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Your Money
Getting Over Grover Norquist; Rebuilding GOP Message; The Cost of Mortgage Deductions; Taxes, Rip-off or Bargain?; Amping Up Infrastructure
Aired December 02, 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: The world is finally paying attention to the fiscal cliff. But you've known about the economic storm of our own making for months now.
I'm Ali Velshi, this is YOUR MONEY.
As you know, I wasn't waiting for the elections to end to focus on this major threat to the economy. I wish others had. It would have given us more time to fix this major problem. But at least now there is a focus on one thing and one dangerous man. A man who's not elected, who's never run for office, and is standing in the way of a potential economic disaster.
(BEGIN VIDEOTAPE)
GROVER NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM: Taxes went up, spending didn't go down.
VELSHI (voice-over): He's been called a kingmaker, a patriot, and the ideological godfather of the Tea Party. Since the mid '80s, Grover Norquist, the founder of Americans for Tax Reform, has been the driving force behind the anti-tax movement. His goal, to take big government and, in his words, drown it in the bathtub.
Norquist's weapon is the Taxpayer Protection Pledge which was at one point signed by 95 percent of GOP members of Congress.
UNIDENTIFIED MALE: Raise your hand if you feel so strongly about not raising taxes.
VELSHI: On the campaign trail this year, only one Republican presidential candidate, John Huntsman, dared to cross him.
Norquist has clout. He's called the most powerful unelected man in America today. But since the November election, his fortunes have changed.
SEN. LINDSEY GRAHAM (R), SOUTH CAROLINA: I will violate the pledge.
REP. PETER KING (R), NEW YORK: A pledge you signed 20 years ago, 18 years ago, it's for that Congress.
SEN. BOB CORKER (R), TENNESSEE: I'm not obligated on the pledge. VELSHI: Republicans in Congress are jumping ship and supporting unspecified revenue hikes to help cut the deficit and big businesses now resigned to higher taxes.
Here's Goldman Sachs' Lloyd Blankfein.
LLOYD BLANKFEIN, CEO, GOLDMAN SACHS: If we had to lift up the marginal rate, I would do that.
VELSHI: Norquist's response?
GROVER: To be fair to everybody, some of these people have had impure thoughts. No one has pulled the trigger and voted for a tax increase.
VELSHI: To be sure, Norquist is still raking in big bucks. According to OpenSecrets.org, he shelled out almost $14 million to defeat Democratic opponents in this past election cycle.
GROVER: We've run ads to let people know who's taken the pledge and who doesn't. We'll do phones into letting people know who's taken the pledge and hasn't.
VELSHI: Norquist's big backers are powerful Republican operatives, Crossroads GPS, the super PAC led by GOP kingpin Karl Rove and the Center to Protect Patient Rights, closely tied to the ultra conservative Koch brothers. Those groups account for the majority of the Norquist budget and there's no sign that they're running scared.
Norquist truly believes that the best way to grow the economy is to tame big government. He told me recently he will be vindicated no matter how many politicians break the pledge.
(On camera): What happens if they break -- they break the pledge? Because you've got money behind you. So you pile on and try and get them defeated in the next election?
GROVER: These are self-enforcing. Why? Because the American people, the elected people who they want to reform government rather than raise taxes.
VELSHI: Wait. I'd like --
(Voice-over): Norquist is clearly looking toward the 2014 midterm elections. But one high-profile figure from the Fix the Debt Movement believes that Norquist's clout is clearly waning.
STEVE RATTNER, MEMBER, CAMPAIGN TO FIX THE DEBT: I don't view this as some -- as the end of Grover Norquist. I don't think he suddenly disappears and never to be seen of again. But I think his aura of invincibility has been largely shattered.
(END VIDEOTAPE)
VELSHI: So can Grover convince his pledge signers to not give in, no deal, no matter what the consequences to the economy? Jessica Yellin is CNN's chief White House correspondent. Mark Preston is CNN's political director, Kevin Glass, managing editor at Townhall.com, a conservative political outlet and the author of a new piece published in "The Atlantic," "The Loophole in Grover Norquist's Anti-Tax Pledge" is what it's called.
Mark, let me start with you. A majority of Americans -- this is fact. People are tired of me saying it. I'm tired of saying it to people. A majority of Americans support raising taxes on the rich. But everybody's taxes go up if Congress doesn't get a deal. Many Republicans are now stuck between this pledge they've made to Norquist and this real threat of everyone's taxes going up and the attendant effects on the economy.
How much power does Grover Norquist wheel right now in this environment?
MARK PRESTON, CNN POLITICAL DIRECTOR: Well, he clearly wheeled power but he doesn't have absolute power. And I think Steve Rattner is right. You know, the invincibility of Grover Norquist, I think, has been overblown by us in the media. Quite frankly. You know, this tax pledge isn't necessarily with Grover Norquist as it is with taxpayers in the state that voted for a lot of these conservatives who signed the pledge.
But I think it's foolish for us to think that there isn't going to be a deal cut. We don't know what the deal will be. I think it's foolish to think that anyone who wants to have their legacy to be that they drove us off of the fiscal cliff.
We're just in the political dance right now, Ali. We've seen this time and time again. There is still three weeks for a deal to be cut. The problem is, is that the White House threw down a very heavy marker yesterday. And we'll have to see if, in fact, they're willing to compromise. It's got to be compromised on both sides.
VELSHI: Yes. Right. And that marker they throw -- they threw down, Kevin, is that the White House says actual tax rates, the top tax rate, 35 percent, has to go up for the rich and that limiting deductions won't be enough to get a deal.
Now you wrote in "The Atlantic" this week that despite that there is a way around this for Republicans who don't want to incur the wrath of Norquist or, as Mark suggests, voters. How?
KEVIN GLASS, MANAGING EDITOR, TOWNHALL.COM: Right. So the Grover Norquist pledge is actually incredibly misunderstood. It's based on what Washington budgeting organizations call the current law baseline. And that that means is that what scheduled to go into effect already is baked into the cake. And because the Bush tax cuts are expiring provisions that were voted for 10 years ago, it doesn't really count as a tax hike when they're already, you know, scheduled to take effect.
So as long as Republicans can just keep the revenue below what taxes would raise to in full expiration of the Bush tax cuts, they won't be violating the pledge.
VELSHI: Kevin, that sounds incredibly reasonable. Do you think Grover Norquist shares that interpretation?
GLASS: Well, so there's a -- there's an important distinction to be made between what the pledge actually says and what Americans for Tax Reform, his activist organization, advocates for. As Grover has said himself, the pledge is to the American people, not to Grover Norquist. So it's not just, you know, Republicans need Grover Norquist's approval --
VELSHI: Right.
GLASS: -- for what they want to do. It's more that Americans for tax reform wants to keep tax rates low despite the fact that legislation says they're just going to go up no matter --
VELSHI: Right.
GLASS: -- if Congress doesn't do anything.
VELSHI: All right. So compromise is going to require more than finding Republicans who are willing to break with the Norquist anti- tax pledge. The GOP wants to know what the Democrats are going to be willing to give up in the form of spending cuts.
(BEGIN VIDEO CLIP)
REP. JOHN BOEHNER (R), HOUSE SPEAKER: Despite the claims that the president supports a balanced approach that Democrats have yet to get serious about real spending cuts.
(END VIDEO CLIP)
VELSHI: Jessica, the president ran and won on a promise to raise taxes. I mean what a different scenario, Jessica. A year ago you and I were talking about how this election was all going to be about jobs. And then both campaigns made exactly the same promise about job creation. So that almost got off the table and it all became about taxes.
He doesn't have to run for office again, as you've stated before. Could we make the case that in order to get a deal the president should just put forward a big proposal to cut the size of government that is significant enough to give Republicans the cover they need to agree to a deal that would meet that red line that you pointed out that means raising tax rates? Is there a win-win for the president here?
JESSICA YELLIN, CNN CHIEF WHITE HOUSE CORRESPONDENT: The win-win is -- sure, it's finding the middle ground. But the dynamic, as you point out, has changed, Ali. And it's clear that Washington hasn't accepted that the dynamic has changed. It hasn't fully settled in. As you point out, the president ran and won on a promise to raise taxes. The president will not back down from that. And Republicans on Capitol Hill are still not accepting at this point that rates will go up. And that is the dividing line at this point.
VELSHI: All right. So that's --
YELLIN: That's where it is.
VELSHI: That's the problem on the Republican side. You -- one of the things that I really stick to that you have said in the past is boy, you and I would both love if everybody involved would just tell the truth. Now a lot of Republicans have said that the White House and the president are not telling the truth that you could only achieve about $1 trillion over 10 years with this increase in tax rates to the top 2 percent.
That means three quarters of that $4 trillion goal that the president needs has to come from somewhere else and he's not saying where from.
YELLIN: But they've also made it clear -- well, first of all, they've said that they're willing to do $400 billion in Medicare and other entitlement savings.
VELSHI: Right. That's true.
YELLIN: And they've also said that they're willing to be flexible beyond that. Now they won't talk about the numbers with us and the press and the public. We all know they won't negotiate the public.
VELSHI: Right.
YELLIN: But they have said, and I've asked them point blank, will you go beyond what your -- essentially, will you go beyond that? And they've said, yes, we're open to negotiating. So the bottom line is they've indicated that they are willing to do more than that. That they're willing to open up basically what they're talking about during the debt talks, you know, it comes to changing eligibility ages for some of these --
VELSHI: Sure.
YELLIN: -- entitlement programs, raising -- changing the caps, you know, indexing for inflation, et cetera.
VELSHI: Inflation. Yes.
YELLIN: They'll do it. But they want to start talking numbers with Republicans. So, yes, they're willing to do more cuts. But they want the Republicans to agree on revenue first. And they're emphatic that the Republicans aren't willing to talk about the revenue and so they can't start the negotiations. And this offer this week, or not even offer, but these numbers they came out with this week were an effort to try to prod some sort of specific discussion of numbers.
VELSHI: It's a remarkable game of chicken. I'm quite happy that they don't do the negotiations public. It doesn't matter to me, as long as they're going on somewhere.
Jessica, thanks very much. Jessica Yellin is our chief White House correspondent. Kevin Glass, managing editor at Townhall.com, and Mark Preston, my good friend, is CNN's political director.
Two hundred and fifty-eight lawmakers who will serve in the next Congress have signed the Norquist pledge. Just one of them is a Democrat. You'll meet him next and find out if he's sticking to his guns.
(COMMERCIAL BREAK)
VELSHI: Despite what you may hear in the news, there are, in fact, members of Congress who are willing to compromise despite having signed the Norquist pledge to never raise taxes. I've talked to Grover Norquist many times on this show. But I'm also going to continue to introduce you to those politician who have had the courage to question whether a hard and fast rule is really best for the country.
Here is a running count of lawmakers who say they are willing to break the pledge that they have signed. We suspect that those empty spaces could fill up over the coming weeks. And if you'd like to call your congressman and tell them that, that's up to you. But if you thought that Norquist conservative anti-tax pledge is for Republicans only, I want to introduce you to Congressman Robert Andrews. He is a Democrat from New Jersey.
Congressman Andrews, thank you for joining us. You are one of a handful of Democrats who have signed on to the tax pledge. The only one in the new Congress. You do not feel bound by it. In fact, you've said you are married to your wife, not Grover Norquist.
REP. ROBERT ANDREWS (D), NEW JERSEY: Lucky me.
VELSHI: This is normally -- lucky you. I agree with you. This is not normally thought of as a pledge for Democrats. It's thought of as a Republican pledge. Why did you sign on to it in the first place?
ANDREWS: In 1992, I signed on to the pledge because I thought a tax increase at that moment in our economy would be wrong. And I honored the pledge. I voted against tax increases. My understanding was it was for that one Congress. I've never renewed it. And I think that flexibility in doing what is right for the country is a heck of a lot more important than what Mr. Norquist wants.
VELSHI: And I'm looking at a copy of the pledge here. And it's got a lot of detail but it doesn't actually have an expiration date or a reference to how long it has been. A number of your colleagues has said the same thing. That I signed it at a time. I don't think it's forever. It's not a marriage. The other Democrats who signed the pledge, by the way, were either voted out of office or decided not to seek re-election.
Norquist groups spent upward of $300,000 to defeat Representative Ben Chandler from Kentucky after he went back on the pledge. Are you worried about the consequences?
ANDREWS: No. I'm worried about my constituents who are unemployed, who are struggling to make their businesses succeed or make their home values go up. And I think if we worried less about Washington politics and more about the economy we'd do a better job.
I'm in favor of something like the Simpson-Bowles approach being adopted here that has about $3 of spending cuts for every dollar of new revenue, cuts the deficit by $4 trillion and gets the country back on the right track.
VELSHI: You know, that's where some of the sticking point is. So we think that the sticking point is just on Republicans who don't want to raise taxes. But they say that it's on Democrats who are not willing to cut spending.
You know, what Republicans want to hear from Democrats is specifically what they're prepared to cut what they're willing to agree to in exchange for that tax cut. So tax cuts, so you're saying, three to one, that's -- it's an interesting number. Do you have some sense, though, that once you start getting to real cuts all of the low- hanging fruit is gone.
ANDREWS: Yes.
VELSHI: Now everything you cut is going to hurt.
ANDREWS: I agree. I think there have to be some mature decisions. Look, I would favor on a fair and equitable basis, a slight delay in the age at which people can get Medicare. What I favor, is if you're under 55 years of age you'd have to wait one month for every one year that you're under 55. So a person 50 years old will get their Medicare when they're 65 years and 5 months old. I wouldn't change it for anybody who's on Medicare right now or over 55.
Look, I would close about two-thirds of the military bases overseas in Asia and Europe. I would scale back -- I'd get rid of the ethanol subsidy altogether. I'd scale back on some of the sugar subsidies and other crop subsidies. And I think that there are things that we have to do and I would do those things.
VELSHI: Congressman, pleasure to talk to you. Thank you for joining us today to give us your sense of where things should go.
ANDREWS: My pleasure, I like to be back.
VELSHI: Congressman Robert Andrews, Democrat from New Jersey.
Coming up next, there are cracks in the Republican Party. And it's not just because of the Norquist tax pledge. How to repair the GOP message next on YOUR MONEY.
(COMMERCIAL BREAK)
VELSHI: A Republican Party re-launch. A reset. The "Obama is bad for the economy" message didn't work and it's not likely to resonate going forward. Home prices climbing, household debt down, consumer confidence up, jobs are coming back. Breaking from that Grover Norquist anti-tax pledge is only going to take the GOP so far if they can even deal with it. So can Republicans find an economic message that resonates with voters? Well, to find out, I spoke with Stephen Moore, editorial writer at the "Wall Street Journal" and CNN contributor David Frum, a contributing editor at "Newsweek" and the author of a new book -- how can he write this so fast -- "Why Romney Lost."
(BEGIN VIDEOTAPE)
DAVID FRUM, CNN CONTRIBUTOR: Looking forward, not backward, looking forward. The Republican dangers, there may be an accelerating economy. You can't simply say Obama is bad. You have to have an affirmative message. And it has to be economically inclusive. That means I think moving away from the myth of the heroic entrepreneur as the main hero and also the main victim of the American economy and understand that -- you know, the people who have been leading big companies have actually done pretty well over the past four years.
The harm has been done to the American middle which is experiencing slow growth. What it need -- what we need to see above all are control of healthcare costs, that's the key to getting middle class incomes rising again.
VELSHI: Stephen, talk to me about this. The myths of the heroic entrepreneur. Look, I mean, the fact is, we do think the entrepreneur as heroic in the U.S. How do you -- how do you square that circle?
STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Well, look, I think the old economy, the backbone of the economy and the spinal cord of this economy, is the entrepreneur. It's the person who sets out the shingle and employs workers. And I think Republicans have to make this connection with workers that, you know, if you hurt the businesses you're hurting jobs.
I don't think they've done a very good job of doing that. But, you know, look, I certainly agree that health care is a big issue. I kind of agree with David that Republicans have kind of attacked the Obama ideas but they haven't really been very forthright about what they want to do to fix these things. On healthcare is a perfect example. I think Republicans have to have a very robust, very sellable alternative of Obamacare because I think that might be rejected in the years ahead.
VELSHI: The problem is alternatives are lacking. Criticism is in abundant supply.
So, David, what do we -- what do we do? Where do these ideas come from? Where are you -- where is the well that the Republican Party should be looking at for the new ideas? The criticism alone didn't work.
FRUM: Right. Well, we -- the Republican Party actually has to rebuild a lot of its idea generating apparatus. We've had basically four years whether the Republican Party had a lot of fiscal ideas. A lot of ideas about the budget, but not very many years of ideas with the American economy.
You know what? On health care, for example, Obamacare is a fact. It is a fact.
VELSHI: Right.
FRUM: And it is -- that is what this election decided. It is not going to go away. So any Republican idea about how maybe there'd be a better way to do it or maybe we shouldn't have done this, those ideas are obsolete.
VELSHI: Stephen, let me ask you something, you are -- you are forever and have been a supporter of no tax increases. You wrote a very affectionate op-ed about Grover Norquist the other day which is very nice for Grover because nobody else is being all that affectionate about him. I'm not asking about whether --
MOORE: That's for sure.
VELSHI: I'm not asking whether taxes should go up. But is the tax pledge, is that kind of behavior standing in the way of reinvention of the Republican Party?
MOORE: No, I don't think so. I think it's just the opposite, Ali. Look, the reason that the left and some of your friends in the media have really, you know, ganged up on Grover Norquist, and they've really been extraordinarily hostile in their tax against them is that this has been really the fortress of the Republican Party. That no tax position has been the defining issue for the Republicans.
And I still think, by the way, it's a -- it's a winning issue. Americans don't like taxes. They do believe that we have to cut spending first before taxes go up.
(CROSSTALK)
VELSHI: Let me interrupt you for a second. Let me just interrupt. You and I, we talk a lot.
MOORE: Yes.
VELSHI: And at the beginning of this year jobs were far and away the most important economic issue. And by the time people went to the ballot boxes, it really kind of had come down to taxes.
MOORE: Sure.
VELSHI: It kind of was a referendum. So how do you figure that's a winning issue for the Republicans when it was kind of repudiated?
MOORE: Well, look, because the -- there is two parties. There's a pro-tax party and there's an addict tax party. And Republicans have to continue to highlight those differentials. You may be right, by the way. Right now Americans may think well, let's tax the rich.
VELSHI: Right.
MOORE: Let's do that. What I'm saying is if they do that, it should be Democrats who'd do it. And Republicans should not sign off on a policy that raises tax rates. What I would say and I wonder what David's reaction to this is, Republicans have to double down on the growth message.
Maybe you're right, David, that the economy is improving. I'm not quite as sanguine as you are with Obamacare and these tax rates going up and also the big burden of the debt. But, you know, Republicans have to have a growth message. And I just don't think they articulated any kind of alternative.
David is right. All they talked about was Obama's policies aren't working. But if you ask Americans today what are Republicans for, they don't have a solution. Education, by the way, is a good one. I think Republicans should be talking about choice.
VELSHI: Yes.
MOORE: Charter schools, vouchers, anything that gives especially minorities more opportunities.
VELSHI: David?
FRUM: Look, I'm in favor of the Republicans being a low-tax party. Here's the danger Republicans have got. When Republicans say taxes, they mean income taxes. Eighty percent of Americans now pay more in payroll taxes than they pay in income taxes. And payroll taxes will go up at the end of the year. The payroll tax holiday will end. So that's a big tax increase for everybody.
VELSHI: Yes.
FRUM: And 80 percent of Americans pay more. And where is the Republican plan to hold the line on those people's taxes? If taxes only mean the tax, the income tax portion of the tax burden for four fifths of the country, you're talking about something that doesn't matter that much. And in a democracy, you cannot be a successful party if you talk about things that don't matter that much to four fifths of the country.
(END VIDEOTAPE)
VELSHI: OK. Your paycheck, your investment, your home, they may all be taxed a bit differently next year. Not just income tax. And that's if lawmakers can't decide on a plan to avoid the fiscal cliff. So coming up next, I'm going to talk to you about a deduction that America loves, you probably love, but might be taken away.
(COMMERCIAL BREAK)
VELSHI: You simply cannot have it all. There aren't many things the government can cut out of the tax code to boost revenue. Many of those things are relatively small tax breaks, but there are a few big things that do need to be considered. And one of them is the mortgage interest deduction that about 40 million of you have been claiming each year.
Don't throw anything at the TV set. I know you like it. But it is expensive. And it doesn't really get the government or the housing market anything all that great. Many developed countries around the world do not have such a thing and they have higher homeownership rates than the U.S. does. Canada is one example. About 70 percent homeownership in the U.S. -- it's about 65. Canada gives you no benefit for buying a house.
Don't worry, you've got the powerful lobbyists on your side, America, protecting this thing with everything they've got. And they may very well succeed in swaying lawmakers to not touch the mortgage interest rate deduction. But you need to know where it came from, who benefits from it and what it costs.
So who better to explain that to us than Christine Romans. She joins me now.
Christine, lay this thing out for us.
CHRISTINE ROMANS, HOST, CNN'S YOUR BOTTOM LINE: All right. It's one of the most expensive, Ali, of those tax goodies in the very dense and complicated tax code in America. We're talking about the mortgage interest deduction. It's the middle class' most cherished tax break.
Government spending on this deduction will reach $100 billion by 2014, making it the third largest tax break on the books. But who is it really helping? The Tap Policy Center says it tends to benefit the upper middle class, upper middle class families the most. These bars behind me show income and the circles show the average savings for those with annual income up to $40,000.
The average savings is a whopping $91 a year, Ali. But for those earning more than $250,000, their savings is much more significant, about $5500. Now critics say it's not helping to boost homeownership. Sixty-five percent of Americans live in a home that they own. It was up nearly about 70 percent during the housing boom in 2005 and 2006 but now we're back to the same levels we saw in the 1980s.
Yes, the great recession is partly to blame but the fact is that we are stuck in this 64 to 69 percent range.
Now, Ali, housing industry lobbyists are telling lawmakers, keep your hands off this deduction. You will hurt home prices, you will hurt the middle class. They say home prices would plunge immediately and sales could slow and independent economists, too, have said, look, you could see home process fall maybe 15 percent. This is really important on the coasts like Chicago, places where there are high home prices.
Compromise might be the best solution here though, Ali, not cutting it out entirely. But lawmakers might cap it or limit how much you can claim.
There is also talk if the president gets his tax increases on the wealthiest, maybe he'll just leave the mortgage interest deduction alone.
VELSHI: Stay right where you are, Christine. Good setup for this. Christine, I want to bring in Kevin Hassett, he's a senior fellow and director of Economic Policy Studies at the American Enterprise Institute. He was a key Romney adviser during the campaign. Diane Swonk is also with us, she's the chief economist at Mesirow Financial, joining us from Chicago.
Diane, let me start with you. The deduction is getting about $10 billion more expensive every year. But this is money in people's pockets. I mean Christine does outline that low-income people don't nearly get the benefit of this that high-income people do or high -- you know, high value homeowners do.
But it is money in the economy. So what's the danger of pulling it out? What does it do to the economy or the housing industry?
DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Actually, at this stage of the game, I think the danger is fairly little. And I would limit the housing market deductibility. I wouldn't eliminate it entirely. One for pragmatic in reality, this is a -- it is a major transition. But I do think it needs to be major scaled back so that most Americans can benefit from it. But we really would rather have high income Americans investing in our future, in investment markets, in equity markets, things like that rather than in their homes.
And if they can build multimillion dollar homes, you don't need a million-dollar deduction or a million one deduction and subsidizing that from the government. I don't think that's the best use of government policy. So there are a lot of arguments on both sides of the issue on deductibility. But I do think for the bulk of middle class Americans to be able to deduct is very important because this is their -- single largest asset that they hold and they actually do trade it in and hold it for a long period of time.
And it is an asset. It is something they actually trade down into a condo once they sell it. So there is some justifications for deductibility there. But let's face it, you know, the high end doesn't neat this extra deduction and it's very distortionary. We don't want to over consume housing in this country.
VELSHI: Right.
SWONK: When we should be consuming and investing in more productive assets.
VELSHI: Kevin, good to see you, by the way, we haven't talked since before the election. Cutting deductions on the one like mortgage increase will increase the amount that people pay in taxes every year. One way or the other. It won't raise income tax rates. Something Republicans are against and it will hit, as Diane and Christine point out, wealthy Americans a little harder.
Where do you think Republicans come down on this?
KEVIN HASSETT, SENIOR FELLOW AND DIRECTOR OF ECONOMIC POLICY STUDIES, AEI: Well, really, the mortgage interest deduction is about the worst designed part of the tax code. You know, it's tax candy for "Bobos in Paradise." It doesn't get anybody into a home. It pretty goes to people who are going to own a home anyway and encourages them to -- instead of investing in the future of America -- have, you know, an addition to their home or something like.
And so I think Diane is exactly right. What we need to do is pair it way back. You know, if you have a big tax giveaway over here, then that means you need to have a higher tax rate over there. And I -- you know, for me, I think what Republicans would like to do is pair back cuts like this. You know, as Romney proposed, you may recall, and then use the revenue from that to get a lower rate.
And I think that the right way to structure the mortgage interest deduction really is to eliminate the deduction altogether but replace it with a refundable credit. So that if you're a low-income person who's actually the true person at the margin of owning a home, you know, then either you might not have a very high tax rate but if we give you a generous tax credit for the first bit of interest then it might get you into a home.
That's the way to subsidize homeownership, not to give this big giveaway to rich people who are going to have a house anyway.
VELSHI: Kevin, I'm disappointed you didn't -- you didn't cite Canada. You know, we got --
(CROSSTALK)
VELSHI: You always bring up Canada.
SWONK: That's right.
HASSETT: Yes. We do that every time.
SWONK: Yes. Yes.
VELSHI: Some new data shows that home prices are up 3.6 percent from this time, you know, compared to this time last year, the third quarter of this year compared to the third quarter of last year. New home sales did dip a little bit. But that's less than 10 percent of the market. Now here's the concern, if we kill the mortgage interest rate deduction, or scale it back or do something with it, what's the follow on effect to the housing market? That small part of the housing market that is where the jobs are all created because we are really -- we've talked about the growth in new homes being this golden lining around the economic cloud that we're under.
SWONK: Well, I think you need to take it in the context of the current economy. First of all, rents are so much higher than the marginal cost of homeownership even before deductibility. That it is now encouraging people to buy homes to flip to rent for those people who can't get in or qualify on a mortgage rather than just leaving those homes on the market. So it's triggered demand. It's still cheaper even without the deductibility than renting to actually buying.
So I think that's very important. So you're eliminating some of that movement and some of that cushion on the housing market at a time that it's not necessary anyway. Because you'll still have a lot of activity. And you still have a lot of pent-up demand.
Also, ultimately what really matters here is we need to balance our budget deficit.
VELSHI: Yes.
SWONK: We need to reduce the debt in the economy to reduce interest rates. Lower interest rates over the long haul are much more important at holding housing prices high and affordable than mortgage deductibility.
VELSHI: Yes.
SWONK: I'd much rather have it coming through responsible fiscal policy.
VELSHI: Right.
SWONK: And giving a boost to housing prices that way and asset prices that way than having it come it through these distortions of over consuming high-end housing.
VELSHI: Let me ask Christine this. There are some other deductions I want -- I want to show our viewers and their expected costs by 2014. All right? In a year, in the mortgage interest, about $1 billion. Income taxes, $54 billion, charitable contributions $50 billion, property taxes $27 billion, medical expenditures a little over $26 billion. These are things --
ROMANS: You forgot the 401(k), too.
VELSHI: And 401(k). A huge one.
ROMANS: Yes.
VELSHI: It'll -- that's -- 401(k) like mortgages -- all of these things, there are arguments in favor of keeping them because they do certain things. Others will say it's social engineering, right? We have this mortgage tax deduction that's supposed to get people to buy houses. But as Kevin does point out, it's unclear whether it really does.
ROMANS: Well, I mean, the whole tax code is a whole experiment in social engineering, isn't it? I mean, I mean, Diane was talking about the distortions that these incentives make, especially for high-end housing and the like. But I mean that's what it is. And it's been just 86 since the last time we had a meaningful revamp of the tax code.
VELSHI: Yes.
ROMANS: It's really -- it's a big -- it's a big, big mess. You also have lobbyists, Ali. What I want to bring here, too, is that we talk -- we're having this very measured discussion about the benefits and the drawbacks of the mortgage interest deduction. But there are lobbyists who are very forcefully giving a very different picture than what we're seeing right here in Washington. And they do and have had the ear of policymakers for a very, very long time. So I wouldn't count them out.
They say a 15 to 20 percent decline immediately in home prices. That's something that most elected leaders don't want to have happen to their constituents.
VELSHI: Yes. And even if it's --
(CROSSTALK)
VELSHI: It feels bad. Feels bad to take something. By the way, the housing lobby you're talking about has spent $25 million this year in telling Congress don't touch this deduction or bad things will happen.
ROMANS: Yes.
VELSHI: Hey, Diane and Kevin, great to have you back on the show. Good to see you both.
Christine, thanks so much.
Listen, maybe we're having the wrong discussion about taxes entirely. I don't think it really should be about what rate you pay as it should be about what return you get for the taxes you pay.
Do you think you are getting a good return on your taxes? I think some of you are going to say you don't. But if you don't, don't ask the Europeans for any sympathy because they are paying substantially more, substantially higher tax rates than you are and they're getting less for it.
So are Europeans getting ripped off or are you getting a bargain? Think about that. I'll tell you on the other side.
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VELSHI: OK. It's a big world out there. And we need to look at all of it, lest we get a little too introspective. So for that, I bring in my good friend Richard Quest for a little Q&A.
Richard, today we talked taxes. The average income tax rate, and I know there are problems with averages here, but the average income tax rate for individuals in the Eurozone is 42 percent, including countries like Belgium, Germany and France with some rates above 50 percent.
Here in the United States, the average income tax rate is 29 percent. Federally, 39.6 percent is the highest rate. Someone will pay in the United States. So for today's Q&A, the question is, are Americans getting a bargain, Richard, or are Europeans getting ripped up?
Let me go first. Sixty seconds on the clock starts right now. Economies, Richard, cost money to run. They are not free and societies do not finance themselves organically. There is misplaced popularity in the libertarian myth that governments don't need to involve themselves in most economic matters and that markets will handle whatever needs to be handled.
We need taxes. And we need safety and services and infrastructure in return. In some cases, it is simply more economical for governments to provide services because of scale. Healthcare might be one example. The building and maintenance of smart grids and roads and broadband infrastructure. So think of taxes not as needing to be low but of the return from those taxes of needing to be high.
Now, traditionally, Richard, that worked in Europe. Now it doesn't. They got the math badly wrong. So what once provided a high return is now an utter failure which makes America a tax bargain. But that is going to change, too, Richard. So the solution is to move to Canada where taxes are low, government offerings near high.
You, sir, can come and live with me and sleep on my sofa.
RICHARD QUEST, HOST, CNN'S QUEST MEANS BUSINESS: And here we go. Ali Velshi, whoever thought that this was going to be the PIMCO socialism of the business world. But there we saw him in his true colors.
The truth of the matter is, as one famous judge in Britain once said, it is every man's duty to avoid paying taxes. It is no man's duty, no man's duty to evade paying them. And that is the threshold upon which we seek. However, bearing in mind there are deficits that have to be covered. And there are spending that has to be reached. And in that environment, there is no other alternative but for higher taxes.
Do you think Europeans like paying 40, 50 percent taxes? But the alternative is not nearly so pleasant.
I have just been into Iceland, high taxes, high rate of living. And an economy that is actually recovering better than anywhere else from the financial crisis.
VELSHI: Wow.
QUEST: So Ali Velshi, does -- do taxes have to rise? Yes, in the United States.
VELSHI: I think we agreed on this. Richard, always my pleasure to see you from across the pond. Richard Quest, host of CNN International's "QUEST MEANS BUSINESS."
All right. Let's talk about where those taxes sometimes go. Infrastructure, superstorm Sandy cost overwhelming devastation and exposed dangerous flaws in U.S. infrastructure.
Coming up next, I'll tell you how investing in infrastructure will not only help get the power back on faster after the next storm but could be the key to jobs and the boom we've all been waiting for. You are watching YOUR MONEY on CNN. (COMMERCIAL BREAK)
VELSHI: Americans in the path of superstorm Sandy know that investing in infrastructure will help protect against storms. As I've said, investing in infrastructure is also one of the best things we can do to protect ourselves from economic storms as well.
American infrastructure was in poor shape even before Sandy hit. The American Society of Civil Engineers gives U.S. infrastructure a grade of D. Hey, guess what? Energy infrastructure did a bit better. It got a D plus.
The U.S. is spending money on its electrical grid, it actually is, and power plants. Five hundred and fifty-six -- $566 billion by 2020, but according to the American Society of Civil Engineers, that falls short by more than $100 billion. So what would the U.S. get for that $100 billion, an extra $11 billion every year?
Let me tell you, the American Society of Civil Engineers say if you spend the $11 billion -- this is a multiplier effect -- you get an extra $55 billion in economic output. It would protect 491,000 jobs. It would generate $73 billion in disposable personal income and create $94 billion in business sales.
Michael Grunwald is a senior national correspondent for "TIME" magazine. He's also the author of the "New Deal: The Hidden Story of Change in the Obama Era." In his book, he argues for increased investment in energy infrastructure.
Michael, welcome to the show. Superstorm Sandy left 7.9 million Americans without power, some for three weeks. And you say that the electrical grid is slowly actually improving. Now would any of that change -- would any of these changes that we're talking about had had a different effect on what people in the northeast went through as a result of Hurricane Sandy or are we talking about apples and oranges here?
MICHAEL GRUNWALD, SENIOR NATIONAL CORRESPONDENT, TIME: No, in fact, it already has a difference. President Obama had $11 billion for a smarter grid in his much maligned stimulus bill in 2009. And as a result, for instance, in the Washington, D.C. area, the PEPCO utility was able to get just about everybody their power back within two days because with a smart grid, and that's essentially mixing up modern information technology with that ancient electrical grid we've got.
VELSHI: Yes.
GRUNWALD: But with smart meters and digital routers and sensors. They were able to figure out where the problems were on their grid, route power around it, and without having to send a million trucks out to try to figure out where the lines were down and without having to send meter readers to see who didn't have power. They could do it just about automatically, and they were able to get things rolling within two days.
VELSHI: Michael, you're talking about the smart grid. One of the proposed solutions is to improve the usage and the reliability of the smart grid which allows, as you said, for two-way communication between utilities and devices like transformers and meters. Now this smart grid can detect the equipment, as you said, that's about to fail or that has failed. It can help utilities pinpoint the outages. It also means lower operational costs for utilities and, one hopes, eventually for consumers.
Now Brookings estimates that the federal government will spend around $6 billion on the smart grid between 2009 and 2014. Is there the political will to increase investment in this sort of thing because we are used to the lights going on when we switch them on? So we don't think we should be spending a lot of money on these things.
GRUNWALD: Exactly. Infrastructure is one of those things people don't think about in their everyday lives. We just assume the lights to go on. But then when you have something like in 2003 where a tree branch goes down in Cleveland and wipes out power in eight states you realized that you've got -- you've got a deeper problems. And that's really -- the self -- the smart grid will help -- will help the system kind of self-monitor and self-heal.
Essentially, we have -- you know, you look at telecommunications where if Alexander Graham Bell came back today, he'd be shocked, he'd flabbergasted seeing what we got.
VELSHI: Yes.
GRUNWALD: If Thomas Edison walked into a modern substation, he'd feel very much at home. He'd recognize all of those gizmos.
(LAUGHTER)
GRUNWALD: The idea of a smart grid with these synchrophasors and you know the routers and the smart meters that go right at your home is to really sort of, you have this situational awareness so that people know what's going on at the utility end.
VELSHI: Yes.
GRUNWALD: But also for people in your home, you have more power over your -- you're your energy use.
VELSHI: Yes.
GRUNWALD: You know which appliances aren't working. Eventually, you appliances will be able to talk to your -- talk to your utility directly. And it also will allow you to use more renewable energy. If you think of the modern grid as sort of like those old operators who used to have to connect every call manually, with a smart grid, when you don't -- you can have the more intermittent power, you know, when the wind stops blowing or the sun stops shining, it really happens more automatically. And that's good for everyone.
VELSHI: One of the conversations that took place in a lot of communities after Hurricane -- Sandy -- superstorm Sandy, was the idea that some places like New York City have all their power wires underground. Other places are susceptible to trees and things falling. Former New York governor, George Pataki, wrote that in the wake of Sandy, quote, "Serious consideration has to be given to burying electrical distribute wires underground. It's costly but critical investment that would eliminate the need for utility poles and overhead wires drastically reducing the need for repairs caused by wind and tree damage. Sounds entirely reasonable and sensible and you say that's crazy.
GRUNWALD: Well, I mean, I think it is reasonable in some areas. And when a line goes down, it sometimes makes sense to bury it. We have a lot of electricity lines in this country. And putting them underground, you know, we're no longer looking at illions with a B in front of it. You're starting to look at trillions. And remember these are investments that utilities need to make and that are paid for by rate-payers.
It turns out that we don't necessarily need to do all that. Utilities are starting to build a lot more transmission on their own. And you know, and they are trying to harden their systems, but again, by smartening up, by making it so that, you know, that when the wind knocks a line down, it isn't such a catastrophe. That's a lot cheaper and smarter way to start fixing our system than to try to put this entire above ground network that we have to, you know, start digging billions of holes and putting everything underground.
VELSHI: Michael, good conversation. Thanks very much for joining us.
Michael Grunwald is the senior national correspondent with "TIME" and the author of "The New Deal: The Hidden Story of Change in the Obama Era."
All right, with the fiscal cliff on the horizon, Americans are learning a lot about the politicians they hired. My final thoughts on this, the tax pledge that's standing in the way of compromise when we get back.
You're watching YOUR MONEY.
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VELSHI: This is it, this is the famous tax pledge we've been talking about created by Grover Norquist back when Ronald Reagan was president. Times have changed since then. I had hair back then. Some lawmakers are starting to understand it's not just low tax rates that matter. It is the rate of return that taxpayers get in paying those taxes. What do they get in support, in services?
Washington has a lot of work to do to avoid the fiscal cliff and to fix our debt issues and I will keep bringing you the lawmakers, economists, and intelligent minds who have real ideas about how to fix it all and how to get America back on the path to prosperity. It is possible.
Hey, watch us, we're not just on Saturdays at 1:00 p.m. Eastern and Sundays at 3:00 p.m. We're now on Monday to Friday at 3:30 p.m. Eastern. A little version of YOUR MONEY. Everything you need to know in business every day.
You can find me on Facebook at Facebook.com/alivelshi. Tweet me, my handle @alivelshi. Have yourselves an excellent weekend.
