Looming End To Tax Cuts Stirs Political Battle

During his presidency, George W. Bush introduced major tax cuts, including for those with incomes topping $250,000 a year. But these cuts are set to expire and a political battle is raging in Congress over how many of the tax cuts should be extended and to whom. Host Michel Martin talks about the issue with Tell Me More regular financial contributor Alvin Hall and William Rodgers, professor of Public Policy and chief economist at the Heldrich Center for Workforce Development at Rutgers University.

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MICHEL MARTIN, Host:

I'm Michel Martin, and this is TELL ME MORE from NPR News.

MARTIN: The recession is over. It ended in June of last year. That's according to the economists who make up the National Bureau of Economic Research's Business Cycle Dating Committee.

Now, you could be forgiven if you're not ready to plan the party, particularly if you are unemployed or at risk of foreclosure. But with congressional elections around the corner, there is still plenty of talk about what needs to happen to really get the economy moving again, and one of the main sticking points, of course, is tax cuts. Should tax cuts adopted during the previous administration, when times were good, be kept in place now that times are so not?

To size up those policymaking efforts, we've called William Rodgers. He's a Rutgers University professor of public policy and former chief economist for the U.S. Department of Labor. Also with us, as he is most weeks, is TELL ME MORE's money coach, Alvin Hall. He's our regular contributor on matters of personal finance and the economy, and he's with us from our bureau in New York. Welcome to you both. Thank you for joining us.

WILLIAM RODGERS: Great to be here.

MARTIN: And let's just play a short clip to start us off of President Obama talking about the direction that he would like to see tax cuts going yesterday. This is at his town hall meeting here in Washington, D.C. Let's listen.

BARACK OBAMA: I can't give tax cuts to the top 2 percent of Americans, 86 percent of that money going to people making a million dollars or more and lower the deficit at the same time. I don't have the math.

MARTIN: So Professor Rodgers, is the president telling the truth about that? Is it just not possible?

RODGERS: Well, it's possible, but it comes down to our priorities and choices. This is a clear issue about equity, but it's also a clear issue of just what's going on with the economy.

I mean, this is going to cost us, estimated by the Congressional Budget Office, over $700 billion over the next 10 years. And one piece on the economics here is that when you give tax cuts to this segment of the population, they tend to save it as opposed to spending it, which he wants to do.

The other piece here are the top 2, top 5 percent of families, they're controlling one-fifth of total family income. So they've got resources. Another point for you here is that from the period from 2003 to 2007, when the Bush tax cuts went into place, income at the top 5 percent of families, and it's even smaller for his calculation, it basically stagnated, while income from these tax cuts at the bottom fifth, the lowest part of the income scale up to just above the median, their incomes actually increased by about 2 percent. And so the math doesn't add up, but also here just the benefit-cost analysis doesn't seem to make sense for me.

And then the final point on why I agree with the president is that the recession hit low- and middle-income families the hardest. If you look at the family income data that just came out from the Census Bureau yesterday, over the last two years, the income in the top 5 percent of families only declined by about a percentage point while income contracted between 4 and 8 percent at these lower parts of the income scale. So it just doesn't add up.

MARTIN: Alvin, there are two different arguments on the table here. One is to let the so-called Bush-era tax cuts expire for everybody, but the other argument the president is taking is to only let them expire for the top wage- earners.

But then there are other people who say, look, if you let them expire for everybody, the deficit problem is almost taken care of.

ALVIN HALL: Well, I don't necessarily agree with that. I think if you let them expire for everyone, yes, the government is going to be able to get in more revenue. But it's very clear, as Professor Rodgers mentioned, that the lower- and middle-income people have been most affected by this recession.

And these are the people who are unemployed, who are living off their savings, who are really exhausting their finances. And these people need some help. So the extent to which the continuation of tax cuts for the broader society would help these people perhaps get work or at least be able to survive longer would be more important.

Whereas for the very rich, they don't spend the money, they typically invest the money because of the relief that they also get from capital gains taxes and dividends that they earn on those investments. So the impact on the economy would be substantially less. That old trickle-down theory that came about during the Reagan years just isn't proving true during the current recession.

MARTIN: And who, when you're talking about the very rich, who are you talking about? I mean, the president's proposal is to let the tax cuts expire for anybody who earns over $250,000 in family income over the course of the year. Does that constitute rich in your view? Is that rich?

HALL: I think that anyone who earns that type of money is successful. But for me, rich is anybody who earns over a million dollars a year. And I think that number really speaks to a very narrow band of Americans who earn that type of money.

MARTIN: But that's not the proposal. The proposal is over $250,000. Let me ask you a sensitive question, if I may. I'd like to ask both of you this question.

One of the sort of groups that we don't talk about very often is, you know, we often talk about minorities and the poor and, by definition, non-minorities as being not poor. I'm wondering about is there sort of a group in the middle there, which is sort of a first generation to achieve some wealth or to achieve at least some economic stability? Many of these people are people like the Obamas, who live in cities, who may be the first people in their families to go to college. Where are they in this conversation?

HALL: I think that many of those people are working for corporations, or they're working for municipal organizations. I don't think that their salaries are the equivalent of $250,000 or $220,000. I think it's more in the $185,000, $190,000 range at this point. And I think those people would not be affected if the tax cuts expire.

MARTIN: Professor Rodgers, what do you think about that?

RODGERS: Yeah, I would even use that as an upper threshold in that many of those families are in the kind of $70,000 to $100,000 range. And they're the ones who lost major equity in their housing, so many of them are underwater. They're the ones who've lost major levels of funding for savings for propelling the next generation of kids to school. They're the ones who also lost their jobs because they've been downsized through the jobs that's been outsourced.

So again, the president's proposal, it really is - on one level, it's about shared equity.

MARTIN: If you're just joining us, I'm Michel Martin, and you're listening to TELL ME MORE from NPR News. I'm speaking with our regular contributor on matters of personal finance and the economy, Alvin Hall, and Rutgers University Professor William Rodgers.

And we're talking about the fact that, according to the numbers, at least, the recession has ended. And we're talking about the current debate in Washington over whether to extend the tax cuts that were passed during the Bush administration and set now to expire. Alvin?

HALL: Before today's interview, I decided to call a broad array of my friends who have small businesses, who work for municipal organizations, and virtually every one of them have been hit in some way.

In some cases, they've had to bust their retirement plans in order to pay for their kids' continued education. In other cases, they've seen their business or their income drop by 50 to 60 percent because one of the people in the relationship has been laid off.

All of their salaries are significantly below the threshold. So these are indeed the people who need the tax breaks who would not be affected if the government allowed the upper-income tax brackets to expire.

What's interesting to me is that the rich have garnered all the media attention. It's as if everybody believes that even in this shrinking economy, with salaries clearly going down, that they could eventually be those rich people when the laws are in place. And the laws are likely to change over time.

RODGERS: But it's fascinating, though, if you listen to some of the reactions of people at President Obama's town hall meeting yesterday. And many people seem to be starting to question whether they can achieve the American dream. And that's connected with a new streak that I've actually been talking about over the last few months, and that is that along with Wall Street and Main Street, there are what I'm calling the side streets.

These are families and neighborhoods and communities where they were firmly and squarely on Main Street. But because of the housing issues, the mortgage issues, job loss, that many of these families are now being pushed to those side streets, and I'm very concerned that this sort of dribbling and drabbling of fiscal policy to try to, you know, sort of mend the fence is really going to make it much more difficult for those families who are Main Street to get back off those side streets and back on Main Street.

MARTIN: Well, let's hold on a second. In the time that we have left, let's wheel the discussion around to the question of deficit. So far, a lot of the discussion has to do with whether the tax cuts will be extended and for whom, with the Republicans arguing that they should be extended for everybody because they're arguing that further tax increases at this point would dampen whatever economic revival is already taking place.

Some Democrats are agreeing with that argument. Some Democrats are with the president, saying that the tax cuts should only be extended for the middle class or those with incomes below $250,000 a year. But what about the other side of the argument, which is that adding to the deficit burdens not just the economy at the present but future generations, and it really inhibits the government's ability to do anything to help anybody. What about that argument? Professor Rodgers, do you want to take that first?

RODGERS: Sure I mean, you know, in the long run or over the next few years, yeah, we have to get back to some deficit reduction approaches. But to extend these tax cuts for those with less than $250,000 in couples and $200,000 for individuals, you know, it's the right thing to do. The benefits of that exceed the cost and where the cost is, the increased deficit.

But once you jump above that threshold, now you're talking about $700 billion just for basically 3.4 to 3.5 million families, where also it's been shown by Mark Zandi, an economist who actually served for Senator McCain, that each dollar of Bush-type tax cuts, you're only getting 31 cents back on that dollar.

MARTIN: Okay, but just to clarify the point, Professor Rodgers, the fact is that the plan that the Senate Democrats say they're advancing would add $2 trillion to the deficits by the year 2020. So tell me, you still maintain that the benefit outweighs the cost because why?

RODGERS: Yeah, I mean, the odds of, if you were to let these expire, the odds of then us running back into a double-dip scenario increase dramatically.

MARTIN: Because?

RODGERS: Because you are making it much harder for families and businesses to make decisions. We need that money into the system to stimulate and to grow the economy.

MARTIN: So basically, people with lower incomes will spend that money, and we need people spending right now to the degree that they can.

RODGERS: Correct.

MARTIN: Alvin, final thought from you. What about the deficit?

HALL: I think the deficit is a case where we have to run up this deficit in the short term in order to be able to survive. I think by letting the rich off the hook with the deficit is wrong.

We need to look at this as a more broad society issue. If you can help 98 percent of the people, but yet the 2 percent will be marginally affected by this, then the cuts should stay in place, and the rich should have their cuts removed.

I think this is all about one word, and we've been saying this on this program a long time, jobs. When people feel they have job security and job hopefulness about their future, they will spend. But right now, none of that exists.

MARTIN: Alvin Hall is TELL ME MORE's regular contributor on matters of personal finance and the economy. He was with us from our studios in New York. William Rodgers is a professor at Rutgers University. He joined us on the phone from his home office in New Jersey. Gentlemen, I thank you both so much for speaking with us.

RODGERS: Thank you.

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