Tammy Frisby on Tax Reform
Aug 13 2012

Tammy Frisby of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the likelihood of U.S. tax reform in the near future. Frisby reviews the changes in tax policy over the last 30 years focusing on the changes of the 1980s, looking at both the economics and politics of past changes. The conversation then turns to the present and the possible changes that might be coming as the Bush tax cuts expire on January 1, 2013.

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Alvin Rabushka of Stanford University's Hoover Institution lays out the case for the flat tax, a reform of the current system that would replace the 66,000 page U.S. tax code with a single rate and no deductions other than personal...
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Are Americans overtaxed? How does the average American feel about the tax system and tax reform? Vanessa Williamson of the Brookings Institution talks with EconTalk host Russ Roberts about her book, Read My Lips. Williamson shares the results of her...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Aug 13 2012 at 8:29am

Dr. Roberts,

I don’t know if you really believe what you are saying or are just trying to be provocative, but hamburger helper is not “disgusting”(35:17). It is 41 flavors of deliciousness. I guess sitting in your ivory tower of academia, eating your lobster and kobe beef that you probably have not tried the helper in quite some time, but are you trying to tell me ultimate cheeseburger macaroni is disgusting? Ridiculous!

Other than that, thank you for the podcast. It is always part of my continuing education.

Aug 13 2012 at 12:36pm

The only thing the right and the left can agree to is to spend money and not pay for it with revenue. The assertion that the right has any inclination to balance the budget is not backed up by the last few decades of policy.

Aug 13 2012 at 12:46pm

Dr. Roberts,

Considering that you specifically asked Dr. Frisby about the immediate future of tax policy and likely scenarios of how it will play out, there should have been disclosure with regards to her possible role in the Romney campaign. I would consider it to be pertinent information.

Hugely informative, as always. Regards.

Fred Giertz
Aug 13 2012 at 1:32pm

There is a confusion in the discussion in regard to the Hall–Rabushka flat tax. The flat tax proposal would indeed result in base broadening and a flat rate. More important, however, is the result that the plan would move to a consumption base by eliminating the taxation of the returns on capital and by expensing investments.

A VAT is not the only way to achieve a consumption base.

Aug 13 2012 at 3:57pm

Why should we be worried about an inequality in income tax revenue and when there’s a colossal (in comparison) inequality in wealth?

Aug 13 2012 at 4:06pm

The Earned Income Tax Credit was proposed as an alternative to inefficient government bureaucracy: Just (politically) decide what is an acceptable income level and credit those who make less.

Friedman’s negative income tax was intended to replace government services that waste money. The recipient spends the money on services the government would otherwise provide inefficiently: no food stamps or health programs, just a single money transfer and the recipient shops in the market.

Of course, as usual, the reciprocal spending cuts never materialized.

Thanks for the podcast, Russ!

Aug 13 2012 at 7:16pm

JanD, inequality has a wide range of root causes. The tax code is a poor way to address those. Income tax inequality is caused by the tax code and are best addressed though the tax code.

It really doesn’t make sense that you get lower tax rates in exchange for choosing to buy a house, let alone that the rate is even lower if you buy a bigger house and put less money down.

There are large numbers of loopholes inthe tax code that favor those who make enough money to itemize.

Aug 14 2012 at 12:39am

[Comment removed for rudeness. Please see your email for a one-sentence editing suggestion. We would be happy to publish the comment without the crass remark.–Econlib Ed.]

Aug 14 2012 at 8:38am

Towards the end of the program Frisby mentioned a freely available data set that tracks individual income tax returns over time. Where can this data be found?


Greg G
Aug 14 2012 at 9:31am

I tend to agree with those who think that changes in the tax code have not been the main factor driving increases in equalities in incomes and wealth.

Changes in the tax code might increase, decrease, or leave unaffected this increase in inequality. It is hard to understand why using the tax code in a way that increases inequality would be a good idea when inequality is increasing on its own for other reasons.

Aug 14 2012 at 7:13pm

I remember being baffled by the 1986 payroll tax rate (Social Security, Medicaid, etc.). In contrast to the simple income tax rates of 15% and 28%, it was 7.55%. Why wasn’t it a simple number?

It wasn’t until later that I realized why that number had been chosen. Consider the next $100 dollars that appeared on someone’s paystub, when they were in the 15% bracket and subject to the payroll tax:

Income tax: $15.
Payroll tax: $7.55.
Employer’s “contribution:” $7.55.

The paystub $100 cost the employer $107.55. The total amount paid in income tax and payroll taxes was $30.10.

Marginal salary tax rate: 30.10/107.55 = 27.99%.

Suspiciously close to 28%. That’s no accident.

Payroll taxes shut off when income hit the 28% bracket. In plainer language, the 1986 tax reform instituted a flat tax on salary income.

There were significant deviations for two earner couples, such as for a highly paid surgeon married to a nurse. An unmarried nurse would have been in the 15% bracket. The married nurse’s marginal income tax rate was 28%, but that income was still subject to payroll taxes. The marginal rate (payroll + income tax) was just over 40%.

That rather substantial marriage penalty is not often discussed.

Aug 15 2012 at 1:05am

GreG Writes:
I tend to agree with those who think that changes in the tax code have not been the main factor driving increases in equalities in incomes and wealth.

Changes in the tax code might increase, decrease, or leave unaffected this increase in inequality. It is hard to understand why using the tax code in a way that increases inequality would be a good idea when inequality is increasing on its own for other reasons.

I don’t see how the tax code is contributing at all to what is the mainstream concept of income inequality. And the income inequality it does create (primarily against middle to upper middle class and less loophole savvy taxpayers) is the reason to look at reform.

the tax code is already written to make up for income inequality to a very significant extent. For example, low income recipients can get up to $5000/year refund without paying a dime in taxes. There’s a good argument that the EIC encourages work. There is a counter argument that it may discourage actively working towards specialization since such improvements are not as rewarding as they would be in the absence of EIC.

With the current setup, low income people who do not pay taxes have no vested interest in the expanding level of government spending. Also, high income people tend to be catered to in other ways to make them happy because they pay the bulk of the taxes. One could argue that it evens out (unless you are in the middle), but both aspects are skewing government policies. Further, low income people could well find themselves thrown into a situation where they actually have to pay taxes due to expanding government spending.

The extent of income inequality itself is very debatable. Most analyses that support the ‘extreme inequality’ position use pre-tax dollars, ignore government transfers and health insurance. They look at the median which ignores the fact that all the subgroups are doing much better than the median, a statistical issue known as the Simpsons paradox (see…). They ignore aspects like retired people taking part time jobs and therefore falling into a low income bracket which is not representative of their wealth position in society. Very importantly, such analyses also ignore income mobility. A person in the bottom quartile in a 1990 study is probably not in that same quartile in 2010.

People tend to develop skills over time and increase their value in the labor market via specialization. There are problems such as when the market is artificially steered towards housing and large numbers of people specialize in trades that are unsustainable then get booted from the market and move from skilled labor to unskilled with regards to current market needs. In my opinion, the most contributing cause of slow wage growth at the bottom of the spectrum is that most corporations are now almost completely global and there is a huge pool of unskilled labor worldwide. Income inequality is largely a supply and demand phenomenon.

Aug 15 2012 at 2:33am

I don’t know why Russ went to the well of percent of people paying income taxes so many times. It’s one of the misleading statistics ever, because it assumes that all government spending is income taxes. Kudos to the guest for making the points that a major driver of that is the EITC and that the poor pay lots of taxes other than income taxes. Remember that only 43% of Federal taxes and 35% of all government taxes (Fed, state, local) are individual income taxes. Once someone starts only talking about income taxes, you are about to be sold a bill of goods.

When Federal, State and Local taxes are all included, marginal rates are pretty close to 40% for all, but those earning less than $20,000 a year, but can sometimes be very high for the poor. Here is a very careful study by Kotlikoff and Rapson.

Looking at average tax rates, households are paying positive net taxes even at very low wages. A couple earning a household income as low as $32,000 pays 14% of their income in taxes. (Source again Kotlikoff et al.)

Speaking of, Kotlikoff would be a good guest, and I think he would be your first presidential candidate.

Greg G
Aug 15 2012 at 7:20am


I was going to write a response pointing out that you are conflating income taxes with all taxes but I see that Charlie has already done a better job of that than I could have. Thanks for that Charlie.

Aug 15 2012 at 11:40am

On my comment above, the source for average tax rates is only Federal. I wanted to make that clear. It isn’t just state and local driving it.

Aug 15 2012 at 12:12pm

When we speak of the impact of taxes on the nature of the activity of the federal government, it is most relevant to refer to federal taxes. Certainly other taxes – state, local, sales – are important in many contexts, but the point Dr. Roberts was making in the podcast had to do with the impact of extreme progessivity in federal taxes on the health of the federal government.

A better counter-argument might have been pointed at federal corporate taxes which are likely regressive in their impact.

I also believe that the inclusion of FICA in the calculation of tax burden is wrong. When you pay into Social Security and Medicare you receive a promise from the federal government to pay you back some percentage of that payment in the future. For those in relatively low income brackets the portion the federal government promises to pay back is more than 100%. For those in high income brackets that amount is less than 100%.

The fact that the government borrows these funds and replaces them with Treasury securities is interesting from a public finance perspective, but from the perspective of a “contributer” it is the same as saying that your FICA payment is used to purchase Treasuries in your name (and if you are relatively poor, you are getting those securities at a discount).

There are many components to Social Security, Medicare, etc. It is a retirement system, disabilty insurance, a form of life insurance – and it is another progressive tax.

Brian Gibson
Aug 15 2012 at 1:42pm


You can make the exact same argument regarding any taxation since your taxes paid are returned to you in the form of some public benefit.

If you die when you are 60 years old, that FICA contribution didn’t do you a whole lotta good. And when trying to pay the bills when you are 25, it certainly has the same chilling effect on your economic well being as any other forced deduction from your wages.

Aug 16 2012 at 3:04pm

No, I don’t think it is the same as any tax. If I pay taxes for national defense I am paying for a public good. My retirement is not a public good, it is most assuredly a private good. Not the same thing at all. Furthermore, the more I pay in, the more I get back, in expectation. It is a really inefficient forced savings system. If the government said that you must save 10% of your net income for a year it would be fair to complain about coercion, but it would not be fair to treat that 10% as if it had been stolen from you, never to be returned.

If I die when at 60, then (apart from the benefits my family receives for Social Security) I haven’t gotten anything, but is that really relevant? If I buy term life insurance and don’t die during the term, have I been cheated? What you are getting for your social security is a conditional promise – if you live long enough we will pay you a certain amount of money. If you expect to die at 55 the value of that promise is small. If you expect to live to 90 the value of the promise is high. But you cannot claim that because you might die before you collect the promise has no value to you today.

Here’s a test. Would you be willing to assign all of your social security benfits to me for five cents?

And as for FICA payments having the same impact on current consumption as a tax, so does buying food. But no one suggests that we should count food expenditures as federal tax.

I am not arguing in favor of social security. I am merely saying that lumping the entire amount of payroll deductions for social security and medicare as federal tax paid is wrong.

Aug 16 2012 at 3:49pm

txslr, I don’t completely agree that Social Security is not a public good. I can think of several reasons to not want impoverished old people clogging up the overall system (if you’ll pardon the phrasing). There’s an economic benefit to me, in the middle years of my career, to have people retire. In addition, not having to support my parents frees up my income. I also think it safe to assume that, like many other impoverished groups, senior citizens without means would use the Emergency Room for basic medical care. It’s kind of like highways – I certainly benefit from a couple of them, and do not from a whole host of them (at least, directly), but there’s no question the money I pay to support them is a tax.

D. Edwards
Aug 16 2012 at 4:34pm

I have to admit that I find economics to be totally mysterious but I have two questions about this program.
First concerning the comment that “the top 1% of taxpayers paid 40% of U.S. income taxes. Which seems like a high number to me.”
From what I’ve read the top 1% possess about 40% of the wealth (though I suppose this can be counted in different ways depending on whether you want to accentuate of minimize this disparity). So shouldn’t a rate of 40% be considered too small? (Though the point about the dangers to democracy when government relies so heavily on such a relatively small group is a good one.)

Secondly, what’s the big deal about reducing the number of tax rates? I can understand why someone might argue for a flat tax, but if you accept the idea that different incomes should pay different rates, and also accept that computers are widely available, why couldn’t you just have a rate of say “the square root of your income – 40000 dollars divided by 17” — that’s a totally arbitrary example, but you just want some function that increases reasonably with income.
Presumably that’s how they come up with the rates that are used anyhow. So different incomes would pay different rates but there would be no sudden jumps from one bracket to another.

Aug 16 2012 at 6:10pm


Public goods are those which are non-excludable and non-rivalrous. Social Security is neither. What you are describing are (tenuous) externalities. I don’t want the malnourished clogging up the system, but that doesn’t make food a public good. It would help me if my boss was killed by the plague, but that doesn’t make the Black Death a public good. Emergency medical care is rivalrous, and hence not a public good. It is only non-excludable because the government has decreed that it be.

Highways, similarly, are not public goods because they are rivalrous. They are not Pareto efficient, but that doesn’t make them public goods.

You don’t have to support your parents; to some extent at least, because they paid money for which they received a government guarantee for a set income past a certain age. For the money you are paying to Social Security you are likewise receiving a government promise to pay you when you retire. This is a private good.

If you don’t make much money and hence do not pay much in FICA, the value of the promise to pay you in the future is greater than the value of the money you paid. This is like a negative tax. If you paid the maximum into Social Security each year the value of the promise you receive is less than the value of the payments you made. The DIFFERENCE is a tax.

Hence, removing the cap on annual contributions to Social Security (it is already this way for Medicare, as I recall) simply makes a progressive tax even more progressive. This is the problem with lumping FICA payments in with federal income tax payments and using this to calculate effective tax rate. You are not netting this for the value of the specific, private benefit that the payer alone is receiving in return for the FICA part.

Aug 16 2012 at 10:16pm

D. Edwards, Interesting idea of using a formula based equation. Still for many, the difference between your average rate and your marginal rate is very high. I would like to take a part-time job on the side to pay off some bills but the taxes on that make it not worthwhile.

There is a difference between wealth and income. High earners are often not wealthy and the wealthy are often not high earners. You can have a lot of money invested in treasury bonds generating a trickle of income and get by quite well. You can be a doctor with hundreds of thousands of dollars worth of student loans.

I’m not sure that throwing bricks on the backs of entrepreneurs is good for the economy. We are discussing federal income taxes, but remember that people pay other taxes… including high earners.

This country has experimented with a wide range of tax rates over the 100 years that income taxes have been in existence. Despite rates being all over the board during that time, the total receipts have held pretty close to 20% of GDP. I have to wonder if there is a limit to what we can bring in.

Income taxes dis-incentivize earning money.

Greg G
Aug 17 2012 at 8:25am


I see your point about commenters not netting out different degrees of cost and benefit for different taxpayers when including Social Security taxes in comparing tax rates. But if we apply your standard consistently, we won’t be able to calculate effective tax rates at all. So your point still strikes me as special pleading.

Almost every government expenditure benefits different people differently and not necessarily in proportion to what they pay. Even defense. Different citizens have very different ideas of what constitutes justifiable defense spending. Some profit greatly from defense spending. Others are injured by it.

Russ Roberts
Aug 17 2012 at 11:48am

D. Edwards,

In 2009, the top 1% had 19% of taxable income and paid 39% of the income taxes. See Summary Table 1 and Table 2 from this CBO report.

Aug 17 2012 at 5:38pm

D. Edwards,

Since you asked about the wealth distribution, from this cite the top 1% of households held about 33% of aggregate wealth from 1995 to 2001 (Table 1). The top 5% held 58%. The bottom half of households held 3% of aggregate wealth.

If someone has an updated citation, I’d also be interested in seeing it.

Aug 17 2012 at 5:50pm

This paper coming out of the Federal Reserve says the top 1% of households held 33.8% of wealth in 2007 (Table 4).

Aug 17 2012 at 5:57pm

From the FRB paper, the top half of households hold 97.5% of the countries net worth.

Should that make us worry about the status of our Democracy? More or less than share of income taxes paid?

Aug 17 2012 at 7:14pm

“In 2009, the top 1% had 19% of taxable income and paid 39% of the income taxes. See Summary Table 1 and Table 2 from this CBO report.”

I think it’s also interesting to note, that again if one looks at all federal taxes, rather than income taxes, this drops from 39% to 22%.

Aug 17 2012 at 10:50pm

It’s important to think about the degree of income inequality in a society when comparing income shares to tax burdens.

When we compare these two percentages for a given group of households [say, the top 1% of income earners], we are making the following comparison:

(Group Income / Total National Income) compared to (Group’s Tax / Total Tax Paid)

As Russ says, in 2009 the top 1% earned 19% of income and paid 39% of taxes.

Imagine an unequal country. If those in the top have much higher incomes than the rest, we would expect the top’s tax contribution to make up a much larger piece of the revenue pie than those of the other groups – even if everyone were subject to a flat tax. If every member in an unequal society paid 5% of their income in taxes, the payments of the top earners would make up a larger percentage (> 5%) of the total tax payments.

The more income inequality, the more tax burden inequality, so wouldn’t reducing income inequality (preferably through means other than the tax system) also reduce tax burden inequality and the concern that fewer Americans are making meaningful contributions to the financing of their government?

Aug 19 2012 at 7:28am

The concern with statistical variations in income is an oddity in a country where we prize the ability to succeed – equality of opportunity rather than equality of outcomes. Variations in income represent Opportunities.

In a poor country there is a 1% with most of the income. The 1% is usually made up of the people who claim to be making life wonderful for everyone else. In the Soviet Union there was a statistical upper class, as there is in every socialist society. The difference is whether the ability to rise is a matter of markets and freedom or of political favoritism.

People aren’t frozen in statistical categories over time. The 1% today is not the same group of people as the one percent a generation ago. Ditto the 99%. Perhaps our societal focus has become short term instead of long term.

Aug 19 2012 at 7:29am

The concern with statistical variations in income is an oddity in a country where we prize the ability to succeed – equality of opportunity rather than equality of outcomes. Variations in income represent Opportunities.

In a poor country there is a 1% with most of the income. The 1% is usually made up of the people who claim to be making life wonderful for everyone else. In the Soviet Union there was a statistical upper class, as there is in every socialist society. The difference is whether the ability to rise is a matter of markets and freedom or of political favoritism.

People aren’t frozen in statistical categories over time. The 1% today is not the same group of people as the one percent a generation ago. Ditto the 99%. Perhaps our societal focus has become short term instead of long term.

Russ Roberts
Aug 19 2012 at 1:05pm


On your point about including all federal taxes and not just income taxes…

The current system is horrible, mixing so-called payroll taxes and income taxes. The payroll taxes are opaque and considered “contributions” by some as if the money is put side for them. When we talk about tax reform, payroll tax is too often forgotten.

Bad system.

Greg M
Aug 19 2012 at 8:04pm

I appreciated the discussion of tax changes in the 1980s, but I think there is a need to clarify when the change in inflation indexing took effect. From the discussion, I got the impression that it took effect after the 1981 legislation was passed and went into effect in 1982. But when I read Brian Westbury’s discussion (http://www.econlib.org/library/Columns/y2003/Wesburytaxcuts.html), he wrote that the change started in 1984. A bit of searching turned up this Federal Reserve paper by John Tatom, which indicates the change took effect in 1985.

Perhaps this is nitpicking but with the considerable attention to the “Reagan Recovery” during this election cycle, I think it is worth paying attention to the sequence of events.

The banner years of the Reagan Recovery were 1983 and 1984, when real GDP growth was 4.5% and 7.2%, respectively. This occurred after the top marginal tax rate was reduced to 50% but before inflation indexing took effect if Tatom’s version of the story is accurate.

The further reduction of the top marginal rate (to 28 or 33%) did not occur till after the 1986 Tax Reform Act took effect, presumably in 1987. Annual GDP growth from 1987-89 was respectable, ranging from 3.2% to 4.1%, but less than 1983-84 values. In 1985, GDP grown was 4.1%.

Another economically significant trend during the 1980s was a decline in energy prices, and thanks to investments in energy efficiency, there was a drastic decline in energy expenditures even though energy consumption increased. Regan and some of his fans have claimed credit for declining prices of oil and gasoline, but examination of the changes in US oil production in the 1980s indicates that Reagan’s policies had little influence on either domestic production or world prices.

US expenditures on energy during the 1980s declined nearly 6% of GDP, while federal revenues declined less than half this amount. This surely provided economic stimulus to energy consumers (the majority), but hurt energy producers (a minority). Republican discussion of the “Reagan Recovery” emphasizes tax cuts. If Republicans mention energy, they almost always erroneously credit Reagan’s policies for the decline in energy prices. Based on this, I think Republicans and conservatives have developed a story about the “Reagan Recovery” that exaggerates the likely economic benefits of tax cuts.

Greg M
Aug 19 2012 at 9:10pm

Addendum to my previous comment: I had intended to include a link to the John Tatom article. Sorry for the omission. Here it is: https://research.stlouisfed.org/publications/review/85/02/Federal_Feb1985.pdf

Aug 21 2012 at 1:22am

D.Edwards wrote:

“From what I’ve read the top 1% possess about 40% of the wealth”

In response, Russ Roberts wrote:

“In 2009, the top 1% had 19% of taxable income and paid 39% of the income taxes. See Summary Table 1 and Table 2 from this CBO report.”

Noting that D. Edwards was talking about wealth, not income, Charlie wrote:

“This paper coming out of the Federal Reserve says the top 1% of households held 33.8% of wealth in 2007 (Table 4).”

Charlie also notes that even if you do what Russ Roberts did in his comment and turn “wealth” into “income”, you won’t get a federal tax rate of 39%, unless you use only income taxes:

“I think it’s also interesting to note, that again if one looks at all federal taxes, rather than income taxes, this drops from 39% to 22%.”

In response Russ Roberts wrote:

“The current system is horrible, mixing so-called payroll taxes and income taxes. The payroll taxes are opaque and considered “contributions” by some as if the money is put side for them. When we talk about tax reform, payroll tax is too often forgotten.”

I’m sensing a pattern here. It seems important to certain people that wealth get re-defined as income and that taxes get re-defined as income taxes. It doesn’t seem that conflating these things helps clear up that opacity. Seems instead to (purposefully?) muddy the water.

I’d add that I believe there’s also “opacity” (purposeful?) inherent with the self-reporting of income to the IRS that skews the reported numbers (i.e. Russ Roberts’ “top 1% has 19% of taxable income” cite). This “opacity” boils down to the taxpayers use of tax avoidance (legal, arguable, and cheating) to exclude certain monetary gains from taxation as income.

The top 1% use the legal and the arguable avoidance techniques much more than the poor or the middle-class. The wealthy do this because they can afford to hire people to help them find/invent these avoidance techniques and can afford to defend themselves if audited as a result. In fact, with more to gain, it makes economic sense for these folks to spend money/risk money avoiding taxes in a way that may not be true for the average taxpayer.

The same logic would seem to hold for the third type of tax avoidance, tax cheating. Would you cheat to save $50? $5000? $500,000? But even if you don’t buy that argument and you believe tax cheating is the same across all income levels, the wealthy would be excluding a much larger amount of money from income simply because they have more income to exclude.

If I’m correct about the tax avoidance strategies of various taxpayers, isn’t the accuracy of percentages derived from the reported numbers (such as the 19% Russ Roberts cited above) called into such question that referencing them only further muddies (“opaques up?”) up the discussion?

Finally, here’s a (I believe) relevant quote from Andrew Mellon on the issue of “tax fairness”:

“The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.”

Greg G
Aug 21 2012 at 7:03pm

Excellent summary by keatssycamore in my opinion.

I would be interested in to hear Russ’s response. Once again a very interesting discussion inspired by EconTalk

[erroneous attribution corrected per Greg’s followup comment, which has now been removed as extraneous–Econlib Ed.]

Aug 21 2012 at 10:38pm


Certainly the tax code is confusing. I think we should try very hard not to confuse it further.

There seemed to be some confusion in the podcast of whether “the percent of people not pay any income taxes” includes people getting the EITC. It does! This cite has a fuller explanation of what that figure comes from. Here is a helpful summary, for people interested:

“50 percent are in this category because their incomes are so low that they are less than the sum of the standard deduction and personal and dependent exemptions for which the household qualifies. As TPC Senior Fellow Roberton Williams has noted, “the basic structure of the income tax simply exempts subsistence levels of income from tax.”** Some 62 percent of the households who will owe no federal income tax in 2011 have incomes under $20,000.

Another 22 percent do not owe federal income tax because they are elderly people who benefit from tax provisions to aid senior citizens, such as the exemption of Social Security benefits from income tax for beneficiaries who have incomes below $25,000 for single filers and $32,000 for joint filers and the higher standard deduction for the elderly.

Another 15 percent (of the households who don’t owe federal income tax) don’t owe the tax because they are low-income working families with children who qualify for the child tax credit, the child and dependent care tax credit, and/or the earned income tax credit, and the credit(s) eliminate their income tax liability”

Greg M
Aug 23 2012 at 12:01pm

Although most of the people who have no federal income tax liability have a low income, a growing percentage of high income earners also have no tax liability. Bruce Bartlett (former aide to Reagan and Kemp) recalls a time when Republicans advocated reducing the tax burden on the poor and advocated for closing loopholes so the rich paid their “fair share”, as Ronald Reagan said.

Aug 29 2012 at 9:14pm

Can anyone point me to Milton Friedman’s 1986 April editorial that was mentioned in this podcast?

Frank Howland
Sep 2 2012 at 9:30am


I enjoyed the podcast. Some comments:
1) The discussion of a flat tax was confused. Hal and Rabushka’s plan, as noted above by a commenter, is actually a consumption tax.
2) The number of different marginal tax rates is hardly a major cause of complexity. It’s very easy to use a table to go from taxable income to tax.
3) Contrary to Russ, I think almost everybody knows they are paying payroll taxes. You take a job and your take home pay is less than you think it ought to be. Why? People do have trouble with multiplication, but this happens over and over again–do you think that people don’t ever look at pay stubs and are not sufficiently curious about their own income?
4) I note that Tammy Frisby, who I think was reasonably objective in describing tax policy, is now an economic adviser to Romney. Here is a link to a Fox Business interview of Frisby: http://video.foxbusiness.com/v/1815004998001/romney-economic-advisor-jobs-are-no-1-issue/. It’s interesting–there are some echos of themes from the Econ Talk interview. The interview shows the difficulty in moving from a role as a nonpartisan observer of politics and economics to the role of someone who must defend a partisan position. I bet Tammy Frisby would much prefer to spend her time giving advice to Romney than to be defending his inchoate plans.

Marc B
Sep 2 2012 at 3:02pm

I think I understand why you think it is bad for democracy to have 40% of income tax paid by the 1%. No skin in the game & dependent on revenues from rich people.

But isn’t it much worse for democracy that so many people are so poor, and so few people are so rich, that the income tax distribution falls as so? Doesn’t that encourage hopelessness, anger, and social unrest?

Bevis Schock
Sep 4 2012 at 6:21pm

Several comments have related to the inclusion or exclusion of payroll taxes (FICA, Social Security/medicare, or whatever one wants to call it), in a discussion of tax rates and the burden on members of society in different income quintiles.

This happens to be my pet peeve.

I find any discussion of taxes that fails to start with the working man’s 15% of income which goes to payroll taxes to be insulting to the working man.

Imagine being a $13 an hour worker who pays little income tax but 15% payroll tax, (and here I assume the worker understands that even though his check only shows about 7.5% the employer doesn’t care whether he pays the worker or the govt, so the tax is really 15%), and some radio or podcast host talks about tax inequality and does not acknowledge his payroll tax payment.

The worker is going to feel that the discussion is unfair to him.

When one gets into the fine points of what is or is not “rivelous” as discussed above I tend to think the discussion has gone so esoteric that it does not help the debate in the sense that 99% of the people don’t have any idea what that issue is about, and so it has no impact on their basic wish for some kind of fairness.

So while I acknowledge that this point was covered briefly in the podcast, I think all the commmentators should have a starting point that everybody with an above the table job is paying 15%.

Bevis Schock

Sep 6 2012 at 12:07pm


It is disturbing to hear you cite a

“ little known fact which is that they were a proportional cut in rates across the board, not a tax cut for the rich.”

This is both false and misleading.

Here are the changes in tax rates:

    Old    New    Change
     28     25     -10.7%
     31     28      -9.7%
     36     33      -8.3%
     39.6   35    -11.6%

So, the proportionate decrease was larger for the highest-income people than the middle class. The difference between 11.6 and 9.7 is quite material.

But more importantly, when most people think of the “Bush Tax Cuts” they think of both 2001 and 2003. You are focusing on one of the most proportionate parts of these tax cuts. Dividend tax rates were cut from 35% to 15% in the 2003 tax bill. That’s a 57% decrease. This cut went almost exclusively to rich people. The decline in the capital gains tax rate did too.

I would also note that you threw that “fact” in gratuitously. As in “We are not going to debate the virtues of the Bush tax cuts in 2001 other than” this piece of misinformation.

Russ Roberts
Sep 6 2012 at 3:06pm


I appreciate the pushback, but whether my claim is false is complicated. I certainly didn’t mean for it to be misleading.

I was mainly reacting to the claim I often hear that the Bush tax cuts were a tax cut for the rich as if only the rich got a tax cut. That’s certainly false. Your point is relevant–the cuts in marginal rates were not equi-proportional as I may have implied. But changes in marginal rates are not the only way to look at it. You might also look at the average rate. Measured that way, the Bush income tax cuts were much more favorable to the poor and the middle class than to the upper classes. The CBO reports changes (second table in the pdf in the link) in average Federal income tax rates by quintile between 2000 (before the cuts) and 2006 (after they were phased in, I think)

Top quintile -17.5%
4th -26.2
Middle -40%
2nd -153% (went from 1.5% to -0.8%)
Bottom -43.5% (from -6.6% to -8.6%)

So by this measure, the poor got a bigger cut than the rich. Of course in absolute dollars, the cut was not proportional. The rich gained more.

One thing that is interesting about the CBO chart is that between 1985 and 2000, the average income tax rate for the top quintile rose by 25%. It fell for every other quintile for that period. That may be part of the political pressure to change rates.

Finally, your point about dividends is a good one, though the benefits of the cuts don’t go only to the people who receive incomes in dividends. There are other effects as businesses change how they are financed and structured.

Sep 7 2012 at 10:57am


Thanks for the response.

First of all, I apologize for the tone of my previous comment. I shouldn’t have suggested that you were intentionally being misleading or presenting inaccurate information. I don’t believe that.

But I do think that despite your commendable skepticism, you are sometimes too inclined to be supportive of Republican initiatives that do not move things forward and this was a case of that.

I support your desire for a simpler, more sensible, fairer and more stable tax structure. I think the Bush Tax Cuts were a step backward in that regard. I was reacting to what seemed intended of an endorsement of them.

Overall, I thought the podcast was very good (though I do have one other quibble I’ll post separately). Thanks to Tammy for an excellent discussion. I hope she is right about the prospects for reform.


Russ Roberts
Sep 7 2012 at 4:40pm


Your comment has a certain unintended irony in this political season. I doubt you can find many or any Republican initiatives I have championed on this program. With respect to the Bush tax cuts I have repeatedly written (and maybe said on EconTalk) that a tax cut without a spending cut is not a tax cut. George Bush did not cut taxes. He raised them. He cut some tax rates but if spending is increased at the same time and there is a deficit, that requires higher taxes in the future.

The irony is that Republicans talk a lot about free markets and limited government (especially in political campaigns) but when it is time to act, they rarely support free market principles. I assume it is that Republican talk is what makes you think I support Republican initiatives. But Republican initiatives are rarely the same as Republican talk.

Similarly, watching Obama last night and hearing him champion the middle class and the little guy while criticizing the Republican’s coddling of the rich, you would never know how good he has been to Wall Street and its richest members, members who have been great donors to him campaign.

My first desired tax change is to merge the payroll tax and the income tax so that there would be more transparency about what we are paying to the government.

Sep 12 2012 at 3:07pm

Just listened to the following podcast from CSPAN. Investigative Reporters Donald Barlett & James Steele wrote a book regarding the dwindling middle class and how multinational corps move jobs and money overseas and offshore to skirt paying taxes.


They are critical of propaganda from the news media and think tanks as shaping the right’s argument. If I recall correctly, they name George Mason specifically.

Juan Williams interviews them.

I am an avid listener of EconTalk, and agree with Russ most of the time. But these guys have been doing investigative journalism on the tax situation since the 70s and their side should be heard. I think they make a good case for raising taxes on the corps that move jobs overseas and keep money offshore, but I dont nec agree with more Keynesian type spending.

I recommend you listen to it. The CSPAN Q&A and After Words are regular weekly 1 hour podcasts that I try and listen to during my commute along with EconTalk. They are thought provoking and often have a wide range of views presented for the listener.

[url changed to full url from tinyurl–Econlib Ed.]

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Podcast Episode Highlights
0:36Intro. [Recording date: July 26, 2012.] Russ: Topic is U.S. tax system and prospects for reform or maybe just change. We'll see. I want to start with going back to the 1980s, something I know you have looked at. There were quite a few changes in the U.S. tax code beginning in 1981. What was the most important and what was the timing of those changes? Guest: The first important change is in 1981, with the Economic Recovery Tax Act. And that's one of the landmark pieces of tax legislation that comes out of the Reagan Administration. That's when most people talk about Ronald Reagan cutting taxes, that's the first bill they are talking about. That's the piece of legislation with which we bring the top marginal tax rate from nearly 70% down to 50%. It also makes an important structural change to the tax code that we continue to benefit from and that's the indexing of the marginal rates to inflation; also the personal exemption and the standard deduction were indexed to inflation with the 1981 act, and we all can probably remember--I have to admit that I was not just adult during these years. That was the big bracket creep, the tax code wasn't indexed to inflation before 1981; it was a revenue machine for the federal government. Russ: Without legislation. Automatic tax increases--the more people's incomes were pushed into higher brackets, generate more income--more revenues. Guest: Exactly. And there were other important changes with the 1981 act, but those were two of the most prominent. Russ: I was going to say: Do you remember? But since you were barely sentient, evidently, in the 1980s, I'll ask: Do you know roughly how many people that top rate bracket reduction affected? So, 70% is a high number. It had been 70% for a long time. It was dropped to 50%. Did that affect a tiny portion of the American people, or a significant portion? Do you remember? Know? Guest: Well, there is some debate about calculating exactly who pays less and buys how much, but in total there is a consensus that the 1981 Economic Recovery Tax Act saved the American taxpayers $143 billion over the next 4 years. Russ: So, it was called a $143 billion dollar tax cut--you could call it that. Guest: Yes. Russ: A phrase I really don't like, because it doesn't distinguish between changes in rates--which was the centerpiece of the Reagan tax cuts--and changes in collections--which have been, the last couple of tax cuts, the Bush tax change and the Obama tax change. These were temporary one-time checks in the mail, not alterations in the marginal rate. Guest: That's right. The changes that we saw in the tax code in the 1980s are of a fundamentally different kind than the kind of tax policy making that elected officials have been doing over the last decade. Russ: So, that was 1981. What came after that? Guest: There were then, in 1982, the Tax Equity and Fiscal Responsibility Act. After the 1981 tax cuts there was within the Reagan White House a group of individuals who were concerned about the size of the budget deficit and then of course the debt that would accumulate due to that. And so there began to be within the Reagan White House conversation about how to actually walk back some of what was done with the 1981 tax reforms. Not changes in the marginal rates, to go to your point about the difference between changes in marginal rates and collection, but collection. So a couple of things that were done in 1982 were that interest and dividend withholding was put into place as a way to increase revenue collection; and also the corporate estimated tax payments were on a schedule that was set to be accelerated, and they accelerated that further. Those were two of the important changes that were made. Of course, in any of these tax reform packages, there are a lot of things that we could go into; I'm just trying to highlight a few of them on any of these that we talk about. And so, to give you a sense of the scale of those changes compared to the 1981 act, so, $143 billion with the 1981 act in tax relief; and then in 1982, with the Tax Equity and Fiscal Responsibility Act, you had $47 billion over the next 4 years that was then increased. Russ: But not changes in marginal rates. So, that's a different story. And of course these estimates are somewhat wild guesses--well, that's a little strong, but they are inherently imprecise because there is dynamic behavioral changes in response to the rates. You can't, there's a lot of hypotheticals that have to be presumed when you are trying to measure changes in revenue collection. Guest: Correct.
5:54Russ: So then we go--I was going to say, though, that instead of changing the tax collection, the withholding, maybe they should have spent less, if they were worried about the deficit. But that was 1982. After that, what was the next big one? Guest: The next big one is 1986, by most scholars of legislative tax history. There were also changes in 1983, and I don't want to discount the significance of those reforms to particular constituencies in politics, but really 1981 with the Economic Recovery Tax Act, 1982 with the Tax Equity and Fiscal Responsibility Act, and 1983, you do have the Interest and Dividends Tax Compliance Act, which actually repealed those interest and dividends withholdings. There were a lot of changes in the 1980s in tax policy. For a wonk it's a great time to study in tax policy. But that really brings us up to 1986, the last time we had comprehensive tax reform. And so now as we enter this period where we once again in America talking about tax reform, it's to 1986 that we harken. Russ: So, why was 1986 important? Guest: 1986 is the last time that we've had tax code changes, reform if you will of the scope that bill represents. Russ: So, since then, we had tax changes in 1991 for example. When George Bush broke his campaign pledge; and Bill Clinton had a major tax change in--what was it, 1993? Guest: Uh, 1993, I think you are correct with that. And then of course the Bush tax changes as well. Russ: In 2001, Bush II. But all those, though I think you could debate it because I think some of the Bush changes were a little more important, were tweaks. Changes in marginal rates. You are suggesting that the 1986 one was of a different qualitative nature. Guest: Yes. Because you get changes in marginal tax rates that are accompanied with significant changes in tax expenditures, with these loopholes and exclusions. And individual reform is done part and parcel with corporate reform, and the extent to which the tax code changed during that period cannot be matched by any of these subsequent reforms. Russ: So, what was important about 1986? What happened? Guest: So, in 1986, you have a tax code that has 14 brackets. Russ: Before the reform. Guest: Before the reform. And that is taken down--well technically to 2 brackets, but there was a phantom top marginal tax rate of 33% that I really actually wish that people on the Right would be more honest about. That there were 3 tax brackets there. Russ: Well, you and I can call it three. Guest: Yes, okay. Russ: Phantom or not, there were three. Guest: And then you had-- Russ: Hang on. So, a simplification from 14 rates to 3, but also a further drop from the 1981 level in the top rate, correct? Guest: Yes. So, you had this simplification to the individual tax rates, going from tax rates under prior ranged from 11% to a top marginal tax rate of 50%. That was still the top marginal tax rate in effect from the 1981 Reagan reform. Russ: So down from 70% to 50%, but then further in this code to? Guest: Top marginal tax rate of 33%. Or 15%-28%, depending on what your position was on whether there were two or three rates. Russ: Big change. But why is there debate about that? Are there 2 rates or 3? Just between you and me. No one's listening, really. You can be honest. Go ahead. What's that about? Guest: There was a surcharge on certain high incomes that brought that effective rate to 33%. Russ: For some high income earners. Guest: Right. Russ: So, it's not really in the book, but you do pay it. It's a special supplement in the back. Guest: That is my interpretation of it. I know that there are well-respected policy experts who disagree with whether that is actually a top marginal tax rate, but in my view--as a political scientist, that's my view. Russ: So, still, it's 33%, down from 50%. Guest: Right. Russ: Which is a 33% change--it's a 17 percentage point change based on 50, which is quite large. Guest: Yes. And to pay for those very large reductions in marginal tax rates, elected officials on both sides of the aisle had to get together and agree to some very difficult deals related to the loopholes and exclusions in the tax code. You should keep in mind that they did that because they set the ultimate goal of this tax reform being revenue neutral. Russ: On paper. Through some Congressional Budget Office (CBO) or other standard. Guest: Correct. Of course not using dynamic scoring. Russ: Dynamic scoring being? Guest: Dynamic scoring being a way of modeling the effect of tax reforms in a way that you allow for economic growth as a product of reduced tax rates. Russ: Incentive effects. Guest: Right. The CBO currently doesn't do that under law. They don't do that not because they don't want but because that's the rules that Congress has set. Russ: They presume and any other estimates that nobody changes their working habits or declares more income in response, or investment behavior in response to changes in rates. Guest: Yes. Overall. The CBO does take into account some changes in behavior, but not as much as those who favor fully dynamic scoring from the CBO would like to see. So, you had to come up with ways to pay for those reductions-- Russ: If you wanted to be revenue-neutral. Guest: Exactly. And they did that in a number of ways. So, they did chip away a little bit at the mortgage interest deduction. It used to be fully deductible. No matter how many houses you owned, if you had a mortgage, you could deduct that from your income. When all is said and done, after really two years of battling over this tax reform, from November of 1984 when Treasury I, the first plan of the Reagan Administration, till when Reagan signs it into law in November of 1986, this nearly two year period. They managed to say: What we're going to do is mortgage interest will be deductible for your first and second home, but-- Russ: I think that probably covered most. Guest: Probably covered most Americans. Consumer interest, as some of your listeners may remember, used to be fully deductible. Russ: Credit card charges of the late payments--not late payments but the interest incurred because of that was deductible. Guest: Right. Not any more, after 1986. Russ: You don't want people to incur too much debt. We found other ways to encourage it. But that was a big change. Guest: Charitable contributions, another exemption that we talk a lot about when we talk about tax reform. That used to be deductible for both itemizers and non-itemizers. After 1986 and now it's only deductible if you itemize. So that's one way. When you are thinking about tax reform, you think about the ways to pick up little pieces of revenue to put toward the larger goal, and then some bigger chunks. And this charitable deduction is an example where they picked up several billion dollars. Not a big chunk of change.
13:27Russ: While we're on the subject, what was the measured so-called official size of this tax change? Was it neutral? I assume people separated out the revenue effects of the marginal tax cut rates to other things. So you suggested that the marginal tax cut rates "be paid for." So, how big were they? Do you remember? Guest: Right. Russ: Because you were quite old in 1986. Guest: So, they were, by the consensus estimates of the effect you are talking about, several hundred billion dollars. Russ: And so, big. Guest: Yes. And you get $200 billion of that actually from changes in the corporate tax code. Corporations get there--to jump to the other side of the tax code here, they take lower rates and they do also take these changes in exclusions, loopholes, but it is not purely revenue neutral on their side. It is revenue neutral across the corporate and the individual tax code. So that paid for most of these changes on the individual side. And on the individual side, that side picked up another $100 billion dollars, several hundred million dollars. So, just to give you a couple other examples--I don't want to cause people to go to sleep talking about tax policy here--but the two-earner deduction. We used to not have a marriage penalty. After 1986 you have a marriage penalty. Russ: Which means? Guest: That if you have two earners in a household that their incomes are added up, are on top of one another--if there is a marriage penalty. And that they are treated, essentially as if one person owned that income. Russ: So, the progressivity of the tax code hits the married couple in a way that it wouldn't if they were single. That's the effect of it, right? Guest: Right. Because together they might hit the top marginal tax rate; and they wouldn't if they weren't added together. Russ: That's the essence of it, the so-called marriage penalty. Guest: Right. And now, in the current tax fight we are having, we do actually have a modified reduction in the marriage penalty that could potentially go away, depending on what Congress decides to do. So, it's not fully correct to say that right now we have the marriage penalty as it was in 1986. And then, one of the most important changes in 1986 was that the preferential treatment, the differential between the capital gains rate, the long-term capital gains rate, and income was eliminated. So, in prior law, in 1986, you had a 20% long term capital gains rate; and then when the bill was signed into law you had a 33% capital gains rate, which would bring it into line with the top phantom rate. Russ: The top rate that individuals paid on their earned income. Guest: Correct. Russ: And the idea there was to give people no incentive to artificially distort how they collected their income. I assume. That was the justification for it, at least. Guest: Well, that is one justification for it. As a political scientist, I would say the justification for it--and knowing something about the legislative history on this--is that they needed to pay for the reductions in the marginal rates. And that was Reagan's real priority. The story of the 1986 tax reforms is--forgive me for saying so--a really great read. And if I could give a recommendation to your listeners, it would be to read Showdown at Gucci Gulch by Birnbaum and Murray, who were cub reporters for the Washington Post during the 1986 tax reforms. And they wrote a really riveting account. Russ: It's hard to believe. Is that giggle because it's hard to believe it's riveting? Tax reform? I assume they are talking about horse-trading and other backroom deals that had to made, or avoided, to actually make this happen. Is that what the essence of the book is? Guest: Yes, that's what the essence of the book is. The story of how the deals actually got done. And they had fantastic access to all the insiders. The reviews of their work by all the major political players are largely favorable. So, that's a good sign. It comes in paperback. I recommend it.
18:00Russ: Let's talk about the politics. In the 1980s, when we look back on them, of course there's a lot of bias the way people look at it depending on their political persuasion. But it was clearly a time of pretty healthy, if not very healthy economic growth overall. Lots of turmoil in the tax code. And lots of spending. So, the deficits that--people blame the deficits sometimes on the tax cuts, but if you look at spending, it depends what you call the Reagan era. If you start in 1980 you get a different answer. If you start in 1981, there's a recession in there, debate about where GDP is. Basically spending rises dramatically and tax revenue doesn't keep up. However you want to label that, but that's what happens. But at the same time, the structure of the tax code--it's raising a lot more money, by the way by the end of the 1980s than before, because income is rising and possibly there are incentive effects that are positive from these tax changes, but there's an overwhelming income increase--the base of tax change is much larger. Defenders of the tax code changes will say: That's because we changed all the incentives. But I'd argue we can't really know any of that really well. So, let's put that to the side. What were the political forces that caused this much change to be politically realized? What's your read on that, of that change? Guest: That's a top-notch question. If I can start by saying, that one of the lessons that I try to keep in mind when I study public policy making is from John Kingdon, dean of public policy scholars. And he says that trying to go to the point of origin on policy change is a fruitless exercise, because it's an exercise of infinite regress. Russ: Sure. It's a complex system with emergent behavior, and politics is emergent. It's not: some person decided because of some factor to do X. It's hundreds, thousands of people interacting in complex ways. But what are some of the effects? Guest: So, to go to the point about the person leading the charge--and many people talking about the 1986 tax reforms will talk about the crucial role that Ronald Reagan played. This was a personal issue for him that he used to talk about when he was subject to the 90% tax rate, when he was making movies, in Washington. That's a starting point that many people have. I'll just throw that out there. But of course, had he wanted that and no one else did-- Russ: It wouldn't have mattered. Guest: It wouldn't have happened. So to think about the pressures that were out there among the American public and then within Congress. So, first, among the American public. There was a growing sense that the tax system was unfair. The stories in the nightly news, in the daily newspaper, were with growing frequency about people who were getting away with tax evasion. Russ: Avoidance. Guest: Avoidance. Whatever you want to call it. There were tax shelters. There was an elaborate scheme of tax shelters during this time, many of them related to cattle. And being from Montana, I find that particularly interesting. Where you could dump a lot of money into an investment initially, experiencing a huge capital loss, and then only over time experience the revenue from that. So you could manage it in that way. Russ: To avoid tax. Guest: Right. Because marginal tax rates were so high, people had figured out how to engage in tax avoidance. But, this was coming to light--that people weren't paying taxes. That there were these lists that were being presented in Congressional testimony of very wealthy Americans, Americans with high incomes who had paid no income tax in the last year, in the last tax years; corporations that were paying no income tax. And so the sense among the American public, this was becoming an increasingly salient issue. And the American public was aware of it at this time. And then in Congress, in Washington, D.C., you had divided government. So, Reagan in the White House; you had the Senate controlled by Republicans with Bob Packwood the Chair of the Finance Committee; and then you had House Democrats with a majority. So, Dan Rostenkowski from Chicago is Chair of Ways and Means, and he's the major player in the House side. Those players had their own interests in getting on the tax reform bandwagon. Reagan gives a speech, says that he's going to push for tax reform. Rostenkowski is designated to be the Democratic response and everyone is sort of waiting for him to just attack at Reagan, to suggest at this, to say--imagine what we are hearing now in the current very polarized debate over taxes. And instead he says: This is exactly the kind of leadership the President needs to be exercising, and I encourage you to write Rosty and tell me what you think about this. And the response is overwhelmingly positive. And so you get, both sides realize that they need to be involved in this, to make sure that their interests and constituents are protected. Russ: So, if you had to list the winners and losers in broad-brush style, obviously some of the people who are benefiting from those loopholes lost, because they got their benefits taken away. Who else lost? Who else won? The "average taxpayer" doesn't have access to some of those investment vehicles. I presume, one, that in one dimension they got lower tax rates on their income. Of course they probably paid implicitly higher taxes through products they bought--the corporate income tax, their stock returns, if they held mutual funds--who knows. But who were some of the obvious winners and losers? Do we know? Guest: Well, we do know. On the corporate side, there was a division within corporations on this, which was one of the other keys to understanding why 1986 was right for reform. That you had oil and gas corporations on one side, who were set to really take a hit from this--and there were eventually changes in the way that that equipment is depreciated. But then there were other corporations that were paying very high corporate rates to pay for those loopholes. And once those loopholes got closed, they benefited. So, thinking about individuals--certainly--it's difficult to say. This is one of those moments where as a political scientist I try not to weigh too much into the economics of the economic effects of tax reform. To the effect that I want to understand how public opinion changes, as a result of these things. I do that. But certainly the average person, average taxpayer, did experience a benefit on these things. Russ: For sure. Guest: The mortgage interest deduction, first and second homes--taxpayers are just fine on that. That's not a change to them. Russ: A lot of people who give charitable deductions were itemizing already perhaps, so that effect was small; it's not a big amount of money. Guest: Right, right. And state and local taxes--there was a change where income and property remained deductible but sales tax was not. So, it's difficult to generalize across these; and that's why I'm hesitant as someone who is not a tax economist to weigh too heavily into that. And maybe the lesson for your listeners is that for any tax reform of this magnitude, whether it's 1986 or what we might be getting, 30 years overdue for some sort of tax code reform, it's difficult to say with sweeping strokes who wins and who loses because of the nuance that tax policy is broke.
26:27Russ: Let's come to the present. As an economist who is not an expert on tax policy, my views are very general. And I think most economists who are not experts, and I think many who are, have similar views that transparency is a good thing, simplicity is a good thing. Low marginal rates are better than high marginal rates, if you can hold revenue neutral. I am surprised that you think there is some possibility of serious tax reform in the next few years, simply because none of those things, from an economist's perspective, seem to be salient to the average voter. I mean, everybody complains about doing their taxes. That's always been true, and that's a wonderful make-work program for accountants and lawyers. They are going to always like complexity and opacity and pain, because they profit from it. But what's going on today that you think is going to push the political process toward doing something? Which might not be a good thing, but is going to do something. Guest: To make a comment, first, about the nature of public opinion on tax--and you are dead on point that most Americans are not spending their time thinking about tax reform. To my mind, tax politics is one of those issues and sets of policies where it doesn't matter that the American public is jumping up and down at any one point in time. It matters that public officials sense that there is something latent out there, and if they don't do something, that the public will penalize them for it. And that's really what happened in 1986. So, I've been looking at the public opinion about: Do you think the tax code needs to be overhauled? Are there major problems with the tax code? And you occasionally, in these big data sets of public opinion will find some individual poll where it will say American public was really fired up about this. But overall, it's not something that was really registering with the majority of Americans in 1986. And the polling overall, if you look at general issues, it's the same thing we are seeing now. But in 1986 there was a strong sense among Democrats and Republicans that if they did not do something to fix the system, that the American public would pay attention. And would hold them accountable for that. So that exists potentially today as well. So, but to your question. Russ: But why? Why does it exist today? Guest: Uh, well, some of the same markers. It's a little bit like trying to identify the dog that didn't bark. But some of the same markers are there. So, you have a number of stories in the news about corporations that aren't paying taxes or paying very low tax rates; we have this data about the 1% and their tax rates. So some of those points of public discourse have the same flavor to me. We had them before and not gotten major tax reform. So they are maybe necessary but not sufficient. But that's where we are with public opinion. In terms of catalysts before us now: we have hanging before us the fiscal cliff. Taxmageddon. People have come up with various names for it. But the fact of the matter is that on January 1, 2013, we have a set of tax policies that are set to expire. Russ: That's the Bush tax cuts. Guest: That's the Bush tax cuts, and that is more than marginal tax rates. It has to do with child tax credits and earned income tax and it has to do with expiration in the reduction of the marriage penalty. Russ: Estate tax. Guest: Estate tax. Capital gains taxes; the fact that dividends would be taxed as regular income, at earned income marginal tax rates. That is all packaged with the expiration of the payroll tax cut, the sequester spending that is going on. So, all these fiscal issues together represent this fiscal cliff. Russ: But why is that a--isn't that a--we're not going to debate the virtues of the Bush tax cuts in 2001 other than, I would mention, a little known fact which is that they were a proportional cut in rates across the board, not a tax cut for the rich. The rich got the same proportional rates, but because the rich have higher income, they get a bigger dollar benefit, obviously, from that proportional rate cut. But my crude reading of it is that the years before that, going up to 2001, there was an increase in the tax burden on the rich, and this brought it back to what it had been fairly recently before by letting them have the same proportional tax rate cuts as everybody else. That's my take on the 2001 tax cut. I think it's controversial but I think I can defend it. But I am confused why this is a fiscal cliff. We are spending a trillion dollars more than we take in. Isn't the natural thing, if you are worried about deficits, left or right; it's ironic; the right is worried about, they like low tax rates and balanced budgets; the left is worried about high taxes on certain groups: This seems like a perfect political storm. Let the Bush tax cuts expire. The right's happy because we close the deficit gap; the debt goes down. The left's happy because they've been saying for years that those tax cuts were unfair, that the rich got all the money from them. Isn't that what's going to happen politically? Nothing's going to happen? It's just going to--and wouldn't that close the fiscal gap? Guest: On paper, it would close the fiscal gap if it wasn't happening in this economy. And that is the argument that economists on the left and the right are making, that the timing of this-- Russ: Not a good time to raise tax rates? Guest: Right. Well, there's not unanimity on this point. There is bipartisanship and ideological agreement among economists and economy experts that this is not a good time for this to happen. And it could potentially plunge us back into a recession. Russ: If we are not already in one. By then. Which some people are worried about. Guest: Yes. So, this moment, in which there are so many pieces of the tax code--just to take the tax code portion of the fiscal cliff that need to be dealt with. John Taylor, here at Stanford and the Hoover Institution has a nice graph on his Economics One blog, where he looks at the number of expiring tax provisions over the last decade. And for the first set of those years, often no tax provisions expiring in ten, maybe 20. And then you just see those bars go up. And in this most recent year, it's 140 tax provisions expired. Russ: So, these were pieces of the tax code that were "temporary," right? That were allowed to be in place for a while and then, though there were probably some folks who fought to keep them, they couldn't do it, and so they expired. Guest: Yes. Well, they were set to expire and then they were extended for another year. Russ: Oh, ok. Guest: And this has created this whole class of tax policy called tax extenders, which are these one-year tax provisions, usually aimed at businesses, that are habitually extended. And from a political standpoint this is very convenient for Congress because what better way is there that corporations and businesses-- Russ: pay attention to you. Guest: Yeah, and donate to you, and then to have every year, things. Russ: It's like an annuity for a politician. Hamburger Helper. Defender of the--it's disgusting. It's one of the problems, and maybe we'll come back and talk about this, that I find is the perpetual uncertainty for economic decision-making. Because you don't know whether the tax code is going to change or not change, or how it might change; and that uncertainty can't be a good thing. Guest: And that is exactly one of the reasons why this might be a moment for major tax reform. You have all these expiring provisions. It throws in everyone's face that this is no way to run a tax code. And especially in an economy that needs stable, predictable policy in order to engage in a meaningful recovery. And that is ground on which you can get bipartisanship, that you can get both Democrats and Republicans to agree that temporary tax policy is no way to get economic growth and no way to restart the American jobs engine.
36:16Russ: So, the other thing I want to mention, I think it's important to put on the table, is that Milton Friedman used to always say that you shouldn't look at the tax rate; you should look at how much government spends, and that's the measure of how high people's taxes are. So, Bush in 2001 cut rates and then increased spending dramatically for both the war and Medicare expansion--those were examples of tax increases in Milton's world. So, I view taxes as being very high right now. And so if these tax cuts were to expire, the Bush tax provisions were to expire, on paper it's sort of a tax increase because it certainly would be a change in marginal rates, but we still have to pay for all that stuff we're indebted on. So, in a way, it's a lot of noise and heat but not much light, maybe, whatever. Light but not heat. Help me out here. Guest: Milton Friedman also wasn't pleased with what happened in 1986. He wrote an editorial in April of 1986 about the proposed legislation and he said that it was essentially still full of Swiss cheese. That in order to engage in real tax reform you needed to have a set of marginal tax rates and that you would need to get rid of the mortgage tax deduction, the charitable deduction, the employer-sponsored health deduction--all these things. So, there's a lot going on right now that Milton Friedman would not be very happy about. Russ: But going back to your point about the 1986 act where there were certain constituencies pushing for certain things, certainly there are lots of economists pushing these things who think that the deductibility of health care by the employer is a very bad idea. And so by eliminating that, that does free up in a revenue-neutral change, the opportunity to do some other things. Guest: Yes. But that is on my growing list of reasons why there are major obstacles to tax reform this time around. And it has to do with double counting of that particular loophole. Russ: Explain. Guest: Well, you have the tax policy folks listing off the loopholes that they are going to close, exclusions, if you want to give it a-- Russ: More attractive, less disparaging-- Guest: Name. And they list health insurance. And from their perspective, there are good policy reasons for that related not only to tax policy but to health care policy as well. And so they say: This is great; we should be able to use this to pay for the lower marginal rates to keep things revenue neutral. But the health care policy folks, who are interested in making major changes to health care policy in this country, see closing of that exclusion as a way of paying for the things that they are trying to do. So there is going to be, as I see, a coming political battle between who actually gets to count that money. Russ: I see. Guest: And the CBO, under their protocols for scoring, can sometimes double count things. What the CBO does, and what is sometimes actual reality in terms of the policy implementation, are two separate things. And I think that's going to be a problem not just in terms of the politics but in terms of the fiscal health of this country. Russ: That's really interesting. What are some other things that are on the table? With the housing crisis still with us, the bust still there, and a lot of people uncomfortable with the recent years of U.S. housing policy, there's a lot of interest in getting rid of the mortgage interest deduction in abstract terms. But in practical terms, you've got homeowners who have just been kicked. I can't see that happening. Guest: I agree entirely. One of the biggest obstacles is trying to pare back the mortgage interest deduction in a time when so many Americans are already having trouble paying for their houses; and then when so many Americans are out of the housing market who are looking to be home buyers. Many of them are agitating for a further drop in the housing market, which could actually argue for them favoring the deduction. It's going to get complicated. Russ: There's no shortage of politicians who want to do stupid things to encourage home ownership. We know that. This will be one of those things, I suspect. If anything, we might get more of it. Which of course pushes up the price of housing artificially, more of a problem.
41:02Russ: Given that there is this up-for-grabs feeling about January 1, 2013, what might emerge politically? Again, we're not going to talk about whether this is good economics or good tax policy. What do you think is important in terms of politics? Guest: I do think there's a potential for a grand bargain. I wasn't as optimistic about this even six weeks ago. And the thing that was really concerning me was the absence of specific policy bills proposed by Congress. Because when you look back at 1986, the run-up even to 1984 had a group of very prominent members of Congress, Senators and Members of the House, who were sponsoring bills. Most prominently Bill Bradley, ultimately instrumental in getting the 1986 reform passed. Jack Kemp, and other supply-siders. You can go back and you can see these pieces of legislation. You had these guys who had a stake in getting something done. They wanted to see something done and they wanted their stuff in. I was going back and looking through Thomas.gov, the data base of among other things legislation, and could find proposed bill after bill, sponsored bill, of loophole exclusion, making the problem worse of a tax code of Swiss cheese, but only one plan for a tax cut overhaul. And in the last six weeks as people on Capitol Hill have started to think about the potential embedded in this fiscal cliff, or Taxmaggedon, you have had members of Congress who actually have started to write pieces of legislation. So, I see that as a good sign out there. And that you could get something, something that's bandied around a lot, something based on Simpson-Bowles. Russ: Simpson-Bowles being the bi-partisan commission that was trying to solve another problem, which is that we spend more than we take in. Guest: Yes. So, their plan is actually not revenue-neutral. Russ: Yeah. It's revenue-increasing. Or enhancing, as they like to say it, probably. Guest: Yes. Their chairman's mark, which lays out several different versions of plans, but those plans involve elimination or major modification to the mortgage interest deduction and employer-sponsored health exemption. So, all these things that are going to be so difficult to do. I mean, you can't just say: Do Simpson Bowles. Russ: Right. Not going to happen. But something like it could. Guest: It could be a starting point. Russ: Now, just for fun, let's talk about something. Let's dream for a minute. Our colleagues here from Hoover, Robert Hall and Alvin Rabushka, came out with a small book on the flat tax or a small form that would allow you to fill your taxes out fairly easily. Alvin Rabushka was a guest on this program back in 2007. There's always some attractiveness to economists of a flat tax. Meaning both potentially relatively few rates and almost no deductions, so that you could fill out your taxes in about 10 minutes on a postcard. I like to dream about it. And it's happened in some countries that had to start from scratch, in Eastern Europe. I don't know whether they've moved away from that as political forces emerged that pushed them away from it. But what are the prospects for that kind of tax reform, where not just we tweak it here and there, but we move something closer to what economists would like? The other example would be a consumption tax. Guest: Well, to take the flat income tax and the consumption tax separately, I'd say that I think it is unlikely that in the United States we go to a single marginal rate in the foreseeable future. Most of the countries where you've seen that, many of them were transitioning from Communism; so they get the advantage and the challenge of starting from scratch. And they are able to do that. But the conversation about the flat tax is important, because it is inarguable that in 1986 when they were moving to 2 or 3 rates from a 14-rate system, that Friedman and Alvin Rabushka's work about a flat tax was instrumental in that. When you go back and read the interviews and read the reporting that was done after that time, the staffers at the Joint Committee on Taxation, which is the crucial bi-partisan committee that works between the House and the Senate, Finance and Ways and Means, they give credit to that thinking. Officials at Treasury give credit to that thinking. So, don't let the best be the enemy of the good, here. It's important to continue to talk about the argument for a flat tax, and then if we can get somewhere close to that, that's good. On the consumption tax side, politically that is also a difficult issue because--and we saw this in the Republican primary--when you start talking about a consumption tax or a Value-Added Tax (VAT), that is quickly-- Russ: VAT being a Value Added Tax, that would be levied on business transactions. Which has the great virtue of being relatively efficient, but has the horror of being relatively unnoticed. So it does tend to lead to revenue creep, in my perception of it. Guest: And that is the starting point of many of the political criticisms of it, in that it would, in all likelihood in the United States's case, not be done as a replacement for a rate. Russ: Just an add-on. Guest: Yeah. And so you have the criticism that this will be a revenue machine for the federal government, and find out that it is less noticeable to people, that that will only encourage the problem. And so it's not a way to actually fix the tax system, but only a way to increase taxes. That's the political argument that's out there about it.
47:26Russ: So, the one thing I think that you highlighted as being politically salient right now is this anger at the 1%, or anger at the rich, or anger at the financial sector. That's an anger I'd like to see fixed by getting rid of bailouts and other special treatments that Wall Street and other parts of the financial sector get. But it would seem to me that to the extent that is politically salient, debates over inequality, that's going to push us towards higher marginal tax rates in the next round, not lower. Until recently, I think the top 1% of taxpayers paid 40% of U.S. income taxes. Which seems like a high number to me. I don't think that's good for a democracy. Either to have the bottom 99% paying so little or to have government so dependent on coddling the top 1% and having them be successful. Which to me is a really sick, grotesque aspect of the current tax code. I'd like to see us move toward a more proportional--proportional is not the word I want. There are just so few people paying any income tax right now. And so many people--a small group, but paying a very high amount. It seems like a pretty unhealthy thing for a democracy. And I don't see anything on the horizon that's going to move us away from that, do you? Politically. Guest: I do not. Politically, I do not, either. From a policy standpoint, this is a difficult conversation for conservative economists sometimes because conservative economists have been instrumental in arguing for the expansion of the Earned Income Tax Credit (EITC). Russ: Talk about that. Talk about what that is and why it's important. Guest: So, there are tens of millions of Americans who get a refundable tax credit. It means that you can actually get more money back from the Internal Revenue Service (IRS) than you paid in in income taxes. It's the United States's largest anti-poverty program. Russ: Which is wild. Guest: Are you arguably the most successful, too, because it rewards work. You have to get earned income in order to get this tax credit. And part of what's going on right now with the tax policies that are expiring is that you would also have an expiration of an expansion and extension of the EITC. Russ: Which took place in 2001 as part of the deal that allowed the rates to come down for other folks. Guest: Right, during the George W. Bush Administration. The Earned Income Credit goes back to the 1960s, 1970s, and it's been expanded and changed over time. But conservative economists and policy makers have to now figure out a way to address this issue that you point to about the health of a democracy in which you have citizens who are paying taxes--state and local level, sales tax, their payroll taxes if they are working. Russ: For sure. Guest: But they are not paying into the general revenue stream and potentially even getting money back, while at the same time recognizing that they were the ones who forwarded this policy. And it actually has roots in Milton Friedman's work. Russ: Negative income tax; Capitalism and Freedom. Guest: Right. So there's some policy fine-tuning that needs to be done here. And I think some real thinking that needs to be done among economists. Of all stripes. About how you achieve the legitimate goals that were set out and attempted to implement through the EITC, while not experiencing these negative side effects. Russ: You hear all the time, and it's a fact, though I have a feeling it's a misleading fact, that more than 50% of taxpayers pay no tax. Pay 0 tax. There's at least two things about that I find difficult to believe that it's a reliable number. One is: it's tax returns, not taxpayers. And I'm not quite sure how that changes it. So, when it says 50% of tax returns have zero tax owed, I know it doesn't mean 50% of individuals. But it could be the same. But it's not the same, literally. But the second thing is: Does that statement that you typically hear, does that include their EITC? So, I earn some amount of money that makes me eligible for the EITC, does that mean I pay? I have a tax due and then later get a check? Or does that mean I file and have a zero? So, when I'm assessing this claim--which is a worrisome claim again for me for a democracy--that a significant portion for sure, may not be 50%, pay zero: Is that true? How does that EITC interact with that claim? Do you know? Guest: It interacts with the claim depending on how you measure it. This is an ongoing debate between people who are measuring it in different ways. An additional way they are trying to measure it differently is not just to look at any given year but to look across individuals. Because there is some publicly available tax data in which you can look at one individual over time. And what I would think really matters is people who serially fall into that category. And that number goes down quite dramatically--I can't remember off the top of my head exactly what it is. But if you try to identify people who for the last 3 years or the last 5 years haven't paid any income tax, whether because they didn't pay any at all or because they got the EITC, that there are many fewer Americans who are just not paying taxes for year after year. Russ: Many fewer? Guest: Yes. Russ: There are more people paying taxes, you are saying. Guest: There are fewer people who don't owe taxes for multiple years than there are Americans who don't in any given year. People move in and out of that category. Russ: For sure. Guest: Whatever the number is. Russ: I understand. When you say fewer, you mean the number is lower if you look at it over a long period of time. But it could be still rising. Guest: It could be rising. But I guess we have to decide what we're concerned about. Are we concerned about--let's say you include people who are receiving their refundable EITC, and you say: okay, they didn't pay taxes in that year. But then the next year they don't get the EITC. Russ: Don't qualify. Guest: Right. Do you think that they are one of these people that we are concerned that somehow this impacts their view of government and the role of government and the difference in the appropriate tradeoff between liberty and security? Does one year on that cause you to worry about it? Does 2? Does 3? Russ: Yeah. Well, it has an effect. Obviously it's bigger if it's every year. But I think--and I'm also working from memory here--but I think the bottom half of either the income distribution or taxpayers based on Adjusted Gross Income--and of course they are not quite the same--but I think the bottom half pays about 5% of all income taxes. Which means that a dollar of government spending costs you a nickel. If that's true, you are getting a 20-1, 19-1 subsidy. You like it better than if you are paying a lot, potentially. Of course, this ignores payroll taxes, which are quite significant. And any worker pays that. They may not perceive it as paying it, because they may decide, falsely in my opinion, that it goes toward Social Security retirement. Into a little box for them, a little account. But it doesn't. It goes out the door to pay for the war or the agricultural price payments or anything else. It's fake, an illusion. Guest: And I have not seen good polling on how Americans perceive their payroll taxes. Whether they have a good sense of where that money is going, or if they see it as paying all taxes--well, as you put they are paying for all those things with that money. But whether they think that: Oh, I'm not contributing toward that; I'm contributing toward this. Russ: And generally, unless you are self-employed, you don't even file relative to anything about those taxes. So, unless you look at your pay stub, it doesn't even dent your consciousness, I don't think. Guest: I think that's probably correct. You have a startling number of Americans who don't fully understand or even partially understand how Social Security works, how Medicaid works. Russ: That would include me. So I suspect it's a pretty large number. I may be alone.
56:47Russ: Tell me--I want to give you two things to close on. One is a reader of my blog, Pietro Poggi-Corradini, who I know also listens to EconTalk, reacting to something else I had talked about, made the point that maybe this is a good time to stop fiddling with the tax system. So, it's true that there are some unhealthy things coming. Whatever we decide that starts applying in January of 2013, it would be good to just kind of leave it alone for a while. Even though it might not be the ideal system, it would be great to let people make some plans for the future, knowing that some things are in place. Of course, the Bush tax cuts for 10 years, which were "a long time". And then all of a sudden they are gone. It's tomorrow. So, maybe 5 years, 10 years, isn't the right amount. But there's certainly a tradeoff between improving the tax code versus if you are constantly "improving" it--you are making it worse. Guest: Yes. From a process standpoint, that requires a Constitutional Amendment. Or from the tax code, a Constitutional Amendment. In the 20 years after the 1986 Tax Reform, the tax code was changed 15,000 times. Russ: Only 15,000? Guest: Only 15,000. Russ: This comes back to this debate we did here on this program, talking about the effect of uncertainty and what they believe are the effects of uncertainty; but of course uncertainty is perennial. But that's unbelievable. 15,000. Exactly, or 15,384? Something a little imprecise. My other question is: Do you want to make a prediction? I'd like to hear what you think is a likely outcome. If we revisit these issues in a year, what do think will have happened in the meanwhile? Because it's a big year. We are going to have an election; we've got these expiring tax provisions, December 31st, January 1st. What do you think is going to happen? Guest: I think that the first thing that will have happened is before the end of the 2012 calendar year Congress will have dealt with the tax extenders; they'll have dealt with one-year tax exclusions for businesses, especially as we approach November election, they will make sure that this is taken care of. Russ: Which is what? They'll extend these things? They won't let them expire? Guest: They will extend these for businesses. Russ: Temporarily. Guest: For another year, for the annuity. Russ: Because we've got a recession or fear of a near recession; can't risk--that'll be the argument? Guest: Well, that will be the public argument. The private argument is the fact they are raising money before an election. Russ: You scratch my back, I'll scratch yours. Guest: Yeah. I think in a year we could be in the middle of a full-on legislative and White House negotiations about major tax reform. But I would put at 60-40 that the tax policies that the end of 2012 actually are let to expire. I think it is more likely than not that we will roll into 2013 with the Bush tax cuts expiring, and Congress scrambling to figure out what to do about that. Russ: So, you think they'll--they won't expire on January first, you are saying? Guest: Yes, they'll expire on January 1st. Russ: And you think they'll let that happen? Guest: I think that they will, through their inability to reach a deal before the first of the year, those will end up expiring. Russ: So, there's some chance--Dave Brady was a guest on this program, I think a couple of weeks ago; I'm not sure when this is going to air, but a few weeks back. And Dave said: As of now--I know he's looking at data you also look at--slightly higher chance that Obama wins the Presidency, the House is going to stay Republican, the Senate will go either 50-50 or maybe slightly Republican, but certainly in that scenario we've got a divided government. The other possibility is Romney wins, the Senate goes 50-50 or 51-49, which means that it's Republican because he's got the deciding vote through the Vice President, VP; and the House stays Republican. In which case you have united government. You want to say anything about those two different scenarios affecting your prediction? Guest: Sure. If, as we move toward November it continues to seem likely that Obama will win--that's the sense on Capitol Hill--then I think that you actually are more likely to get a deal before the end of the year; and that Republicans, well especially if Obama is elected, they'll decide: Let's just do this. They have no better leverage. Some arguments about whether they'd have better leverage in January, but I don't think so. They should just cut a deal at that point. Russ: And cutting a deal would mean? Guest: At the very least, taking care of the expiring income tax provisions for a period of time that would then allow them to take care of tax overhaul. This is not going to be something that they are going to be able to do in the next 6 months or a year. It's going to take some time to pull this deal together. And in the meantime they would agree to extend some portion of the Bush-Obama tax cuts. Russ: But probably not for the high end. Obama will make that the-- Guest: Well, we'll have to see what the Congressional Democrats decide to do, because right now it's costless for the Congressional Democrats to agree with the President's--well, not entirely costless, but they don't actually have to take a real vote on something. And there are many of them, in particular in the Senate, who think that the high-earner line should be drawn at $1 million, not $250,000. So, that's a problem for the President there. If Republicans on the Hill start to feel confident that Romney is going to win, then certainly if he does, then I expect they would sit and wait for the inauguration. They are not going to deal with the President even if he makes overtures to them. At least a portion of the caucus in the conference will be temped to wait until they are negotiating with a Republican White House. Russ: But if they do that, then January 1st we are back to the 2000 tax code, right? More or less. Guest: Right. Unless a lame-duck Obama can work with Congressional Democrats and Congressional Republicans to essentially save the hide of Congressional Democrats. Who are then going to be putting pressure on him: We've got to agree to something because we are going to have irate constituents. So, that's a potential point of leverage for the Republicans, trying to get the Bush-Obama tax cut portion of it done in advance. But given the level of Congressional dysfunction, I think it's also possible that they just decide that they are going to try to wait this out, engage in what I would hope would be--or they--or I would advise them would be a massive PR campaign to explain that they have things set and ready to go for when Romney's in the White House. Russ: And what would that reform look like? If the Republicans win the White House, keep the House, and make enough wins in the Senate to take charge of it; a year from now or 18 months from now, what tax code changes do you think are in the works that could happen? Guest: Well, Romney's proposal is that you'd have a 20% cut across the board in marginal rates. Russ: Lower than the Bush rates. Guest: Right. So we could come in somewhere between the Bush rates and the Romney rates on that one. Russ: And do you think that's going to be the single biggest change--a further cut in marginal rates? At a time when we are running massive deficits; it's true, we've got a sick economy, we are going to use these to jumpstart growth? We're not going to do anything else? Guest: Oh, in addition to those? Russ: Yeah. Structurally? Guest: Probably not packaged with those, in the first month. I would imagine there would be promises about what would come down the road. But that conversation involves the conversations that we really need to be having about entitlement reform, the overall level of government spending in this country; and that is not a conversation that is going to come easily in Washington, D.C. Russ: I don't know how to describe this, but I am getting a sense of deja vu about the future. I've heard that song before, right? Cut taxes now, cut rates now, and we'll make up the spending cuts later. You think that's where we might be headed? Guest: I think that's where we might be headed. I'm sorry to say it.

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