Everyone Wants One, But Do Tax Cuts Really Work? President Obama plans to extend tax cuts for all but the wealthiest Americans, but hopes to end similar tax cuts for top earners. But how do tax cuts work? Can cuts that benefit individuals be bad for the economy? NPR's Scott Horsley and the Tax Policy Center's Donald Marron explain Tax Cuts 101.
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Everyone Wants One, But Do Tax Cuts Really Work?

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Everyone Wants One, But Do Tax Cuts Really Work?

Everyone Wants One, But Do Tax Cuts Really Work?

Everyone Wants One, But Do Tax Cuts Really Work?

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  • <iframe src="https://www.npr.org/player/embed/129753524/129753520" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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President Obama plans to extend tax cuts for all but the wealthiest Americans, but hopes to end similar tax cuts for top earners. But how do tax cuts work? Can cuts that benefit individuals be bad for the economy? NPR's Scott Horsley and the Tax Policy Center's Donald Marron explain Tax Cuts 101.


This is TALK OF THE NATION. Im Jennifer Ludden in Washington. Neal Conan is away.

The battle over tax cuts has heated up in Washington. President Obama laid out his latest plans, and all sides are weighing in. But will tax cuts spur the economy, as the White House contends? Some say the president's approach will boost job growth, others that it will bring more layoffs. We'll take a step back today and get a primer on tax cuts.

As a country, why do we have them? Who, if anyone, do they help, and how? We'll talk with NPR's Scott Horsley and with an economist. We also want to hear from you. What's your favorite tax cut? Do tax cuts influence your spending, and what tax credits have you taken advantage of?

Our number here in Washington is 800-989-8255. Our email address is talk@npr.org. And you can also join the conversation at our website. Go to npr.org, and click on TALK OF THE NATION.

Later in the program, one woman's sad argument that the legacy of 9/11 is not unity, but division. But first, tax cuts. NPR's Scott Horsley joins us from his post at the White House. Scott, welcome.

SCOTT HORSLEY: Good to be with you.

LUDDEN: So the president is facing a lot of heat this week for how he wants to handle the tax cuts enacted under President Bush. Can you tell us, where do things stand now?

HORSLEY: Well, the president said again yesterday, as he said before, that what he wants to do is make permanent the Bush-era tax cuts for all families making less than a quarter million dollars a year, and then let the tax cuts for the wealthiest Americans expire at the end of this year, as they're due to do if Congress does nothing.

LUDDEN: So all the tax cuts from the Bush era are set to expire. The Congress needs to take action to stop that.

HORSLEY: If Congress did nothing, everyone would see their taxes increase at the end of this year.

LUDDEN: Now, Peter Orszag, who recently resigned at White House budget director, seemed to startle the White House when he offered a different approach to the Bush tax cuts in an op-ed. What did he say?

HORSLEY: That's right. He says, look: America can't afford any of these tax cuts. It's not a matter of rich tax cuts versus middle-class tax cuts. We can't afford any of these.

So he said that the administration ought to simply allow the tax cuts to expire, but he said look, we are in a tough time right now. It's probably difficult to allow them to expire this year or next year. Let's all agree that we're going to let them expire in 2013 instead of 2011, but extend them until then.

Now, he said, it would be best to only extend the middle-class tax cuts, but he acknowledged that politically, it would probably be easier to extend them all for two years.

He's at odds with the administration, really, in two ways. On the one hand, he's at odds with them in saying that it might be okay to extend the tax cuts for the wealthy for a couple of years if that's the political price that must be paid. The White House disagrees with that.

But more importantly, he's at odds with the White House in saying that all the tax cuts ought to come to an end before too awful long because we simply can't afford them. The administration wants to make the vast majority of those tax cuts, for everyone making less than a quarter of a million dollars, permanent.

LUDDEN: How has the White House responded to that?

HORSLEY: Cautiously. White House spokesman Robert Gibbs was questioned a good deal about the former budget director's op-ed piece earlier this week. Most of the questions were over this debate, which really is the crux of what Congress is going to be debating this fall, whether to extend some or all of the tax cuts.

There were fewer questions raised about, again, what I think was the main point of Peter Orszag's op-ed piece, which is that all the tax cuts ought to lapse in a couple of years.

LUDDEN: If not sooner is what Peter Orszag said. I mean, there's political reality, and then there's the economic.

HORSLEY: Correct.

LUDDEN: Now, the president, this week, proposed a tax credit for small businesses. He did that when he spoke yesterday in Ohio. What's he talking about there?

HORSLEY: Well, actually, the administration has been pushing a package of benefits for small businesses, some of which are tax cuts, ever since the president gave his State of the Union Address, you know, last winter. And it's cleared the House, but it has yet to get through the Senate.

He has continued to hit on that and say look, if you want to help small businesses, let's pass this very targeted, directed package of benefits for small businesses. Let's not use that as the excuse for extending the tax cuts, the Bush-era tax cuts for the wealthiest Americans.

Republicans and other proponents of extending those sometimes say that that's a way to help small businesses.

The other thing that he did in Ohio yesterday was talk about making permanent the R&D tax credit, which is not just for small businesses. In fact, most of the beneficiaries of that are big businesses. He talked about expanding that tax credit, making it easier to apply for and making it permanent.

That's something that is a popular idea, although like the original Bush tax cuts, it's never been made permanent because if you do that, the Capitol Hill budgeting rules show it having a pretty big price tag, and that sort of scares people off.

And then finally, the president proposed yesterday a sort of short-term fix that would allow all businesses, again big and small businesses, to write off the full amount of any business investments.

Instead of having to depreciate that over a period of years, they'd be able to expense that right away and therefore get a savings on their tax bill but only between now and 2011, the idea there being to say to companies: Look, if you're going to be making investment over the next few years, you're going to save some money if you do it right now when the economy really needs to boost.

LUDDEN: So how have those proposals gone over on Capitol Hill and maybe from business groups? What have they been saying?

HORSLEY: Well, it's been a sort of a mixed bag. In general, the business community supports the expansion and the making permanent of the R&D tax credit. And I think there is a general feeling that the accelerated depreciation would be welcome, as well.

But you didn't hear the business community shouting from the rooftops that they love these ideas because they're sort of already on they're already worried about what's going to happen with the tax cuts, the Bush-era tax cuts. And so they don't want to sort of give the White House a pass on that.

Here on the one hand, you have the president saying he wants to let the high-end Bush-era tax cuts expire. That would affect some of the same businesspeople that would benefit from the others. And so they don't want to get too they don't want to sound too pleased with the administration.

LUDDEN: Okay. Scott, I think you're going to stick with us for a bit, but we're also going to bring into the conversation Donald Marron. He's director of the Tax Policy Center and also a visiting professor at the Georgetown Public Policy Institute, and he's here in Studio 3A. Welcome.

Mr. DONALD MARRON (Director, Tax Policy Center; Visiting Professor, Georgetown Public Policy Institute): Hey, thanks.

LUDDEN: Can we just take a step back for a moment and educate ourselves a bit? You know, can you tell us: What is the goal? I mean, we all know we have a very complicated tax policy, lots of little things you can do to it here and there. What is the goal of cutting taxes, little, special targeted tax cuts.

Mr. MARRON: Right. So if you think about tax cuts, there are really two different ways to think about it: in the short run, when the economy's weak, and in the long run, if you're trying to design a good tax policy.

In the short run, when the economy's weak, there are three reasons you might cut taxes. The first is to put money in people's pockets so they will go out and spend it. The second is to create incentives for people to undertake activities they otherwise might not. That's the spirit of the president's proposal for investment.

And then the third would be just, you know, to target benefits to particular groups or people that you think are particularly suffering and need help.

LUDDEN: And can you lay out the difference between a tax cut, tax credit and tax deduction? Is that am I being redundant, or are those all different things?

Mr. MARRON: So there are different levers of tax policy, exactly right. So there are the rates you pay, and so you might cut those. For example, if any of the expiring tax rate cuts get extended, that would be basically a tax cut of the rates that people pay on the income that gets taxed.

A tax credit would be something that gives you money back in return for doing something. The classic example would be we have a child tax credit, which gives folks money through the tax system if they have children.

And then a deduction would be money that you spend on some activity, say mortgage interest is the most common example, that you are allowed to deduct from your taxes and thereby basically shield some of your income from paying taxes.

LUDDEN: Or if you give old clothes to charity.

Mr. MARRON: Right, or charitable donation, absolutely.

LUDDEN: Okay. Now, is one of these more effective than the other?

Mr. MARRON: Well, so it depends what you're trying to do. The deductions, for example, are most interesting if you're trying to encourage people to do some particular activity. Like, the spirit of the reason for the charitable deduction is to encourage charitable giving.

If you're worried about a weak economy, the things you want to focus money on are putting money in the pockets of people who are going to spend it, that can provide some short-term support for the economy; and anything you can do to change incentives so that people will, say, bring investment forward or undertake more economic activity when we need it.

LUDDEN: Okay. We want to remind listeners that we want to hear from them, as well. What's your favorite tax cut? Do tax cuts influence your spending? And what credits have you taken advantage of? Call us at 800-989-8255. Or drop us an email at talk@npr.org.

So Donald Marron, how do you how do you measure effectiveness of tax cuts? How do know - do they work?

Mr. MARRON: So this is a topic of running debate in the economics community and the policy community, and I'm sure you've people standing up, quoting studies that say everything from a negative effect to a gigantic positive effect.

LUDDEN: Is this the economist on the one hand, on the other hand...?

Mr. MARRON: Economists have many, many hands, and unfortunately, you know, it's hard to run good, clean experiments. You know, what you'd like to do is have an economy and then, you know, hit it with different tax things and how it responds. But, you know, Congress doesn't let us run the experiments economists would like.

I think kind of the mainstream view is that if you cut taxes, at least in the short run, that will have some stimulative effect on the economy. You know, it's not gigantic, but it points in the right direction. If you put more money in people's pockets, some of them will go spend it. That provides some short-run support.

You know, the tradeoff there is, of course, eventually that will pass, right, and you get on the backside of that, where the tax cut isn't in place, and that demand will recede.

LUDDEN: You mean because the tax cut was put out for a specific period of time.

Mr. MARRON: For a time, exactly.

LUDDEN: But how you said not a lot of effect. I mean, how do you how much of an effect? I mean, is it a direct relation? Is it like X percentage? If you get a $1,000 tax cut, you can be expected to spend $300 of that, or...?

Mr. MARRON: Right. So it varies how they're structured. But, you know, a typical result for kind of normal consumers is if you give them a tax cut of, you know, $100, they're probably going to spend somewhere in the neighborhood of $30 or $40 of it.

LUDDEN: Okay. And but it doesn't feel so direct. You know, it's not like we get a check in our mailbox. I mean...

Mr. MARRON: Well, sometimes you do. As you'll recall, some of the tax cuts we've had over the last decade actually took that form, where a check would show up in your mailbox if you were of a qualifying income. If your income was too high, you wouldn't see a check.

Other tax cuts show up in reduced withholding. So you may not mentally know it, but each, you know, every two weeks when you get your paycheck, it's going to be a little bit bigger.

And then for some of them, it only shows up when you file your taxes in April.

LUDDEN: Right. And once again, we do want to hear from listeners about your favorite tax cuts. You know, have you put those energy-efficient windows in? I've been seeing the ads for that. What tax cuts have you taken advantage of?

We're going to come back in just a moment. You can call us, 800-989-8255. Email us, talk@npr.org. I'm Jennifer Ludden. It's TALK OF THE NATION from NPR News.

(Soundbite of music)

LUDDEN: This is TALK OF THE NATION from NPR News. Im Jennifer Ludden.

With the economy limping along in the lead-up to the midterm elections, we're hearing more and more about tax cuts - for the rich, for the poor, for the middle class.

But how do tax cuts affect the economy and us? We're truth-squadding tax cuts today. Our guests are NPR White House correspondent Scott Horsley and Donald Marron. He directs the Tax Policy Center and served as acting director of the Congressional Budget Office and a member of the Council of Economic Advisors under President George W. Bush.

LUDDEN: What's your favorite tax cut? Do they influence your spending? What tax credits have you taken advantage of? Our number here in Washington is 800-989-8255. Our email address is talk@npr.org. And you can join the conversation at our website. Go to npr.org and click on TALK OF THE NATION.

Let's take a call from a listener now. Larry is in Las Vegas, Nevada. Hi, Larry.

LARRY (Caller): Hi, thanks for taking my call.

LUDDEN: Go right ahead.

LARRY: Well, my favorite tax cut, of course, is to live in a state that has no in-state income tax. And the cuts that has happened here in Las Vegas is the property taxes are down 50 percent because the housing prices are down 50 percent. So the fact we have no state income tax and our property taxes dropped by 50 percent is helping all of us at the bottom line.

(Soundbite of laughter)

Mr. MARRON: Now if they could just lay off half the teachers and the firefighters, you'd be in good shape.

LARRY: Well, the firefighters in Las Vegas are the highest paid in the world. They make over $200,000.

LUDDEN: And don't have to pay state income tax.

LARRY: And we don't have to pay state income tax, and both candidates for governor said they will not raise the taxes.

LUDDEN: Donald Marron, we do see different policies in different states. I think New Jersey, also, at least if you clothes, I remember, you don't have to pay state taxes. You know, how has it shaken out that states have come up with such different policies?

Mr. MARRON: Right, so states have a variety of choices about how they can raise their taxes, right? They have income taxes, and as your listeners just mentioned, some states decide to go without income taxes. But then they need to have property taxes and sales taxes to make up for that.

And then, you know, you have 50 states, and so you have a lot of different political judgments. For example, in New Jersey about, okay, which things are going to - the sales tax is going to apply to and which not.

LUDDEN: Larry, thanks for that call. Scott Horsley, you've been talking to a lot of different people about tax cuts. What are you hearing from ordinary people?

HORSLEY: Well, you know, it's interesting. Donald Marron mentioned that there are different ways to structure a tax cut, and when the stimulus measure was passed, the president included his Making Work Pay tax cut, which was something he'd campaigned on. He talked about giving a tax cut to 95 percent of all Americans.

And he got some advice from behavioral economists, who said the best way to get people to spend that money is don't put it in a check that they get in their mailbox but just do it through reduced withholding, and so a little bit of extra money shows up in their paycheck every week or two.

That may have paid off economically in terms of getting people to spend it, but one of the downsides for the administration was almost - maybe 95 percent of the people got a tax cut, hardly anyone knew they got a tax cut.

So what was perhaps the best way to do it economically was a terrible way to do it politically. Robert Gibbs later said, boy, I wish I could have gone around like the Publisher's Clearinghouse to everybody and said here's your check.

LUDDEN: Yeah, it's funny. It does have a way. Whatever money is there, it finds a way to be spent, doesn't it?

(Soundbite of laughter)

LUDDEN: Let's take another call. Marcus is in Naples, Florida. Hi, Marcus.

MARCUS (Caller): Hi, thanks for taking my call. I don't know if it's a tax credit or break, but I did take advantage of that washer-dryer tax incentive that they had.

LUDDEN: For energy efficient?

MARCUS: Yes, ma'am. I also did the Cash for Clunkers. I did that as well. You know, they gave me four grand for a truck that was worth maybe 800 bucks.

You know, I just think that it's a little bit hypocritical for some economists to say - usually on the right - you know, give that top two percent a tax break because they'll use it to re-invest. That's not true.

In tough times they're not gonna reinvest nothing. They're going to put it in their pocket, sock it away, you know, put it in Treasuries or whatever for a rainy day. They're not going to reinvest, especially with a Democratic president, in my opinion. They're going to hold it, you know, put the little nuts in the tree until a Republican president comes their way, and then they're going to open the floodgates to say: You see? Just my little two cents.

LUDDEN: All right, well, we thank you for that, Marcus.

MARCUS: Thank you.

LUDDEN: So Donald Marron, this is the argument we're hearing, that why, why give the top earners a tax break. They're going to put the nuts away in the tree, as Marcus put it.

Mr. MARRON: Right, so there's good evidence that folks who have higher levels of income, if you gave them a tax cut, will spend relatively less of it than folks of lower and moderate income, which is why there's more one of the reasons why, among economists, there's more support for tax cuts that go to lower and moderate incomes.

But to be clear, right, the effect isn't zero. Right, if you gave a tax cut to someone earning $300,000 a year, they're going to find more money in their paycheck, and they're going to get around to finding some way to spend that as well.

So the effect on the economy isn't zero, and I think that's why you saw in Peter Orszag's recent op-ed where he said, you know, well, if the politics are such that you have to extend for everybody, it'll make sense to include the top people for a couple of years and that at the margin that will have come additional economic benefit.

LUDDEN: Scott Horsley, what are you hearing about that how that top earner bracket might contribute to the economy if they got the tax cut extended?

HORSLEY: Well, I think there is, as Donald Marron says, a consensus that they would contribute proportionately less to the economy than everybody else, but even among the quote-unquote "middle class" - that is, people making less than a quarter-million dollars a year, the impact is not all that great.

You know, the Congressional Budget Office looked at a lot of different ways that the government could stimulate the economy. They said extending the Bush-era tax cuts was dead last in terms of its impact on the economy.

If you really wanted to get more bang for the buck, you'd be better off either providing a payroll tax holiday for employers or extending unemployment benefits further than the government already has, or doing direct government spending on roads and bridges and that sort of thing.

So yeah, again, the effect is greater for lower-income people than for high-income people, but the Bush-era tax cuts in general were considered by the CBO, the nonpartisan CBO, to be a pretty inefficient way to stimulate the economy, which in some sense makes it makes sense because, remember, former President Bush proposed these tax cuts as candidate Bush back in 1999, at a time when the government was running a stimulus.

They weren't designed running a surplus, rather. They weren't designed to stimulate the economy. They were designed to, you know, return excess money that the government had collected.

LUDDEN: Donald Marron?

Mr. MARRON: Right, so, I mean exactly as described - the tax cuts, as originally passed, were intended to be long term. Obviously the folks who enacted them hoped that they would eventually be permanent and so were enacted with some different ideas than just short-run stimulus.

And then as was just described, right, among the all the things in principle you might do to provide stimulus to the economy, extending these tax cuts is not among the best.

However, when you start putting the political constraints of Washington as we find it today, and you say, hmm, a bunch of those things that are ranked higher on the list fall off as just being politically infeasible, and then you kind of end up in the situation where I think a lot of folks think that the tax cuts ought to be extended for a year or two just because that's the path of least resistance to provide a little bit of extra stimulus to the economy at a time where it's still weak.

LUDDEN: Okay, we've got some emails here. Annie(ph) in Athens, Ohio writes: Three years ago, my husband and I took advantage of an Ohio state rebate for installing solar energy panels on our roof. The rebate, more than $11,000, made up about a third of the cost. The installer was a locally owned firm. So we were happy to do it, would not have considered without the rebate.

Sara(ph) in Tucson says: The American Opportunity Hope Tax Credit and other educational tax deductions have helped me so much while I've been in college. As a self-supporting student on scholarship, I don't know what I would do without them.

And Ryan writes that: My wife and I bought our first home this spring, and one of the only reasons we were able to do so was the $8,000 tax cut incentive, by far my favorite.

Let's take another call from a listener. Fred is in Universal City, Texas. Hi, Fred.

FRED (Caller): Hi, ma'am. I have a better deal than your emailer about the solar panels. We had to make up my mind. We were going to get a more fuel-efficient car or get solar panels. And the panels were $36,000. But after the rebates, tax credits, we ended up only owing 12,500.

Plus, the credit union gives you a low interest rate if you put panels in by a whole, for a whole percent. And that left me just with the $12,500 car payment or payment - and that way, in about four or five years, maybe we'll have a hundred-mile-per-hour or hundred-mile-per-gallon car, and I'll spend the 12,500 on that.

LUDDEN: Wow. You're going to town there.

RYAN: Yes, ma'am.

LUDDEN: Thanks for letting us know.

Mr. MARRON: This is a good example of how, you know, tax policy can sway people's decision. And that may be considered a good thing. I mean, one person would call that an incentive. Some economists would call that a distortion of behavior and say, well, why are we, why are we tilting people's decision-making one way or another.

But Congress has done this time and time again. It's become much easier for lawmakers to pass policy through the tax code than in any other way. So we're doing a lot of things through the tax code other than just trying to raise revenue to fund the government.

LUDDEN: Okay, let's have another call here. Jeff is in Portland, Oregon. Go right ahead, Jeff.

JEFF (Caller): Good morning.

LUDDEN: Or afternoon.

JEFF: Or afternoon, yes. So I hear a lot about tax credits, and I own a small inn in the Columbia Gorge, and I employ 30 full-time people in a rural community of 1,200 homes.

What's killing me as a small business owner is, number one, I can't get a small business loan. It's the payroll taxes. The payroll taxes are killing us. We're going to have to lay off - it's the end of season, and I'm going to have to lay off 20 full-time workers and hunker down to get through the winter.

But if we had a break, an immediate break - not a break in the future, but a break right now in payroll taxes - I could survive and I could keep those 30 jobs, but I can't.

LUDDEN: Okay, Donald Marron, remind us what is the payroll tax, and there has been a lot of debate about whether they should be cut as well.

Mr. MARRON: Certainly, so the payroll tax is something that's collected on people's earnings at their work. Basically, they pay half of it. They see the FICA line on their paycheck - that is their half. And then it turns out their employer is also paying half. Economists tend to believe that actually, in the long run, all of this is borne by the worker. It just happens that the employer is writing the check to the government for half of it.

LUDDEN: Because he might, what...

Mr. MARRON: Because...

LUDDEN: ...cut back on benefits or salaries?

Mr. MARRON: Exactly, right, right. That this ends up reducing other benefits...


Mr. MARRON: ...or reduces what people's wages are in the long run. If you go through the various evaluations in the short run, of what would be among the best stimulus options, I think you find economists from both the left and the right who gravitate towards a temporary reduction in the payroll tax, particularly on the employer side - exactly as your caller described - as being something that looks like it would be quite positive. Basically, because it has the effect of both putting money in people's pockets, and it has the effect of making it easier for them to keep workers or to attract new ones.

LUDDEN: So, Scott Horsley at the White House, any sense that Washington could -if economists on both sides are saying this, any chance it could actually happen to help Jeff(ph) there in Portland?

HORSLEY: Well - and the odd thing is if Jeff hired a new worker, right now, he would be eligible for a payroll tax holiday, but he doesn't get that benefit just for keeping the workers that he has. He'd be eligible, I should say, if he hired a new worker who'd been out of work for two months or more, so there are kind of some strings attached. There has been talk of pushing for a simpler and maybe more equitable payroll tax holiday, but it's not something that the administration has moved forward with.

LUDDEN: All right, Jeff, thanks for your call. Let's take another caller. Jerry(ph) in O'Fallon, Missouri. Hi there, Jerry.

JERRY (Caller): Good afternoon. My comment is, for over 30 years now, we've been hearing the talking point about how when John F. Kennedy lowered the tax rate, it stimulated the economy, but what everyone fails to mention is that the upper bracket was lowered from 90 percent.

LUDDEN: Yikes.

JERRY: And my question to your panel, and I guess the audience, is: Can anyone name a country with a lower tax rate than ours, an industrialized country, that has a thriving economy and a stable society? That's my question. Thank you.

LUDDEN: Thank you. Donald Marron, you want to take that first?

Mr. MARRON: It's - so off the top my head, most of the countries that have substantially smaller tax rates tend to be smaller, kind of up-and-coming economies. And then if you look around kind of our comparables, Japan, Europe, those have comparable or higher tax levels.

LUDDEN: So smaller up-and-coming economies like where?

Mr. MARRON: So like there are a bunch of kind of the Estonias of the world that have quite low tax rates, have grown rapidly. I'm not sure about Estonia, particularly, but kind of, you know, that bloc of countries. Ireland used to be a good example, before the financial crisis. Obviously, the financial crisis has rewritten the history of some of these countries.

LUDDEN: Right. Let me just remind people. You're listening to TALK OF THE NATION from NPR News.

Well, let me ask you, Donald Marron, is there a point of diminishing returns? I mean, obviously, you know, we used to have 90 percent tax rate, and to bring that down dramatically you can see how that would have a big impact. Is there a certain point below which, you know, you see diminishing returns or, you know, cutting the tax rate doesn't bring much benefit?

Mr. MARRON: All right. So the discussion to this point, we've had, has been about the short run, but I think it's important to talk about the long run as well. Which is - when it's much more important to talk about what the tax rates are. And as you - basically, what happens is the higher the tax rate, the more distortions you get in the economy, the more you discourage people from working and investing, and the more you encourage them to hire good accountants and good lawyers to hide their money, right? And none of those things are beneficial.

When tax rates are 90 percent, you get a lot of perverse behavior. And there's a lot of sense to ratchet those back. And 90 percent, frankly, was probably on the wrong side of the famous Laffer curve. That was up in a region where you could lower tax rates and probably get more revenue just because you would stop distorting so much economic activity.

But just because that was true at 90 percent, doesn't mean that's true when you get down to 35 or 40 percent, which is where the debate is happening today. You know, today, in the world - today, we're in a world where if we cut taxes that would clearly reduce the amount of revenue the federal government has. If we allow them to go up, we'd raise more. And I think actually the right debate, now, to have, is not so much about the rates, whereas all else equal, it would be good to keep the rates low. But all the various preferences and incentives and special provisions that our tax code is now laden with, it makes it so complicated.

LUDDEN: And Scott Horsley, you actually have been looking into that.

HORSLEY: That's right. Yeah, the tax rate is only one piece of the puzzle and doesn't tell you the whole story. You could perhaps keep the tax rate the same and still raise a lot of extra revenue if you did away with some of those carve-outs and credits and deductions.

It's interesting, you know, Ohio, yesterday, President Obama said to all those who think raising tax rates on the super wealthy, that that would hurt our economy. He says, well, those folks did just fine during the 1990s when those were the rates they were paying. What he didn't say was that was also true of all the folks under $250,000. They were doing better during the '90s when they were paying higher rates as well.

LUDDEN: Okay, we have an email from Christopher(ph) in Riverhead, New York. My favorite is the adoption tax credit, which my wife and I have taken advantage of twice, saving us $20,500 in adoption costs for two beautiful children. Net adoption cost for both kids was about 8,000, and they were adopted from China. The tax credit allowed us to start a family. We have time for one last call. Murray(ph) is in Tulsa, Oklahoma. Hi, Murray.

MURRAY (Caller): Hello. Thanks for taking my call.

LUDDEN: Go right ahead.

MURRAY: My comment is on tax credits. I really like them. I think they are great tools to encourage behavior. And I'd like to talk about two different things. One is the energy efficiency-type products and then also, electric vehicles.

LUDDEN: You would like credits for that, or you've taken advantage of some of them?

MURRAY: I'd say that they're definitely affecting my family in two aspects. One is we're currently planning on building an addition to our home, and the effect - the aspect that we can actually get tax credits on highly efficient windows is definitely modifying our behavior, because we've learned that if we build the addition with energy-efficient windows, we cannot take the tax credit. But if we don't put the windows in and then put them in later, we can take the tax credit. So we may actually build the addition and just have holes that are boarded up so that we can later take the tax credit.

LUDDEN: All right.

(Soundbite of laughter)

LUDDEN: Well, thank you for your call. Donald Marron, just very few seconds left, you know, we talk about how complicated the tax code is and frustrating, but we've just heard a lot of people who really like all these credits and cuts.

(Soundbite of laughter)

Mr. MARRON: Right. So it clearly provides particular benefits to people who can take advantage of them, although, as you heard in your last caller, it can also create weird behavior...

(Soundbite of laughter)

Mr. MARRON: ...when you have folks who it wasn't designed for. I just - I've got to put on my dismal economist half for a moment and just point out, though, that sometimes what happens is that people think they're benefitting from the tax cut much more than they are. For example, the homebuyers' tax credit had the effect of actually raising house prices.

(Soundbite of laughter)


Mr. MARRON: And so a bunch of them went to the sellers...

LUDDEN: ...there you go.

Mr. MARRON: ...not the buyers.

LUDDEN: Okay. Thank you so much. Donald Marron is the director of the Tax Policy Center and joined us here in Studio 3A. Scott Horsley is NPR's White House correspondent. And on ALL THINGS CONSIDERED, today, he'll talk about simplifying the tax code. Thanks, both of you.

Coming up, Nikki Stern lost her husband on 9/11. She talks about her view of the legacy of that day. I'm Jennifer Ludden. It's TALK OF THE NATION, from NPR News.

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