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Your Money
Battle over Bush Tax Cuts; Voters to Blame? The Real Cost of Tax Cuts
Aired July 15, 2012 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: That economic storm I've been telling you about is getting closer to our shores every day.
I'm Ali Velshi. And this is YOUR MONEY.
You can call me nuts. You can call me Chicken Little if you want but the political battle being waged over extending the Bush tax cuts is blowing those storm bands over our heads.
Look, you don't need me to tell you that our economy is on the brink of weakening again. You feel it every day. The latest CNN/ORC poll shows just 27 percent of you say the economy is in good shape, 73 percent feel that conditions are pretty poor. And while rays of hope peek through the clouds from time to time, the U.S. economy is fragile right now.
Families are facing long-term unemployment. There are foreclosures, higher student loan payments, higher medical costs, so the notion that you may have to pay higher taxes by next year could make you to decide not to spend money you otherwise would have spent.
I get it. Everyone wants lower taxes. But you can't have lower taxes. Because for years and years your federal government, both political parties, mismanaged the books and spent more money than they took in. Our tax system is broken. Half the country pays no income tax and the rich pay as a percentage of their income less than the middle class does.
We have a tax system that needs entire overhaul and we've got a lot of interest to pay on the debt that we've been accumulated, which is why at least for the moment you can't have a tax cut. But what President Obama wants to do is extend the tax cut that you've actually been living with for about a decade.
See, back during the final years of the Clinton administration the U.S. had a budget surplus. In the year 2000 the federal government took in $236 billion more than it spent. And in the presidential election that year then Texas Governor George W. Bush running against Al Gore pledged to give that money back to the taxpayers.
(BEGIN VIDEO CLIP)
GEORGE W. BUSH, FORMER PRESIDENT OF THE UNITED STATES: We don't believe the surplus is the government's money. We know the surplus is the people's money. And we're going to send some of that money back to the people that pay the bills.
(END VIDEO CLIP)
VELSHI: And send it back he did. When he became president through temporary tax cuts in 2001 and 2003 known as the Bush tax cuts. Now the first of those tax cuts were set to expire back in 2010 but the economy was still shaky back then so Vice President Biden and Senator Mitch McConnell struck a deal to extend them for two more years for everyone.
Now those tax cuts are set to expire again at the end of this year. It's part of the so-called fiscal cliff that economists are warning the U.S. could go over if Congress doesn't deal with it. Now President Obama says let's extend them for another year but -- and this is the key point -- not for everyone, just for what he calls the middle class, families earning less than $250,000 per year or individuals earning less than $200,000.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I believe that we should make sure the taxes on the 98 percent of Americans don't go up and then we should let the tax cuts expire for folks like me, for the top 2 percent of Americans.
(END VIDEO CLIP)
VELSHI: Now you probably have heard that Republicans want them extended for everyone which means the battle comes down to whether 2 percent of taxpayers, the wealthiest among us, should stand in the way of everyone else continuing to pay the lower tax rate.
This is a conundrum for some but not for Fareed Zakaria. He is the host of "FAREED ZAKARIA GPS" and he proposes an unusual compromise between the right and the left that no one get a tax extension.
Fareed, I take it you don't plan to run for office any time soon.
FAREED ZAKARIA, HOST, FAREED ZAKARIA GPS: I do not plan to run for office. This is good policy, not good politics.
VELSHI: Right. Why should nobody get a tax break at this point?
ZAKARIA: Well, because, first of all, this -- if we were to say that all the Bush tax cuts were to expire, it would be simply getting us back to the rates that everyone paid under Bill Clinton's years in office, eight years, during which the United States had record and robust growth.
Secondly, we do have a deficit problem. We are spending more than we take in and this is one very simple way to do it. If you let the Bush tax cuts expire, Ali, the United States budget deficit goes down to basically the lowest in the industrialized world. You no longer have a deficit problem. You have a long-term problem relating to Medicare and health care costs but you're -- all of the things people are worried about disappear. And I think the argument that we -- the economy is so weak that it can't withstand returning to these tax rates is probably not true anymore. The economy has slowly begun to recover. If you look at the housing market, it is clear that it has bottomed out. Consumers have paid down debt. At some point we're going to have to get the fiscal house in order. This is the best mechanism.
Now I have a secret weapon here, which is --
VELSHI: Yes.
ZAKARIA: I wouldn't -- that's my starting position.
VELSHI: Right.
ZAKARIA: If you -- if were the government say to me, OK, we don't want to put all these tax cuts in, let's delay the -- you know, let's make this phase this in over three or four years.
VELSHI: Right.
ZAKARIA: I'd say fine. But why not instead then do a comprehensive tax reform?
VELSHI: Why not instead then do a comprehensive tax reform? Everybody from every party says it. We've seen the tax code, 73,000 pages. It's impossible for anyone to understand and it seems inherently unfair to almost everybody. Why don't we do it?
ZAKARIA: We don't do it because this is what Congress doles out in return for campaign contributions. This is the institutionalized corruption at the heart of the American system. We don't do, you know, cash and brown paper bags and pass them under bridges the way that politicians in the third world do. We do it openly on K Street.
But what we are doing is essentially -- essentially the same kind of corruption. What Congress does is it raises money for its campaigns. A congressman gets $50,000. Nobody is paying him $50,000 because they want coffee with him. He's not that interesting.
VELSHI: Right.
ZAKARIA: What they are getting in return is a specific line in the tax code, which is why our tax code is 73,000 pages.
The French tax code, Ali, is 1,000 pages long. The German tax code is 500 pages long.
VELSHI: Wow.
ZAKARIA: Ours is 73,000 pages long. What does that tell you? We're giving away a lot of goodies in return for that cash.
VELSHI: We may have the biggest tax code but you tend to point out that the American government compared to other developed governments is actually smaller. That is something I think people are going to find fascinating to hear.
ZAKARIA: You know, we have to keep in mind that when we think about America and we talk about tax rates and regulation, there are two-ways you can compare us against some mythical past that, you know, we don't really know about, or just against the other rich countries in the world.
And if you look at the United States against the other rich countries in the world, we have a smaller government. We have lower taxes. We have lower regulations, so I am all for, you know, more regulatory reform, more tax reform. These are all important things. But clearly that's not the big problem in America right now. The big problem in America, I would argue, right now is we haven't got our fiscal house in order.
You know, we had -- we're spending all of this money. I mean -- to hear George Bush talk about this is the people's money and so we should give it back, fine. It's the people's money but it's also the people's debt. We accumulated that debt.
VELSHI: Right.
ZAKARIA: Doing things for people.
VELSHI: Because people want things.
ZAKARIA: Because people --
VELSHI: From government.
ZAKARIA: People want things from government. They want Medicare, they want Medicaid, they want Social Security.
VELSHI: Let's show, let's show our viewers a chart of projected impact of some of the biggest things in the economy right now. When you look at the top group, that orange section, the yellow section is the Bush era tax cuts. Then you've got that middle group, the orange section, which is a post 9/11 expenditures security wars in Iraq and Afghanistan, and the bottom is everything else including Medicaid.
The Bush era tax cuts and the wars are half our estimated deficit -- estimated debt.
ZAKARIA: And the important thing to notice here is that the Bush era tax cuts and the wars, as you say, are about half of it, and that was in effect a policy decision that was a set of -- you know, a single set of policy decisions.
VELSHI: Right.
ZAKARIA: That could easily have not taken place. The blue, the other half, is an accumulation of lots of government programs that are frankly very popular.
VELSHI: Yes. ZAKARIA: And the reason they have risen is not because those programs have gotten bigger, it is because more of us have aged so that the single most important reason that blue thing got bigger is Medicare.
VELSHI: Is -- yes.
ZAKARIA: More people have become -- have gotten older.
VELSHI: Right.
ZAKARIA: And since Medicare covers them, more people are getting that.
VELSHI: So that's -- well, your point is that's not a single policy decision that we can take away, that's tougher. But the other stuff is actually easier.
Let me go back to another point you made. And that is, you know, six months ago I could have agreed with your position that it shouldn't be extended for anyone, these tax cuts. I am worried that given what is going on in Europe and given the slowdowns in China and India, this is a couple billion people who are -- who are prospering at a greater rate, may be able to buy some of our goods and services.
But we could be pushed into -- I mean I have had some economists tell me a 30 percent chance of a recession. Is this the right time to take that money away?
ZAKARIA: So the ideal thing to do in my opinion would be not to try to stimulate the economy using tax cuts because the truth of the matter is people are not spending the money they're getting in the form of these tax cuts.
VELSHI: Right.
ZAKARIA: We've tried it. Remember, the single largest part of the stimulus program was the tax cuts.
VELSHI: Right.
ZAKARIA: Before the stimulus Bush in his last year in office, in his last months in office --
VELSHI: Right.
ZAKARIA: -- passed the tax cuts.
VELSHI: Right.
ZAKARIA: And we've had two subsequent tax cuts. People aren't spending the money. Just why, they're paying down debt, they're maxed out, they're feeling poor. So these tax cuts are not getting passed through to the economy. So the best thing we could do is restore the federal government's fiscal balance sheet and let the government spend money on infrastructure, on broadband, on science and technology. Ali, right now this week one of the most astonishing things happened. The federal government auctioned off debt. Basically we tried to borrow more money. And what it turned out was the demand for American debt is overwhelming.
VELSHI: Sure.
ZAKARIA: If you adjust for inflation, here is what happened this week. People said to the American government we will pay you money to --
VELSHI: To hold our money.
ZAKARIA: To hold our money.
VELSHI: Yes.
ZAKARIA: So can we lend you money and we don't want an interest rate? We will pay you a negative interest rate. We will pay you money. So the federal government is getting all this money. If it cannot find productive investments, we'd be crazy, this would be the most mismanaged economy. This is -- it is actually fiscally irresponsible for us not to use this money to rebuild America.
VELSHI: You have talked about rebuilding America through education and through infrastructure and other things. The criticism tends to be that the government can't seem to make the right decisions with regard to stimulus into spending it the right way. It becomes a whole bunch of little projects of dubious return.
Will Cain describes it as a Christmas tree approach to, you know, to decorating a stimulus.
ZAKARIA: So here's the answer to that, and the answer is something that Republican Kay Bailey Hutchinson and President Obama have jointly proposed which is an infrastructure bank. You take a certain amount of money from the federal government. You leverage it to get a lot more from the private sector and you have an infrastructure bank that has a bunch of exports who determine what are the best infrastructure projects in this country, and that means energy infrastructure, that means broadband, all of these things.
Guess what? Congress doesn't want to do it because Congress doesn't want infrastructure projects awarded on merit. They want it awarded on cronyism, on the basis of political favors, on the basis of bringing back pork to their projects.
VELSHI: Right.
ZAKARIA: So the problem here is again that the best policy idea becomes politically unviable but we should -- that is the right approach. We do need -- the great deficit in America is that we have -- we have the worst infrastructure in the advanced industrial world, broadband, energy, physical. We have to rebuild it.
VELSHI: Fareed, thank you for joining us and setting off the show very well.
Fareed Zakaria is the host of "FAREED ZAKARIA GPS."
Coming up next, Republicans claim that the president's plan to let those Bush tax cuts expire for the wealthy will hurt job creating small businesses. How many small businesses would really be affected?
Plus Romney's economic advisor explains how cutting tax rates can be done without costing you more money.
And later, I have been saying that I am going to name names of the problem solvers? But the first name I'm going to name is the person at the root of our political problems in this country.
(COMMERCIAL BREAK)
VELSHI: President Obama says let's extend the Bush tax cuts for another year but -- this is the key point -- not foe everyone, just for what he calls the middle class. Families earning less than $250,000 per year or individuals earning less than $200,000 per year.
According to Mitt Romney, this is what he said, quote, "Successful small businesses will see their taxes go up dramatically and that will kill jobs." He said that on July 9th.
Now let's remember that Democrats say the only reason that Republicans want those tax cuts extended for everyone including the top 2 percent of earners is because they want to protect their wealthy donors. That of course is a tough charge to defend against so Republicans need a better reason to want the tax cuts extended for the rich and calling it a job-killing tax increase is arguably more effective.
But just because Romney and the rest of the GOP make that claim doesn't make it true. Christine Romans, host of "YOUR BOTTOM LINE," joins me.
Christine, why does a debate about personal income tax rates have anything to do with small business?
CHRISTINE ROMANS, HOST, YOUR BOTTOM LINE: Always does, Ali, because the IRS allows small businesses to report business income on their personal returns and those businesses can be structured in different ways. For example, limited liability companies, partnerships, and S corporations. It's all very technical, each has their advantages and disadvantages. But you don't have to be a tax accountant to understand what this debate in Washington is all about.
All of these are called flow-through entities because the business promise -- profits flow through the company back to the owners. Those folks then pay taxes on those profits at the individual rate. Millions of American business owners do this, Ali.
VELSHI: All right. How many of those millions of small businesses that use this flow-through would be affected by letting the Bush tax cuts expire for top earners? ROMANS: Very few. That's because most of them don't make enough money to be taxed at the very highest income levels. In fact, Congress's Joint Committee on Taxation, that's a bipartisan group in Congress, it knows exactly how many small businesses would be affected, just 3.5 percent of all small business filers would find themselves there at the top of the income tax bracket.
That's 940,000 people. That means a vast majority of small businesses in the country, more than 96 percent would not see -- would not see higher taxes under the president's plan -- Ali.
VELSHI: OK. So if Mitt Romney wanted to be more accurate, he could say something like 3.5 percent of successful small businesses will see their taxes go up dramatically. So what is his claim that returning taxes to their 2001 levels for that 3.5 percent is going to kill jobs? What's that about?
That may not be true either because some of those so-called small businesses are often anything but small businesses. These are not mom and pops. These are not the corner dry cleaner or your dry cleaner or your eyeglass shop. We are talking in some cases about law partnerships, about hedge funds, about celebrities who incorporate themselves in order to protect their assets against lawsuits or to write off expenses.
Many others who are simply people who work on their own. So many of the 3.5 percent of small businesses who would be affected are not job- creating businesses in the first place. It's unclear that they would kill or create fewer jobs as a result of the tax cut expiring. In fact, in fact, in 2009 of the 400 richest taxpayers, 237 could be classified as small businesses because they reported income from one of those flow-through partnerships or S-corporations that Christine that was talking about.
I want to bring in Stephen Moore. He is an editorial writer with the "Wall Street Journal." He enjoys telling me why I am wrong each week and I suspect you're about to do it again, Stephen. I'll give you a shot at me in just a moment. But first, I have a little more to say about whether small businesses are as conservatives claim going to get hurt by the failure to extend this tax cut to the rich.
Let us, Stephen, for a moment assume that they are, that some percentage of the 940,000 businesses are in fact job creating and that the expiration of their tax cuts will cause them to make less money.
Here is my proposed solution. It's not for everyone and I'm sure some accountants out there will disagree with me. But let's say you're a business owner who file as an S or LLC, why not switch over and become a standard corporation, a C-corporation, and that way your business pays taxes at a lower corporate rate, you pay yourself a reasonable but not outrageous salary, keep it below 200,000, and you could lower your personal income tax that way?
I just proposed a workable solution for a percentage of the 3.5 percent of all small businesses who may be affected by the expiration of the tax cuts and solved the job-killing problem. Tell me why I am wrong.
STEPHEN MOORE, EDITORIAL WRITER, THE WALL STREET JOURNAL: Well, Ali, you just made my point that taxes absolutely do affect behavior. And what you described is exactly what will happen because under Obama's proposal we'll actually have a higher tax rate on small businesses than we do on big corporations which makes absolutely no sense.
I mean why would we tax a small business with income of maybe a million dollars --
VELSHI: Right.
MOORE: -- at a higher rate than General Electric? And you're right. What will happen under what Obama proposes is a lot of those companies will become corporations. I am not sure that's a good idea.
Here's my fundamental problem with what you and Fareed were talking about earlier on the show. I just think look, when you look at the income that is being targeted for these higher tax rates, if -- you know this number, I have heard you say it before, 53 percent of that income is business income.
VELSHI: Right.
MOORE: Right. It's not -- it's not salaries. It's business income. A lot of that money gets reinvested in family-owned businesses and manufacturing companies.
VELSHI: Right.
MOORE: That maybe have $50 or $100 million of assets but are not corporations, and here is my problem.
VELSHI: Right.
MOORE: Look, you're right. Small businesses, there are tens of millions of small businesses in this country.
VELSHI: Right.
MOORE: A lot of them don't make any money at all and a lot of them are just, you know, maybe one or two employees. The major employers in this country do make more than $200,000 and $250,000. They're the most likely to put out the help wanted signs and I just think it's very detrimental to raise the taxes at them at a time when we've got, you know. such high unemployment.
VELSHI: I don't know that it is that detrimental but we just got this conversation started. So come back for round two. We're taking a quick break. Stephen says your small businesses enjoy the next few months because you are going to get hit with a tax bill you didn't see coming. We're going to continue this battle when we come back.
You're watching YOUR MONEY.
(COMMERCIAL BREAK) VELSHI: This is YOUR MONEY. I am about to bust a big myth that letting the Bush tax cut expire on the wealthy is a job killer. Stephen Moore is with us to spar some more.
Stephen, you heard Christine lay it out a few minutes ago. Only 3.5 percent of all small businesses, a number that is under a million small businesses, would see their taxes rise under the president's plan.
MOORE: That's right.
VELSHI: Many of them are not employers. Isn't the -- forget the idea of whether you want taxes raised or not. Isn't the GOP being misleading with this definition of small business because they are including doctors, they are including lawyers, they are including celebrities and hedge funds, people who do not create jobs with their Bush tax -- tax cuts.
Is this not just a canard that we -- that it's about taxes? You know what business hiring is about. It is about demand. If a company can make more money hiring people, then it will regardless of its tax burden.
MOORE: Well, look, I thought Christine did a nice job of laying out, you know, the situation with who pays what and how small businesses actually pay the personal income tax rates. I thought that was very well done. But I think what you guys are missing, first of all, look, the top 1 or 2 percent that we're talking about, they're already paying half the income tax in this country. So it's not as if they're getting away scot-free. They shoulder the big burden of the taxes already.
VELSHI: Right.
MOORE: A second point that I think is important to understand, I bet there are a lot of business men and women watching the show right now, Ali.
VELSHI: Right.
MOORE: And I bet what they will tell you, and I talk to them all the time, you do, too, if they make a profit, if they make a half a million dollars on their company, you know this, Ali, they don't generally go out and buy yachts or buy a Ferrari. What they do is plow that money back into the company. Right? This is what my dad did. He was a small businessman, ran a successful company.
The more you tax those people, the less investment income they're going to get in their business and the less they're going to put in that business which means less investment and less hiring. I just don't see why --
(CROSSTALK)
MOORE: Look, I want the rich to pay more taxes.
VELSHI: OK. Let's --
MOORE: I just think the way to do that is grow the economy, you don't grow the economy by raising tax rates while the rest of the world --
VELSHI: We're supposed to be having an argument, you're not going to drag me into an argument about the fact that I want to grow the economy. We both want exactly the same thing.
MOORE: Right.
VELSHI: So without scaring our viewers off by giving them an accounting lesson, let's just discuss this for a second.
MOORE: Yes.
VELSHI: One of the things that would -- that prompts businesses to spend more money is that if we -- is that if you pay a higher amount of money to take that money out of the business than you would if you invested it in some fashion, in machinery or employing people.
MOORE: Right.
VELSHI: So wouldn't it stand to reason that it would -- it should cost you more if you wanted to create an incentive to create jobs to take that money out rather than hire more people?
MOORE: OK, I got you on this one, Ali.
(LAUGHTER)
MOORE: I got you this one, because you're exactly right. We want companies -- we want people to reinvest money in businesses.
VELSHI: Right.
MOORE: So I think you and I can both agree the dumbest thing right now would be to raise the capital gains tax because what you're doing with the capital gains tax, capital gains is money that people invest in businesses and invest in stock. When you increase the capital gains tax you're reducing the incentive for people to invest in in those businesses and under the Obama proposal on the tax on the rich 60 percent increase in the capital gains tax --
VELSHI: OK.
MOORE: -- a tripling of the dividend tax, you can't be in favor of that if you --
(CROSSTALK)
VELSHI: You will have to come back -- you'll have to come next -- back next week to have that argument because right now we're talking about the Bush era tax cuts and why Republicans --
MOORE: I know. But that's part of it, though.
VELSHI: Are not straight up --
MOORE: Right. But, Ali, that --
VELSHI: OK.
MOORE: But, Ali, that is part of the increase in the taxes is the capital gains dividends and small business taxes. It all is one package.
VELSHI: You perhaps unwisely admitted that you were watching Fareed and me have a discussion a little while ago so you will remember.
MOORE: Yes.
VELSHI: That the time at which we created more jobs in the recent past was when our tax rates were substantially higher than they were now. This tax cut, this Bush era tax cut, has been in place for 10 years and I have heard you say this has not been the record 10 years of job creation in America.
So why is it that we think that under higher taxes during the Clinton administration we created more jobs than we are doing now under lower taxes?
MOORE: Well, look, I mean, Bill Clinton did a lot of good things for the economy and a Republican Congress. We cut the deficit, we cut spending, didn't increasing it like you and Fareed were talking about, we cut the capital gains tax to 20 percent. We had free trade agreements. We had fiscal discipline. None of that is in effect.
I'm not saying that all that matters for the economy is low taxes. What I am saying is we should have a world-class tax system that lowers tax rates. Let's get rid of all the deductions that rich people take. That will force them to pay higher taxes.
I just think you're going to put America at a competitive disadvantage if we are raising our rates on businesses when people can invest in other countries where rates are lower.
VELSHI: All right. So tell me this, then. If we just make this a fair conversation about whether or not you should raise rates on everybody or not on everybody, you are one of these guys who believes not just in low taxes but that the deficit is crushing. Actually Fareed agrees with you, too. He thinks that has an impact on consumer psychology.
I am not sure I am with either of on you this. But assuming it does, President Obama's solution lowers the debt substantially more than yours.
MOORE: OK, let me give you one statistic on this -- on this tax increase on the rich. You know, even if you believe the most optimistic numbers which is that this is going to raise $70 billion a year -- by the way, I don't think this is going to raise any money at all because I think it's going to hurt the economy. But even if you do that, here is the question that I have for you and Fareed. Where are we going to get the other 93 percent?
VELSHI: Right.
MOORE: That is to say this only reduces the deficit by less than 6 percent. So it is not a solution to the -- anybody who think out there watching the show who thinks --
VELSHI: Yes.
MOORE: -- soaking the rich is the way to reduce our deficit, it's just factually not true. We can't do it.
VELSHI: Well, I will tell this, Stephen, all I set out to do was say that this thing, this business about small business, job-killing stuff is not accurate. I am kind of with you. What we have --
MOORE: You've got to get some small business men on this show who will tell you they're --
(CROSSTALK)
VELSHI: I have had small businessmen on the show. That's why I invited you.
MOORE: All right then.
VELSHI: No, but I do agree with you. That the amount of money in the grand scheme of things between taxing the rich and not taxing the rich is actually quite small at this point. That --
MOORE: And you know why? This is still a middle class country where most of the wealth in this country is still in the hands of the --
VELSHI: Well, we would like that to be the case. I'm not -- again, that's another discussion for another week. I am not sure that's the direction we're going in but it's a direction we'd like it to be.
Stephen, excellent. Thank you so much.
MOORE: That's for sure.
VELSHI: I don't even feel too badly bruised by that.
Stephen Moore, editorial writer with the "Wall Street Journal."
MOORE: Great to be with you.
VELSHI: All right. Coming up, I have promised to name names and I am going to start. Except this time it's not for doing the right thing and protecting America from the storm that's approaching, it is for standing in the way. It is just one name. It is the name at the top of the list, the person most responsible for partisanship and polarization in America. Stick around. I am coming back and I'm going to tell you who it is.
(COMMERCIAL BREAK)
VELSHI: I have been telling you about the economic storm making its way to our shores. The headwinds from Europe and Asia may be unavoidable. Congress's refusal to act to protect the U.S. economy on the other hand is entirely avoidable, though not likely, at least not before the election and by then the storm could be just about upon us.
Well, this week the Republican-controlled House voted to repeal Obamacare for the 33rd time. It is the latest example of scorched earth partisan politics that have taken the place of serious discourse. Whether you agree or disagree with the president's health care plan, that vote was absurd and an outrageous waste of taxpayer time.
I wonder how my boss would feel if I told him I wasn't going to work today because I really just wanted to make a point. He'd probably tell me to look for another job.
Well, the point, by the way, in case you didn't already know, is that Republicans don't like Obamacare. I know that. You know that. But we don't need political messages. We need results. This is dangerous for our economy.
The politicians, particularly uncompromising, highly partisan ones, don't simply drop out of the sky and land in Washington. Someone hires them. Someone pays them. And someone encourages them. That someone is at the root of the problem. That someone could end the partisanship and that someone could get our politicians doing what they are supposed to be doing.
You may not want to hear this but that someone is you. The one person that can really make a difference now as these economic storm clouds approach our shores is you. So why are you doing this?
Well, a couple of reasons probably. First, you want it all. You want all the benefits of government, Medicare, Social Security, unemployment checks, maintained highways, homeland security, loans to buy a house or go to college, but you don't want to pay for it or at least you don't want to pay any more for it.
You want lower taxes. So do I, by the way. And number two, you're having trouble getting past the politics and voting real adults into office who are actually willing to act on what America needs. The politicians I am holding responsible are actually pandering to you.
You think I am wrong. I know I'll hear from you, and you know I will respond. I'll get to that a little later. But first I want to bring back Christine Romans and bring the sharp conservative mind of CNN contributor Will Cain as well as Norm Ornstein, he's a resident scholar at the conservative American Enterprise Institute, though he describes himself as a centrist.
Will, I kept you in suspense. Let's get your gut reaction.
WILL CAIN, CNN CONTRIBUTOR: My gut reaction is you, to you folks, you're the problem. I agree with you 100 percent. One hundred percent.
ROMANS: I have never heard that in history.
(LAUGHTER)
VELSHI: Let's say that, Christine, the voter.
ROMANS: The voters. Look, we borrow $3.6 billion every single day to keep our standard of living in this country the way it is. We scream about earmarks but people expect to elect someone to come home and bring them jobs --
VELSHI: But those earmarks are jobs, swimming pools.
ROMANS: Right. Absolutely.
VELSHI: Schools.
ROMANS: You hear people talking about big government and you hear this a lot especially in an election year. People talking about -- voters talking about big government, they hate it, they don't want to you touch their Medicare, and they don't want you -- you know, you hear all of this talk about about what we want from our government and then they turn around and they vote people in office who are just rushing for the status quo which is getting elected in another four years and not really planning for America.
We have been spending beyond our means for so long that now when we're really in a tough spot again it's all of those bad choices up to now that put us in an even worse spot.
VELSHI: And we may not want to vote for the people who did that to us.
Norn, please, help out the voter, man. It's a -- it's a pile-on here. The voters put them into office, the politicians. How do we stop the blaming and start solving our problems? If the voter is listening to me and hasn't turned off the television yet because I've just insulted them, what can they do?
NORM ORNSTEIN, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: Well, and of course part of the problem is that politicians have learned that if you do straight talk, if you tell them this is going to hurt and this is going to cost you something, it gets you bounced from office. So we have to in some ways educate voters and I do think the second point that you made is a particularly critical one, Ali.
It's true on the first point, nobody pays retail any more. We all like things at a discount and that's the same with government. But we keep leeching out of the system the problem solvers. Look at the number of people who lost in the last election because they voted for TARP which I believe is going to go down as something that saved the global economy from a catastrophe at least as bad as the Great Depression.
And anybody who pops up, some bozo who says I don't speak politician, I'm not like the rest of them, I've got all the answers and it's easy and it won't cost you a dime somehow gets to the head of the line.
VELSHI: Yes. Yes.
ORNSTEIN: That can't go on.
VELSHI: Will?
CAIN: We've got two separate problems we're kind of focusing on right now now. One is the voters' tendency to want something for nothing, right? Asking for all of these government entitlement programs, spending programs, and not wanting to pay for it with the requisite tax rate. But the second problem we're talking about is one Norm has written about, and that is -- and you have talked extensively about -- and that is partisanship, the idea that because these parties have become so ideologically extreme we can get nothing done.
But here's where I want to pause. I know Norm has probably considered this fact. The truth is America is partisan. That's why politicians are partisan. They simply reflect who we are.
ORNSTEIN: It's -- the public is getting more partisan and indeed it now reflects what we have seen in Washington for a while. The one place where I might disagree with you slightly, Will, is that I think it started at the elite level and now it's metastasized out to the public.
But the other problem we have is not just voters. What choices do voters have? Most of them now come in primaries. That's true in the House and even in most cases in the Senate. And the primaries are dominated by small elites who are even more ideological and more extreme than the mass of voters are, and then you've got another problem which is a mass media that refuses to say when people have -- gotten to partisan or obstructionist and instead it is on the one hand and on the other hand, they all do it instead of pointing fingers where they belong.
VELSHI: We glorify them all. We glorify the media -- the crazier the things you say --
ORNSTEIN: We want it.
VELSHI: -- the more likely you are going to get booked to be on television.
ORNSTEIN: Yes.
ROMANS: But the fact is, quite frankly, look, aren't everyone's taxes going to have to go up or the government is going to have to get a lot smaller, or the economy is going to have to grow gang busters from some new invention that we haven't seen yet or some combination of all those three, and why won't anybody in Washington say, look, your standard of living, Norm, right now, the way it is, it can't -- it's not going to be like this?
I promise you it's going to be bad or really bad, those are -- VELSHI: Hold your thought there. And by the way, you can have a tax cut. We're coming right back. We're continuing this conversation on YOUR MONEY in a minute.
(COMMERCIAL BREAK)
VELSHI: Let's bring Christine back. Plus our resident conservative and CNN contributor Will Cain, as well as Norm Ornstein, a resident scholar at the conservative American Enterprise Institute, though he describes himself as a centrist.
Hey, Norm, I love your point that we systematically leech the compromisers out of the system in favor of partisans.
Will Cain, you are taking issue with my premise that partisanship is bad.
CAIN: That's right. We've done this before. I think that is the assumption at the beginning of this entire conversation --
VELSHI: Can I restart? Can I say hyperpartisanship is bad? Because that's what we have.
CAIN: You're changing the game a tad bit with hyperpartisanship. But look, remember, I said I think we have two issues going on here. One, that voters wanting something for nothing and two, partisanship. The culprit behind both of these conditions is the same. It is you. It is the voter. It is the viewer.
That being said, what has enabled the wanting something for nothing is bipartisanship. Not partisanship.
VELSHI: Really?
CAIN: That's right. Bipartisan made people think they can have high entitlement spending and low taxes. Look, bipartisan's favorite tool is handing out goodies. Now that you want to correct that you need some bipartisanship to correct it. But that's going to be very, very hard to put together.
VELSHI: Norm, Norm, love your critique on that.
ORNSTEIN: Yes.
VELSHI: Partisanship, the compromising that we made to get the services we want and continue to rack up debt if I'm -- if I'm paraphrasing Will properly. It is what got us here and that's to blame.
ORNSTEIN: You know, Ali, I agree on Will on a lot of things. In this case, you know, in the book I did with Tom Mann, "It's Even Worse than It Looks," we don't criticize partisanship. It's part of our system. What's happened is strategic obstructionism, and I would go back and say if you want to look for how bipartisanship can actually keep us from having everything, the 1990 budget agreement that George Herbert Walker Bush put together with Democrats helped to bring us back to a balanced budget along with the deals that Democrats and Republicans made with Bill Clinton in the 1990s.
That also gave us pay-as-you-go budgeting where you couldn't increase something without cutting something else. Let me finally say in defense of voters, we have those plans that Christine was talking about on the table from Simpson-Bowles and Rivlin-Domenici and that Gang of Six in the Senate.
And I believe that American accept it if you had bipartisan leadership consensus. You get a super committee together and Mitch McConnell does not put on one of the three very conservative people in that Gang of Six. Tom Coburn, Saxby Chambliss or Mike Crapo, and if he'd one of them on we'd have a deal right now and we wouldn't be here discussing this.
ROMANS: And if all of these lawmakers and especially the hyperpartisan lawmakers could somehow hide under the cloak of comprehensive tax reform, that they could -- nobody could say I did anything bad for you. If they could all get together and make it look like --
ORNSTEIN: Yes.
ROMANS: -- no one was raising your taxes and no one was cutting your services, we were just hitting a reset on the way we are in America, that's the only way we can do it if nobody has to --
VELSHI: Will, if you're -- if partisanship or hyperpartisanship is who we are and we as voters or you the viewer are the one to blame, who does reset that? Who's the hero that we're looking for?
ROMANS: Yes.
VELSHI: Right or left? I don't care.
CAIN: Right.
VELSHI: I just want somebody who can get this done.
CAIN: The most simple answer to you is it's a concept. It's the concept of responsibility. Unfortunately responsibility usually comes through the guise of crisis. You're going to Europe come to terms with the concept of responsibility. It's not a hero that rides in on a white horse and his name is Ronald Reagan or FDR. It is forced. If the people forced to come to grips with responsibility. I actually don't know how that happens without crisis.
VELSHI: It comes full circle to my blaming the people for the mess we're in. I happily -- I like you all, by the way. In fact, you pay my bills and you watch the show so please don't take this personally.
Coming up -- thanks, by the way, to all three of you. What a great conversation.
Coming up next, Mitt Romney wants to lower your taxes. It sounds great. But what does he have to take back from you in order to pull it off? One of his key economic advisers joins me next. (COMMERCIAL BREAK)
(BEGIN VIDEO CLIP)
VELSHI: Mitt Romney wants to lower income tax rates across the board. And despite President Obama's recent calls to extend the Bush era tax cuts for nearly 98 percent of taxpayers, Romney says the current administration is pushing bigger government and he is out to change it.
(BEGIN VIDEO CLIP)
MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: Look, new Democrats have done some good things. A lot of Republicans have done some good things. But this old-style liberalism of bigger and bigger government and bigger and bigger taxes has got to end and we will end it in November.
(END VIDEO CLIP)
VELSHI: Now Romney's plan would reduce current income rates by 20 percent, making the top income rate in this country 28 percent. The bottom would be just 8 percent. Now the Tax Policy Center, which is an independent research group, says the cost of Romney's plan would be high. In other words, it would cost money to give you money.
A report out this week shows it would be nearly impossible to cut income tax rates without making concessions in other areas. That's not really news, but this report gets pretty specific. The only real way to do that is to reduce or eliminate some of the very deductions that, well, you have been a little attached to. For things like interest on your mortgage deductions, for paying alimony or for help paying for college.
Now in response the Romney camp says reducing taxes will stimulate entrepreneurship, create jobs and help reduce the deficit. Agree or disagree, this is your money we're talking about.
Kevin Hassett is an American economist who's done extensive work on U.S. tax policy. He's also an unpaid economic adviser for the Romney campaign.
Kevin, good to see you. Governor Romney has said his tax cuts would be paid for through economic growth and by curbing tax breaks, mostly on high-income folks. Now let's just talk about this. How much of the revenue lost from Romney's tax cuts -- because when you cut taxes the immediate effect is government gets less money -- does the campaign -- does his campaign expect to be made up through revenues generated from economic growth and how much from the tax breaks?
KEVIN HASSETT, SENIOR FELLOW & DIRECTOR OF ECONOMIC POLICY STUDIES, AEI: You have to understand that it's very, very easy to lower marginal tax rates, which are the things that influence the decision at the margin without having a tax proposal that reduces revenues. As long as you go after all of the tax breaks that are written into the code. Some of them, you know, very, very specific like you get to have a big tax deduction if you put a solar hot water heater on your roof.
VELSHI: Right.
HASSETT: And some of them more general like the state and local income tax deduction that, you know, most people take advantage of. And so most economists have been saying for years that what we need to do is stop having the government reward you if you do this, but not if you do that with all of these, like, really confusing tax breaks. And rather just have a very, very simple code that takes a lot of that stuff and limits it and then lowers the rate a lot.
And so for example, very simple example, suppose that have you a dollar in income, you know, and the government said, well, if you spend 50 cents on apples, then we won't tax the apple expenditure because we love apples so much, and so then have you 50 cents left over of taxable income.
If we need 20 cents of tax, then you've got to, you know, charge a pretty high rate to get that 20 cents to your 40 percent.
VELSHI: Right.
HASSETT: But if we didn't deduct the apples, then we're taxing the whole dollar, then we get the 20 cents with 20 percent rate.
VELSHI: And everybody can stay in the same low rate --
(CROSSTALK)
HASSETT: And so the whole point about it -- and people would no longer be eating way more apples than they would want to otherwise. Right? And so the whole point about the tax system is that it tells you to do this and not that.
VELSHI: Yes.
HASSETT: And then if you make the government happy and do exactly what they want then reward you. But if you don't, then we won't.
VELSHI: OK.
HASSETT: And what Governor Romney wants to do is just clear out all that muck.
VELSHI: Yes.
HASSETT: And just have a nice low rate that influences people's decisions.
VELSHI: Right. We can have --
HASSETT: And it's absolutely sensible.
VELSHI: We should have --
HASSETT: I think everybody in every party should want to do that. VELSHI: We should have observe another discussion on this. I knew -- you know, that's a very valid discussion. For instance, we give people a break to take a mortgage and buy a house. And, you know, that sounded like a really neat idea way back when. And now we find that it contributed to some of the mess that we're in. But are you talking about taking away things like that, the mortgage interest rate deduction?
HASSETT: Well, there again have been a lot of proposals amongst economics on how to do this in a way that limits the disruption and maximizes the economic benefit. Governor Romney thinks that what he needs to do is work collegially with members of both parties to figure out exactly how to get enough roll back of deductions to achieve the marginal rate deductions that he's looking for.
You know, he's absolutely confident that he can do that. I know he's right because I've seen lots of different calculations to that.
VELSHI: Yes.
HASSETT: Including, you know, the Bowles-Simpson guys got the rates way, way down by going after these things.
VELSHI: But see, here's the thing then. Let me ask you this then. I started the show by criticizing Republicans for calling any tax increase, but particularly the failure to want to extend the Bush era tax cuts for the wealthiest Americans job killing. That -- it is a word that Republicans use all the time.
So how do you use tax reform to create jobs? I'm not asking you to address the job-killing criticism. How do you use tax reform to create jobs, given that you just told me that tax reforms shouldn't be used to get people to behave in certain ways?
HASSETT: Right. Well, they shouldn't be used to get people to buy apples instead of oranges. That's not what tax reforms should do. What tax reform should do is set a bunch of clear rules and then, you know, get government out of the way and let the private sector start to succeed.
You know, Governor Romney's plan will succeed for two big reasons. The first is, you know, President Obama has not told us at all what future tax rates are going to be. You know, he had a super majority in the Senate and yet here we are looking at a December where virtually our whole tax code expires and then we're all unsure what's going to happen the next year.
So if we have clarity -- that's the first thing. If Governor Romney gives us clarity with his plan when it passes, then everybody who's worried about what the future is going to look like will then know and they'll be able to optimize against that and then we'll start to grow again. So business right now don't know what the heck their tax rates are going to be next year.
VELSHI: Yes. HASSETT: And that uncertainty that President Obama has introduced is really harmful for the economy. But the second thing is, if you lower marginal rates, then that will make it so that people work more, invest more and grow the economy and that will create a lot of jobs.
VELSHI: We had lower marginal rates more than 10 years ago, and we had higher marginal rates more than 10 years ago, and people created jobs and invested more. And for the last 10 years they haven't.
HASSETT: People --
VELSHI: And we've had lower rates.
HASSETT: Well, that's an absolute valid point. That you have to understand that the tax rate isn't the only thing going on. It was a much different world then than now. But I think that the crucial thing right now that's costing us jobs is that our corporate rate is the highest in the developed world, I think the third highest on earth. The only two countries that are less friendly for new investments on earth are Ghana and the Congo.
OK? So that' show high our corporate rate is. And so our firms are saying, hey, let's locate over here, let's locate over there, because we'll pay a lower rate, and they're not bringing the jobs here. Governor Romney wants to cut the corporate rate down to 25 percent, that will create a lot of jobs.
It wasn't a problem back when Clinton was in office because when our rate back then was 34 percent, then he increased it to 35?
VELSHI: Yes.
HASSETT: The average around the world was about 40 percent.
VELSHI: Right. So we're relatively higher now.
HASSETT: Everybody else has been lowering their corporate rate.
VELSHI: Yes.
HASSETT: Yes. Right now -- right now the OCD average is 24 percent. So we're giving away a huge tax disadvantage and our firms are rationally looking (ph) to locate where the taxes are lower --
(CROSSTALK)
VELSHI: But you are conceding that it's not the only thing. Lowering taxes doesn't necessarily just equal economic growth. And that was -- that was sort of the point I was coming to. But what a great conversation, Kevin. I appreciate that. Thanks very much for being with us.
HASSETT: Thanks.
VELSHI: Kevin Hassett is senior fellow and director of Economic Policies Studies at the American Enterprise Institute. Coming up, I pointed the finger at you, now your turn to point the finger right back at me. Be kind. Actually, don't be kind. It's actually more fun when you're not.
I'll show you how you and I are going to debate this next on YOUR MONEY.
(COMMERCIAL BREAK)
VELSHI: OK, I'll be the first to admit, I have been hard on you today. Your Congress refuses to act to save us from the potential economic storm that may be headed our way, but I have pointed my finger at you as the protagonist of the problem because I think you have the ability to fix it.
If I'm wrong, tell me. Tweet me right now, @alivelshi, or find me on Facebook.com/alivelshi. Tell me what you're doing to help America prepare for this economic storm. But you better be ready to debate. Because I read all of those tweets and posts and I love to write back.
Thanks for joining the conversation this week on YOUR MONEY. We are here every Saturday 1:00 p.m. Eastern and Sunday at 3:00. Have a great weekend.
