Fixing The National Debt: How About A Tax Holiday?

As lawmakers work to reach a compromise on the 2011 budget, many economists are worried about the long-term deficit. The Bipartisan Policy Center's Steve Bell suggests a mix of tax increases and cuts — including a one-year payroll tax holiday — could help address the problem.

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NEAL CONAN, host:

And now, The Opinion Page. The clock is ticking for Congress to pass a 2011 budget. All sides swear they will not support another temporary measure. So if there's no deal, parts of the federal government shut down starting at midnight on Friday.

The impasse over this year's budget has lasted so long it's already time to start arguing about next year's spending. Tomorrow, the chairman of the House Budget Committee will reportedly propose $4 trillion in spending cuts over the next 10 years.

The federal debt is so scary that some Democrats are willing to discuss changes to Medicare and Social Security. Some Republicans might agree to tax hikes.

This week, a series of conversations on the long-term debt, what it means for the current budget, future spending and the effects on future generations. Today, we begin with Steve Bell, senior director of the Economic Policy Project at the Bipartisan Policy Center, and he joins us here in Studio 3A.

Thanks very much for coming in.

Mr. STEVE BELL (Senior Director, Bipartisan Policy Center): Enjoy it. Thank you.

CONAN: And let's put politics aside for a moment. Why is this important?

Mr. BELL: It's important because in about 20 years, we will spend all the money that we have taking in taxes on interest on the public debt, Medicare, Medicaid and other entitlements, as we call them, like Social Security and other pensions. We will have no money left over - unless we borrow it - for defense and all the other things people expect from a government.

CONAN: And we can argue a long time about how we got into this mess but that's another show for another time. The issue is what do we about it?

Mr. BELL: Well, we can - both parties are culpable. We've made promises that we can't keep. I know that when I was staff director of the Senate Budget Committee back in the '80s, we attempted to take on Social Security, and we were largely blamed for the fact that Republicans lost the Senate in 1986 on that one issue. I think that's very instructive. What we can do about it is really very clear. There's only four things to do.

CONAN: And they are?

Mr. BELL: You have to reform the health care programs that the federal government administers. We cannot keep the promises that we've made to future beneficiaries in Medicare and Medicaid.

Number two, we have to flatten the tax code, and that sounds like jargon. What it means is get rid of all the loopholes, break down everything into two income tax brackets.

CONAN: All the loopholes...

Mr. BELL: Yes.

CONAN: ...that includes like the mortgage tax credit.

Mr. BELL: Yes. What we recommend is this. Essentially anyone who had a $500,000 home and a 5 percent mortgage on it would still get the full mortgage deduction. The average house now is about, well...

(Soundbite of laughter)

Mr. BELL: ...now maybe $200,000 in this country. But about 95 percent of Americans would not even notice that change. Another one is, of course, charitable contributions, and there, we give a refundable tax credit up to a certain income level. But you've got to get rid of all the loopholes and all the special exemptions because that's just like spending, to encourage people to behave in one way as opposed to another.

CONAN: Well, all right - and Social Security?

Mr. BELL: Well, there are two big things there. One, you know, the president's commission, Senator Simpson and Erskine Bowles, said let's make the age of retirement 68. At 68, you reach full retirement. We did not do that.

CONAN: That would be for people who were still 35 now...

Mr. BELL: Correct.

CONAN: ...in other words, not people - phased in over time.

Mr. BELL: Phased in over about 20 years, yeah. That is not what we recommended. We recommended some other technical changes, but the result is the same, is that you would have people who would be getting their full Social Security benefit smaller 30 years from now, 20 years from now, than they would under current law.

Actually, this is very strange. Social Security is so easy to solve because you've got a - enough time to solve it. You know, we don't run into real problems for another 10 years. Medicare, we've started running into the problem now.

CONAN: And as you look at this, there's another side. That's the spending side. What about the revenue side? You know as well as I do, there are people who are saying, wait a minute, if we just cancel all of the Bush tax cuts, not just for the wealthy, but all of the Bush tax cuts, that pretty much solves the problem all by itself.

Mr. BELL: Well, they're just arithmetically wrong, but I understand their sentiments. But the fact of the matter is we're going to have trillion-plus dollar deficits on average for each in the next 10 years. Let's take a look at the Ryan plan that you mentioned earlier.

CONAN: That's Paul Ryan, who's the chairman of the House Budget Committee.

Mr. BELL: Right. Courageous man. He gets a lot of credit. There are some things we'd like him to do he's apparently not going to do tomorrow. But nevertheless, let's take a look at revenues. People want revenues lower, at least in certain ideological circles. Less than 16 percent of GDP right now, one of the lowest levels since before World War II is now devoted to revenues. So if you have the Bush tax cuts on top of this extremely low level of revenues now, you will indeed make the problem much worse.

Now, there are people who will say, well, if you don't cut the - keep those tax cuts down, the economic will get worse. We're not at all persuaded of that.

CONAN: So in other words, you're saying what we're paying in taxes now, our tax levels, both federally and locally, are lower than they have been at any point, really, since the end of the Second World War?

Mr. BELL: Well, actually, since before the Second World War. You know, we - when you start talking about something around 15 percent of gross domestic product as the federal tax level, you're talking about numbers that haven't been achieved in 50 or 60 years.

CONAN: It's going to be hard to convince people they're actually paying historically low taxes.

Mr. BELL: It is very difficult to explain to anybody why they ought to pay taxes. As Russell Long used to say, don't tax you, don't tax me, tax the fellow around the tree. That's always been the way we've done things. But we don't have enough money to pay for the very basic things government is supposed to provide the way we're going now.

CONAN: So you have to raise revenues, otherwise increase taxes one way or another.

Mr. BELL: Right. Right.

CONAN: And you say then reform the tax code by closing all the loopholes.

Mr. BELL: If you close all the loopholes and you make only two tax brackets, what you end up doing is making the system slightly more progressive, so - under our plan. But you also raise a tremendous amount of revenue, and you also keep people from spending, through these tax breaks, an enormous amount of revenue.

There are two sides to this tax question. Everybody focuses on tax increases or tax cuts. The focus ought to be on the literally trillions of dollars in the form of these loopholes and tax expenditures that are enjoyed every decade by Americans of every background and business.

CONAN: Now, as we look at the budget fight that's coming up this week, and that's about the rest of this year, that's - well, they're only talking about discretionary nondefense spending. In other words, they're not talking about Social Security, Medicare, Medicaid or the Defense Department. So they're talking about, as I understand it, some 12 percent of the federal budget. And they're trying to debate whether it's going to be, I guess, $33 billion...

Mr. BELL: Right.

CONAN: ... in additional cuts or the - some of the House Republicans want another $60 billion in additional cuts this year. That - Everett Dirksen used to say, a billion here, a billion there, pretty soon you're talking real money. In terms of reducing the federal debt, people say this is peanuts.

Mr. BELL: Well, it's triviality. What we're doing is wasting a huge amount of ink, a huge amount of cyber space and radio spectrum. I'm talking about something that will change the deficit projection this year 1.6 trillion to 1.595 trillion. Now, it's very difficult to impress anyone with that kind of reduction.

The big fight, and you alluded to it, is how do we get to the FY 12 budget, the fiscal year 12 budget, and in and about five or six weeks? How do we get the votes in the floor of the House and Senate to raise the federal debt limit from 14.3 trillion, where it is now...

CONAN: Mm-hmm.

Mr. BELL: ...up to some other? Now, if we add the 1.6 trillion anticipated deficit, you'd say, well, if we went to about 17 trillion, we'd be able to get through one year.

CONAN: This used to be one thing that the Congress used to pass pretty bipartisan. Everybody said, look, we know we got to do it because if we don't do it, the federal government can't borrow anymore money, what's called the good faith and credit of the federal government would be called into question. All those bonds that are held by China, all of a sudden they're not quite sure that they can actually cash them out. The whole system comes crashing down.

Mr. BELL: Well, there's no doubt about that. It's not a scare tactic. I have no reason to want people to be favorable to Wall Street or bond markets, necessarily. But the fact of the matter is that most of our debt now is not held by Americans. And we have given to foreign nations and institutions a tremendous economic leverage over us. In one of the fears, as Admiral Mullen himself said last year, is this may be the greatest national defense challenge the country faces. That is other countries having so much of our debt that they can actually influence our international policy.

CONAN: Other people look at it in different ways. It gives the Chinese a big stock in keeping that American market alive for their exports, otherwise, they run into big economic woes. But you look at it different ways. But the fact of the matter is as you look at that debt ceiling vote, now you're getting into politics. You have more than ever people, both in the House of Representatives, where it matters some, and in the Senate, where it matters a lot, who say, no way, over my dead body will I ever vote for a debt limit increase. In fact, I might prevent it. And any senator can prevent it.

Mr. BELL: Yes. In 1985 - what seems like a long time ago to most people, to me it just seems like yesterday - I was staff director when we put together Gramm-Rudman-Hollings. And it was the same kind of dilemma we face now. How do you get a debt increase passed through a Senate that doesn't want to do it without guarantees of cuts in spending? It took us six months and about three short-term extensions of the debt limit to finally get that done.

My suspicion is that we'll go through a very similar process right now. So we're going to pass a debt increase. The question is what will Republicans and Democrats require so they can go back home their constituents and say, yeah, I voted for 17 trillion, but listen, this is what I got in return. I think a lot of folks are fighting, right now, about what process that one entail.

CONAN: We're talking with Steve Bell, now senior director of economic policy projects at the Bipartisan Policy Center, as he mentioned, former staff director at the Senate Budget Committee and longtime staffers for Senator Pete Domenici, a Republican of New Mexico.

Part of a series of conversations we're having this week about the debt and how to get rid of it or get it smaller, anyway. You're listening to TALK OF THE NATION from NPR News.

And as I mentioned, you've obviously been through a lot of these battles from the inside. Have you - is the fight over ideology or is it over numbers, or are the numbers ideology?

Mr. BELL: In this case, the numbers, quantity, have taken on an ideological component. There's no doubt about that. You know, 1.6 trillion is a number so large that most Americans will never, in any real world operation, ever encounter something that large. But 1.6 trillion is about 10 percent of - a little over 10 percent of our gross domestic product right now. If we continue at that level, we are going to be unable, as I said earlier, to pay for the things we want.

CONAN: Yeah.

Mr. BELL: But more important about the ideological point... You know, I think Mitch Daniels - who's a very good friend of mine, and he was with Senator Lugar when I was with Senator Domenici - said it best, recently.

CONAN: Now the Republican governor.

Mr. BELL: He's a Republican governor of Indiana - who said, look it, I don't want to be standing around as the shipwreck saying, see, you should have done it my way, you should have done it my way. There are two things wrong right now in Congress: One, so few new members really know what comprises the federal spending. They think it's 25 percent foreign aid and the rest of it is waste, fraud and abuse.

CONAN: No, no, the rest goes to National Public Radio.

Mr. BELL: Well, to NPR. Yeah, well, that's about - my estimate is that's about 200 tomahawks. So I don't mean to lessen your importance, but we kind of spend all the money we allegedly save from you in about 45 minutes in Libya.

CONAN: Minutes in Libya.

(Soundbite of laughter)

Mr. BELL: But, you know, if there was one thing I would want people to know that I wish you can print on their brains when they were born, it's a chart we have in page 14 of our big report, and that is a pie chart. We spend 21 percent on Medicare and Medicaid, 20 percent on Social Security, 20 percent on defense - as all kinds of security operation, 17 percent on other mandatory - pensions, veterans comp, agriculture support programs. We pay about six percent right now in the public debt - we are so lucky that interest rates are so low. Everything else we do is 16 percent.

If you got rid of all of that, the deficit this coming year will be 1.2 trillion. So the ideology is nice. I'll never vote to change Social Security. I'll never vote to raise taxes. But what those people are doing is letting a moment go by where we have exceptionally low interest rates because of unnatural conditions in the world, and saying I want to do it only my way. That's great, but I call that theology, in a way. I really do. I call that more theology than ideology.

CONAN: One other factor, the economy has been in the pits these last several years. If the recovery continues to gain pace, nice jobs report last week - and looks like things are getting better, more people will be working, more people will be paying taxes, all kinds of taxes, can you grow your way out of it or at least part of it?

Mr. BELL: You can, part of it. What you'd take to grow your way out of it over the next 10 years will be 6.6 percent real growth, every year, in GDP.

CONAN: And that's Chinese levels of growth.

Mr. BELL: We have never done it in this country, since before World War II. No decade have we ever done that. So you can't grow...

CONAN: A lot of economists would panic if you did that. They would say, (unintelligible)...

Mr. BELL: Well, the inflation rates would be - and interest rates would be interesting - that'd be self-correcting. You can't go your way out of it. You really can't tax your way entirely out of it. And you really can't spend your way out of it. So what you have - or cut your way out of it. What you have to do is a balanced program where everything this country does is on the table.

CONAN: And is - as you look at the various plans that are being offered, do you see anybody's plan approaching sensible?

Mr. BELL: Well, I do have to give Paul Ryan a lot of credit. I have to give Simpson and Bowles a lot of credit.

CONAN: They were the chairpersons of the...

Mr. BELL: The president.

CONAN: ...president's commission.

Mr. BELL: They took on some tough things. He made some tough recommendations. Ryan, who actually has his election certificate, and for whom this is not a theoretical question, getting re-elected, you have to give him a tremendous amount of credit. There are some things we would've liked him to do that he's not doing.

CONAN: Raise taxes.

Mr. BELL: Raise revenues, cut spending more, not change - not kind of shy way from Social Security. But he still saves four to 5 trillion. And that's a big number over 10 years, I should add, because I'm Scot and therefore sort of dour in my views, that the accumulated deficits over that time period will be about 13 trillion. So he reduces it by about 30 percent, 30, 35 percent.

CONAN: Steve Bell, senior director at the Bipartisan Policy Center here in Washington, D.C. Thanks very much for coming in today.

Mr. BELL: Thanks very much for having me. You're doing a great job on this.

CONAN: We're going to get another view on what to do about the deficit tomorrow in a series that continues all this week. Also, tomorrow, we'll talk about sex discrimination at work. Some say the long battle is over. We'll hear arguments on both sides of that question. Join us for that.

I'm Neal Conan. It's the TALK OF THE NATION, from NPR News.

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