Tax Debate Continues: Who Do Cuts Hurt And Help?
LINDA WERTHEIMER, HOST:
This is WEEKEND EDITION from NPR News. I'm Linda Wertheimer.
Once again, taxes will be a major part of the battle for the 2012 election. Conservative ads out last week seek to savage what they call Obama's Tax Hike, a reference to letting the Bush tax cuts for wealthier families expire at the end of the year.
(SOUNDBITE OF A POLITICAL AD)
UNIDENTIFIED WOMAN: Liberals say raise taxes on the rich. But Reid's Senate passed Obama's tax hike, hurting so many small businesses.
WERTHEIMER: The Democrats are trying a two-pronged attack on Mitt Romney for, as they would have it, protecting tax cuts for the wealthy.
(SOUNDBITE OF A POLITICAL AD)
UNIDENTIFIED MAN: It gives a $4.3 million tax cut to the wealthiest in this country.
WERTHEIMER: They're also determined to keep Governor Romney's refusal to publish more of his tax returns on the front pages, though his vice presidential pick released some of his tax returns this week. So each side is trying to frame the other as unfair on taxes.
As we go into the election, we're talking to a handful of the nation's top economists about the big questions facing our economy. And this week, our guest is Christina Romer. She is professor of economics at the University of California, Berkeley -and full disclosure - the former chair of the Council of Economic Advisers for President Obama, though she emphasizes that her views these days are her own. She joins us on the line from California.
CHRISTINA ROMER: Thank you. It's wonderful to be with you.
WERTHEIMER: How do you characterize this country's tax system compared to other major Western economies? Do we hit the rich for more money than other people do? Do we ask people at the lower end of the spectrum to bear more of the burden?
ROMER: So I think there are two facts about the American tax system. One is, in general, we are lower tax that most other countries like us. So, the countries of Western Europe or other very advanced developed economies. And then I think in terms of progressivity, which is how to tax rates vary according to income level and do they rise as you get richer? We certainly have a progressive tax system but not as progressive as many others.
WERTHEIMER: Earlier in this series we talked to Greg Mankiw. He's a professor, as you are, but also an informal economic adviser to Mr. Romney's campaign. And he made Mr. Romney's argument for even more tax cuts. Let's listen.
GREG MANKIW: Well, the further tax cuts beyond the Bush tax cuts that he's talking about would be a tax reform that would be revenue neutral, by lowering rates and broadening the base. So I actually think the Romney plan is the direction that I would certainly go.
WERTHEIMER: So what's wrong with that? More people chipping in, so everybody pays less. It sounds good, I think, to a lot of Americans.
ROMER: So, I think the key thing is kind of who's paying more and who's paying less? So there's a very important study done by the Tax Policy Center, a nonpartisan research center, which said if you look at the Romney plan, it's going to cut everybody's marginal tax rate, which is the tax that you pay on another dollar of earning. And the way was going to be revenue neutral, he said he was going to cut loopholes, deductions, things like that.
Well, what they found is that the rich aren't paying enough of those loopholes and deductions; they're going to have a big tax cuts for wealthy Americans and a lot of that is going to have to be paid for by middle-class families.
WERTHEIMER: So can economic models tell us that if we lower taxes the economy really will be better?
ROMER: There were two effects of any tax change. So, imagine you cut taxes. There's a demand-side effect. There's more money in people's pockets. They do spend more. And so, it does tend to cause the economy to grow for the next couple of years. There's another effect to taxes, which are the more the supply-side effects. The idea of not just that you can get kind of a temporary surge in growth. But that by changing your taxes from to saying having lower marginal tax rates, that can set off more labor effort, more business creation, and really raise growth over the long-term.
And that's the part that I think the evidence does not support. That we don't see the kind of big supply-side effects from tax cuts that everyone, you know, going back to Calvin Coolidge and in Ronald Reagan have wanted to believe were there but just don't show up in the data.
WERTHEIMER: What about the deficit? On other occasions, you've said that raising taxes to reduce the deficit could damage the economy; that it could go lower Gross Domestic Product - obviously not what anyone wants right now. Do you think that's a problem?
ROMER: We still have two big problems. We obviously still have a jobs problem and we have a terrible long-run budget problem. So the answer is we need a comprehensive policy that deals with both of those. So on the deficit, we need something like the Bowles-Simpson bipartisan fiscal agreement. That's something that would put us on a path to sustainability and dealing with the long-run deficit.
But nothing says that has to be implemented immediately. The other thing is you could actually a pair that with more near-term measures to help job creation.
WERTHEIMER: Do you have any real hope that sensible arguments will be held in an election setting?
ROMER: Not a whole lot. I'm not going to give up hope yet. You know, I do think it's important and especially come the 1st of January, we have huge fiscal changes that are already on the books - the expiration of the Bush tax cuts, we passed a bunch of cuts in government spending last year during the debt ceiling debate. We're going to have to make these decisions and we're going to have to make some fast after the election.
It would sure be a whole lot easier if we've been talking about those issues before the election, and people knew where we each person stood on those issues and how they would deal with this fiscal cliff that we're coming up on very quickly.
WERTHEIMER: Christina Romer is a professor of economics at the University of California at Berkeley. She is the former chair of the Council of Economic Advisers for President Obama.
Christina Romer, thank you very much.
ROMER: Oh, thank you.
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