D.C. We're considering the taxpayer, the tax policies and you. 800-433-8850. Do you want to hear more specifics from candidates about their tax and fiscal policy plans? Are you worried about the so-called fiscal cliff, the Thelma and Louise approach to economics? 800-433-8850 or you can send email to firstname.lastname@example.org.
NNAMDIJohn McKinnon, many middleclass earners benefit from current tax breaks and deductions. Are they likely to see more savings with one party's plan over the other?
MCKINNONThat certainly depends on the final result.
MCKINNONYou know, Mitt Romney promises a lot of tax cuts for everyone. At the same time, he's talking about squeezing deductions and changing loopholes to pay for some of the very, very big changes that he wants to impose in the tax area. President Obama has a few tweaks and changes that he'd like to do around the edges, but by and large, he would extend the current tax policy for most folks in the middle class. Romney's proposal is much, much broader.
NNAMDIAllow me to go to John on the phone in Bethesda, Md. John, you are on the air. Go ahead, please.
JOHNHow you doing, Kojo? Thanks for having me. I'll be brief because I think my question is kind of brief. I mean, we all grew up knowing if you don't have enough money to pay for something that you don't buy it. Or you get more money in to buy what you're looking for. Why is this so complicated? Why can't this be as simple as either raise the taxes and spend what you need or don't raise the taxes and don't spend it? Or find something in the middle. What's the problem? What am I missing?
NNAMDIWhat is John missing, John McKinnon?
MCKINNONWhat you're missing is that the federal government is able to borrow limitless amounts of money to do whatever it wants. And that has included big spending increases on the part of both parties. And it's also included big tax cuts on the part of both parties, but especially Republicans. So I think until you figure out how to change that dynamic somehow, the government is going to run deficits and no one expects the government to return to a balanced budget, realistically, in the foreseeable future.
NNAMDIIf we do, in fact, go off that fiscal cliff, so to speak, what will those savings, if there's not revenue coming in, what will those cuts cost Americans when it comes to cuts in services and budget shortfalls?
MCKINNONI think the big focus you're going to see in that area is concern that defense contractors, other businesses that work for the federal government…
NNAMDIWell, we're seeing that in Virginia already, yes.
MCKINNONRight, right. They are starting to talk about layoffs.
MCKINNONYeah, exactly. And that's probably, realistically, the biggest impact you'll see. I'm not sure that anyone thinks the sequester by itself would have a very dramatic impact on the economy, but the combination of this sequester on spending and the tax increases that would be created by going off the cliff, those combined would have very big impacts on the economy.
NNAMDIOn to Lance in Chantilly, Va. Lance, your turn.
LANCEWell, thank you, Kojo. This is an interesting subject. I was going to suggest perhaps that the Democrats regard this as a hostage worth taking, to echo Mitch McConnell's comments at the end of the whole debate and debacle on our credit limit last year. But I also want to point out that this is not the Buffett Rule. The Buffett Rule is trying to make sure that the wealthy pay as much as an effective tax rate as their employees. I would like to suggest this, that the sequester is going to show up about $23 million in the first year for fiscal year 2013. That is something that should be manageable by the DOD and the intelligence community.
LANCEAnd also I'm a person who pays right now 25 percent maximum marginal tax rate and if it goes up to 28 percent I'm pretty sure that I can handle that. And that's well worth reducing our annual deficit in half, which would happen with the expiration of all the Bush tax cuts.
NNAMDICare to comment on that John McKinnon?
MCKINNONWell, I think the caller is putting a realistic face on a situation that is the subject of an enormous amount of political rhetoric. I mean I think for most people the expiration of the Bush tax cuts would, like I said, would mean a few hundred dollars increase. I think, you know, most people could probably handle that and experience bigger fluctuations in lots of areas. So I mean really it wouldn't make that much difference for a lot of folks. It would, however, continue to be the subject of heated political rhetoric and you would hear no end of it, you know, until the next election.
NNAMDIHow much difference would it make if Republicans were to go along with the suggestions that the benchmark be a million dollars a year instead of $250,000 a year? Just how large a group would meet that mark? And is it a consistent pool of taxpayers?
MCKINNONThe pool of taxpayers that are among the very, very wealthy actually fluctuates a lot. It's extremely fluid. The IRS publishes very detailed data on the top 400 taxpayers every year. And it's remarkable how few people show up year after year in that group. Most people only show up once or twice (unintelligible).
NNAMDIThey make a killing one year and not ever again.
MCKINNONRight. But there are hundreds of thousands of people who make a million dollars a year in a given year. A lot of this income is in the form of capital gains that people are getting from selling a business. And so the tax implications for those folks are difficult to predict. There are all kinds of, you know, provisions that affect that income. So imposing a Buffett Rule, as it turns out, doesn't really raise a ton of revenue for the federal government and it would not have much of an impact on the deficit. But I think it would give Democrats a lot of comfort.
NNAMDIDavid, in Vienna, Va., you're on the air, David. Go ahead, please.
DAVIDHi, how are you, Kojo?
DAVIDGood. Well, it just strikes me that you're really not stating the full severity of this fiscal cliff. I mean the Congressional Budget Office has estimated that as many as two million people could lose their jobs. We could be put into a severe recession. Tony Cordesman, a very-well respected defense analyst, has called it a national game of chicken, who says that the real game of chicken sounds very mature compared to what the politicians are playing. My question for the reporter is, you know, how likely do you think that sequestration is to take place? I mean, will we have a sudden outbreak of statesmanship and compromise that averts this disaster? Or will we go over the cliff like Thelma and Louise? That's the question.
NNAMDIQuestion for John McKinnon.
MCKINNONMy bet is that something will get worked out by the end of the year. We went through this in 2010 in a slightly different form. And in the end everybody blinked a little bit and a deal was worked out and the Bush-era tax cuts were extended by and large for two years. I do think that something like that will happen again. I think nobody who's running in 2014 wants to be confronted with the prospect of driving the economy into the ditch again at the beginning of that campaign cycle. And so I think, you know, cooler heads will prevail. That said, you know, I have to acknowledge that the two sides are extremely far apart in policy terms on this.
NNAMDIThank you very much for your call, David. A simplified tax code is something many an American has dreamt of when trying to decipher those forms ahead of the April 15 filing deadline. Is that something we can realistically expect -- stop laughing -- is that something we can realistically expect from either an Obama or Romney Administration?
MCKINNONNo. I don't think realistically we can expect that. I think the tax system has simply gotten too large, that it can't be reined in anymore. I hate to say that but I think that's really the truth. It's gotten so bad that there are, you know, just a very large number of very important business tax breaks that are available to lots of companies in the country that businesses simply refuse to even try to apply for because they're so complex and so hard to work with.
MCKINNONAnd they cost so much to apply for. Some of them require a computer model. Some of them require armies of accountants to comply with, engineers to comply with. And so businesses just say, thanks but no thanks. And lots of tax provisions get designed that way whether by accident or on purpose. And so lots of tax breaks just go unclaimed.
NNAMDIWell, there are tax breaks and tax loopholes and the latter is what Frank in Washington, D.C. would like to talk about. Frank, you're on the air. Go ahead, please.
FRANKYes. I'd be interested in whether your guest knows whether anybody has looked at the extent to which Romney's balance sheet shows how much he's benefitted from loopholes and abuses. And the two that come right to mind are the way that his IRA, his retirement account ballooned from a few thousand dollars a year to up to a hundred million dollars a year. And how much he's gotten from changing capital -- ordinary income to capital gains by using the so called carried interest loophole? Is that something anybody has studied and is that the reason why he doesn't want to release his tax returns?
NNAMDIDo you know anything about this at all, John McKinnon?
MCKINNONThere are a lot of questions imbedded in that comment and question. I'll try to deconstruct it to the extent I can. Romney's tax rate -- he says his effective tax rate has been 13 to 15 percent over the last decade. One big reason for that is that he benefits from the capital gains rate, which is low and is 15 percent for folks like him. Another big reason why he has a relatively low affected tax rate is that he and his wife give a lot of money to charities. They gave $4 million in one recent year. And that, you know, of course represents a very big deduction from their income.
MCKINNONAs far as why he hasn't released his returns, that has been the subject of a lot of speculation. Harry Reed the majority leader in the Senate said that he thought he had -- he said he had heard that Mitt Romney didn't pay any tax for the last ten years and that prompted Romney to say, no my tax rate was at least 13 percent for each of the last ten years. You know, I think the Romneys claim that they don't want to put their returns -- more of their returns out because it will just be more fuel for Democrats to attack.
MCKINNONAnd certainly the Romneys have lots of investments that ordinary Americans don't have in their portfolios and that includes, you know, funds that operate in the Cayman Islands. And the Romneys say that, by and large, you know, they gain no benefit -- no tax benefit from these funds. Those funds are set up by others for other reasons in the Cayman Islands. And, you know, lots of people do that and -- lots of wealthy people do that and no one can say that the Romneys are not telling the truth about that.
NNAMDIAnd finally we'll hear from Nick in Winchester, Va. Nick, you're on the air. Go ahead, please.
NICKHi, Kojo. I wanted to address the question of the media's responsibility and not following up with tough questions when politicians of whatever stripe express extremist views and -- or give you half truths. And I can cite -- I'll try to cite examples, but since we just mentioned Romney's taxes, what about pointing out that loopholes or no loopholes, he is using the tax code to his advantage. And if you don't like it, change the tax laws. Don't blame him for using them.
NICKSecond, on the other side, if you have people arguing that taxes on gasoline are as high as they ought to be, point out to them that they haven't been changed since 1993 and ask those politicians, well, what was your salary back in 1993. What could you buy for 17 or 18 cents per gallon? I mean, this -- okay.
NNAMDIOkay. We're running out of time very quickly.
NICKYeah, I know. I got in two examples. That's enough, Kojo.
NNAMDIOkay, good. You got in two examples and I'll have John McKinnon at least respond to the first example, and that is why not simply say that Mr. Romney is taking advantage in a very legal way of the tax system?
MCKINNONI think that that's a legitimate argument and a lot of people probably feel that way. No one likes to pay taxes and no one's obliged to pay more taxes than the law requires. So Romney would say he pays what he owes. And by the same token, however, there is a lot of gray area in the tax system and there are a lot of tax accountants and lawyers on behalf -- working on behalf of wealthy people who push the envelope, push the loophole sometimes farther than it should go. And some people question whether Romney has benefitted unfairly from a couple of loopholes.
NNAMDIJohn McKinnon is a reporter who covers tax and fiscal policy for the Wall Street Journal from Washington, D.C. Thank you very much for joining us.
NNAMDIWe're going to take a short break. When we come back, do money and food go well together? Charlotte, as an indicator of how regional culture is evolving. I'm Kojo Nnamdi.
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