Sen. Conrad: “No way to get the revenue necessary without significant changes on capital gains and dividends”

November 15, 2012

Wonkblog is running a series of interviews with key lawmakers and stakeholders on the fiscal cliff. On Wednesday, I talked to Sen. Kent Conrad (D-N.D.), outgoing chairman of the Senate Budget Committee, about the state of play since the election has ended. Our conversation is below, lightly edited for length and clarity.


(Melina Mara/The Washington Post)

Suzy Khimm: What do you think of Speaker John Boehner's remarks on taxes after Election Day, and what have you been hearing from Republicans lately?

Kent Conrad: My conversations have been with Republicans primarily in the Senate, and House members, who've said "We know revenue has to be part of a balanced plan. We're prepared to support it. We want to be assured if there is revenue, we know there are also going to be reforms to entitlements — those are going to be insolvent without action." 

Do you think that Republicans will end up changing their position on tax rates? 

I can't predict what they're going to do or not. What's very clear is that you do have to raise rates. You certainly have to [raise taxes] on capital gains and dividends. From 15 percent to 35 percent — that's a 20 point difference. There's no way to get the revenue necessary without significant changes on capital gains and dividends, to have any kind of fair tax system. For the very wealthy, it's an incredible advantage they have on capital gains and dividends. 

It is mathematically possible to reach what the president is calling for in revenue, $1.6 trillion, by raising capital gains and dividend rates, coupled with a cap on exemptions. Those two together can raise enough money to meet his requirements. And of course that would significantly boost taxes on wealthy individuals without raising the top individual rate. It is mathematically possible with the top rate on individuals at [the Bush-era level of] 35 percent. 

If you raise the rate on capital gains and dividends to 28 percent, and if you have for example a $25,000 cap on exemptions, you will raise the amount of money the president is calling for. That would be paid for by those who are the wealthiest among us, disproportionately. 

So do you think there are actually good policy arguments for raising tax rates on capital gains and dividends to raise revenue, as opposed to raising the individual marginal tax rate? 

Sure there are. The argument against raising marginal rates is that has a very different economic impact than it does to raise capital gains taxes, or to raise capital gains and broaden the base. Broadening the base is seen by most economists as more efficient, with better incentives. And when you're having [taxes on] capital gains and dividends at 15 percent, when everybody else is at 35 percent, it creates these incredible distortions in which very wealthy individuals are paying a fraction of the rate of those with far more modest incomes. You can see a rationale for doing it that way.  

If if we raise $1.6 trillion in tax revenue, as the president has proposed, does that also mean $1.6 trillion in savings from entitlement reform? If so, how would you envision that happening? 

We've got to separate out Social Security — the savings derived from there should be purely for the purpose of extending solvency of Social Security itself. Social Security has not contributed to the deficit problem. 

For the health-care accounts, the goal should be to keep health-care costs from growing more rapidly than the overall economy. That should be our goal — that would be a very significant achievement  The other mandatories in agriculture, federal employees, military health care — the Tricare program is very generous — these are all places to look for changes.  

We should not look just to entitlements for savings. We're going to have to go back to defense and non-defense for some additional savings, though they have been hit almost exclusively so far. The savings that we look to from discretionary accounts is relatively modest as compared to the revenue/mandatory side.  

Obama has already suggested raising the retirement age for Medicare. Should that be the starting point for thinking about entitlement savings? 

I wouldn't want that to be the starting point, but as part of an overall package, that's balanced and fair. Given that we now have exchanges to purchase insurance because of the president's health-care reform law, it makes it much more acceptable, much more reasonable, over a long period of time to gradually increase the age given that people are living so much longer. 

Before the exchanges in the Affordable Care Act, it would really be unacceptable to raise the age. What would people do without insurance? Now that exchanges are going to be there, that's going to be an alternative.

Just going back to the tax reform question — you don't think that we can do this through limiting tax exemptions and deductions, without touching tax rates of any kind? 

The numbers really don't work. The Joint Tax Committee has given us examples of how hard it is to make that work in any fair way. It's very clear to me. You do have to have rate increases, especially on capital gains and dividends — it's needed and fair.

 Do you think we should be trying to reform the corporate tax code at the same time? The fiscal cliff doesn't affect corporate rates, but it's something that some business groups have talked about — trying to use this moment to get comprehensive tax reform done, that includes both individual and business taxes. 

I personally do. I think that the top corporate rate ought to be lowered to approximately 28 percent. I do think that would be a fair change. Our effective corporate rate is in the middle, compared to other major industrialized nations. But our stated rate of 35 percent is highest in the industrialized world. Even though our effective rate is much lower, we are seeing the need for fundamental tax reform. I think all of this has to be dealt with as a package — it's the only way to make the trade-offs that are fair and transparent. 

How are things going with the Gang of Eight? 

It's been reported that we have resumed meeting. It's fair to say that we're quite far apart,  especially on the revenue question, and in other areas, too. We are also under no illusion that ultimately these decisions are going to be made on a much higher level than ours. Perhaps we could contribute some useful ideas to those, because of the work we've done over the last year and a half. 

To what degree do we need to promote stimulus now to boost the short-term economy, in addition to dealing with the long-term structural deficit?

The continuation of the payroll tax reduction is something on the tax side that the Congressional Budget Office says gives you the biggest bang for the buck. An even bigger bang for the buck is infrastructure spending — road, bridges, highways, schools. Some combination of an expanded investment in infrastructure, together with payroll tax holiday, gives you the most effective lift to the economy. 

How much would a package like that cost?

In a $15 - $16 trillion dollar economy, that's got to be in the 2 percent range, so  about $300 billion — if I were designing it. 

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