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Pearlstein on Tax Changes

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Steven Pearlstein
Washington Post Columnist
Wednesday, July 29, 2009; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, July 29 at 11 a.m. ET to discuss why the impact of tax changes is almost always overstated.

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Pearlstein won a Pulitzer Prize in 2008 and is co-moderator of the On Leadership discussion site.

Read today's column: Health Reform Threatened by Conservatives' Anti-Tax Fantasy.

A transcript follows.

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Fort Worth, Texas: So I know it hasn't gotten a ton of attention, but since the Post penned a (slightly comical) editorial last Friday against it, what's your take on further transparency at the Fed? Personally, I'm all for opening things up for two main reasons:

1) Contrary to what the editorial board says, this doesn't sacrifice the Fed's independence. All it does is reveal more of the Fed's decisions, with some specifics. We've all heard "trust us, we're keeping this secret because of national security" too many times to just trust quasi-government institutions, especially when they were supposed to be on top of things. Especially with Geithner going from the Fed to Treasury, the idea that the Fed isn't really a part of the government doesn't fly. and...

2) Once again, while the new transparency doesn't give Congress power over the Fed, would that be such a bad thing? I find it funny that it's OK for Congress to decide when young men and women should go to war, risking their lives and limbs, but whoa! monetary policy! that's just something you can mess around with. Not like war, which we trust that silly political Congress to deal with. Nah, leave the monetary policy to the financial whiz kids, they must know what's best for the rest of us.

Your take?

Steven Pearlstein: Any time anyone proposes to do something to the Fed that the Fed chairman and board members and regional presidents don't like, they wave the "independence" bloody shirt and claim it will diminish their ability to execute monetary policy. It is a knee jerk reaction on their part, and it often works. I'm not that familiar with the various proposals, so it may be that some of the ideas actually do threaten the Fed's independence. But the Fed doesn't want you or me or anyone else to examine those proposals. They just paint the whole effort as an attempt to undermine the Fed's independence.

The current chairman is probably sincere in that he wants to make the workings of the Fed less mysterious. But he doesn't want to lift the kimono on the open market operations; he doesn't want more tarnsparency in bank regulation, preferring the Fed's usual stance of not talking about problems at banks until after they've been fixed, if ever; and he doesn't want more transparency in the details of the Fed's extraordinary efforts to deal with the financial crisis as it relates to identifying specific assets that have been financed, the terms of which they were financed, and who got the money. Their idea of transparency is a pretty limited one.

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Dallas, Texas: Is Congress considering local taxation in their assessment of what is needed and the total burden on the citizen? It seems the city, county, state are all looking to raise money. (I have a feeling its not just here in Texas)

Steven Pearlstein: I think people here are aware that in many states, there will be an extra 10 percentage point income tax on high income earners.

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Richmond, Va.: I enjoy your work, but it seems you are a real cheerleader for Obamanomics. Where are all the jobs? Trillions and trillions in projected debt. Homeowners aren't getting much relief. Is there ANYTHING you disagree with the Obama Machine on?

Steven Pearlstein: I've criticized the president on a number of occasions, actually, but in general I support the thrust of what he is doing.

You ask a question of where are the jobs. Well, you can actually look that up at the vice president's website. And you can go to any state government and figure out how much the extra money translates into state jobs that haven't been cut. To say that the extra spending has created extra jobs is just loopy -- where do you think the money has gone? Evaporated into the air. Gone directly into the pockets of corrupt officials? No, it is being spent on goods and services, which translates into jobs somewhere.

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Virginia: Hello. I enjoy reading your articles and though I don't agree much with you, you DO make me think. So, thanks for the points to ponder!

I am one of those rich folks who would be subject to surtax and additional tax increases. Some things I hope you'll say to people who think higher taxes are OKAY: First, the number of us are shrinking. This is hardly a rapidly growing demographic. So, hoping the rich people will pay for all the spending and borrowing is highly problematic.

Secondly, as a small business owner, do you really think I am gearing up to hire new people or give nice pay raises? Heck no. Like many small business owners we are holding back on hiring, etc., worried Obama is going to raid us. Employment simply will not improve as long as there is this anti-business atmosphere out there. Meaning, "If you dare make some money, we'll get you." You can argue it all you want, but that is how business owners feel right now.

Steven Pearlstein: That's really a silly way of characterizing what the President is doing or characterizing how he thinks about it. Really. You should know better.

The President knows that to do stuff that needs to be done, including close the federal deficit, taxes are going to have to go up. And he thinks the best place to raise them is from the people who have basically collected 75 percent of the benefits of all the economic growth over the last several decades -- people with large incomes. Some of those are small businessmen, some of them are lawyers and doctors, some of them are investment bankers, some are successful investors and corporate executives. Its the old Willy Sutton thing -- that is where the money is.

I disagree with him that the middle class should be immune from a tax increase -- a modest increase for people earning more than $125,000 is to my mind reasonable. But returning the marginal tax rate to 40 percent for top income earners is not class warfare and won't tank the economy, and to characterize it as such is simply untrue.

Taxes aren't punishment. They are a way to raise revenue. And it is simply not a fact that rich people simply use their riches to hire new employees and create economic growth through their investment. They also live a lot better than other people. They can pay slightly higher taxes without giving up too much and still living better than everyone else and still living better than they did 10 years ago. That's not opinion, that's fact. Obviously, they might prefer not to. But please don't couch this as something that's bad for the economy. It's bad for you, if you want to characterize it that way.

I'm sorry business owners are feeling pressed right now. I have two sisters in that category. But don't blame that on the tax code. Remember, you only have to pay income taxes if you make a profit. A lot of businesses aren't -- and that's the problem, not taxes. The reality is that the economy doesn't need all the businesses it now has, there is too much capacity in many industries and some of them will have to shrink or close their doors as a result. Until that happens, everyone in an industry suffers because of a lack of pricing power. All businesses think theirs is the one that should survive. Obviously, some of them will be wrong. That's the harsh way in which markets operate coming off an expansion that was fueled by unsustainable amounts of government and household debt.

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Baltimore, Md.: Steven: The whole health care reform "process" has been a depressing spectacle, highlighted by Senator DeMint's comment about scuttling reform so the Republicans could "break" President Obama. But I am disappointed in the President as well. I realize no modern executive wields the kind of power LBJ did, but the aura of cool detachment the president maintains while this crucial effort founders in Congress is very disappointing to me. I can't help but wonder how this might be going if Senator Webb from Virginia were in the White House. The one thing he has no lack of is passion. Webb might have challenged DeMint to a duel.

Steven Pearlstein: I agree the president should have rolled up his sleeves and begun to influence the congressional process earlier than he did. He could have helped to make the House bill less expensive and liberal, and he certainly didn't need to pull the rug out from under max Baucus with his rejection of any taxation on outsized health benefits. But don't confuse his coolness for lack of engagement now. He's on the phone personally with everyone all the time, and bringing groups up to the White House, and putting his chief of staff on virtually full-time health insurance duty.

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Washington, D.C.: Pearlstein: "To say that the extra spending has created extra jobs is just loopy -- where do you think the money has gone?"

Um, what? Want to try that again?

Steven Pearlstein: Sorry, I meant to type: To say it HASN'T created jobs.... Thanks for catching that.

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McLean, Va.: Conservative Republican here. Anti-tax, but not one who peddles the small business tale.

First off, I'll acknowledge you have a significant amount of credibility on tax questions, due to your consistent argument against raising the aggregate amount of taxes above a certain rate. I'd also add that even when I disagree with you, I really enjoy your columns and find them intellectually challenging.

With regard to your column today, my opinion is that the small-business argument is simply a way for Republicans to package their basic argument, which is something a little different. Conservatives don't hate taxes simply because they want to keep that money. It's more of a philosophical opposition to sending that money to an organization that uses it so inefficiently. The government is inherently the worst mechanism for any funds, simply because of the necessary bureaucracy through which the funds must pass. Obviously, there are some things that cannot be done in the private sector -- say, printing the currency. So I believe in paying taxes that go toward that sort of thing. But the list of things that the government must do is pretty short. When you get past that list, then it becomes distasteful for taxpayers to send 100 dollars to the government and get 60 dollars worth of service in a field that the private sector might have yielded 80 dollars worth of service.

In the context of health care, the standard rebuke from the left is to ask: Do you really think that the government is going to run a MORE inefficient system than the insurance companies are running now? My answer, fully acknowledging the current inefficiency, is: Yes. I'm quite confident that it will.

Steven Pearlstein: You have the legitimate conservative argument against taxes, which is that government doesn't always spend taxes wisely and you would prefer to use the money to buy things of your choice and trade away some of the services provided by government.

That is true for any individual -- nobody things the way government spends money is perfect. I'd give up star wars, maybe you'd give up housing subsidies and Joe over there would give up the entire Medicaid program. The point is that most of the things government does can only be done by government, by collective action, and so if a majority of the people want to spend their money to do so, then they can compel the rest of the country to pay for that as well. So for any one individual, some amount of what government spends will be wasted.

You could reduce what government spends by reducing taxes, but you won't necessarily know that the spending that gets cut would be the spending you would prefer. Until you know that, you really don't know whether you'd be better off with lower taxes, would you?

Now you may also feel that government isn't particular efficient in the way it spends money -- that it could achieve the same results for less. That's undoubtedly true. But that is also true of most big corporations and non-profits. I concede government might be a bit more inefficient than those, and we should work on that. But let's get the efficiencies first, and then return them to the taxpayers once realized.

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Baltimore, Md: With the various analyses of the current health care proposals that project their alleged costs, what is the cost of our current health care system, particularly regarding the uninsured, who visit emergency rooms because they can't afford a doctor, who don't receive pre-natal care and so give birth to (expensive) underweight babies, etc? Do the analyses of Obama's plan include the savings in taxpayer costs that his plan would provide by more timely addressing and preventing health problems?

Steven Pearlstein: The costs for care provided to the uninsured are built into private insurance premiums and fees, for the most part.

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Columbia, Md.: I find the examination of the impact of taxes to be extremely interesting. U.S. taxes have changed mightily in the past 50 years with the rich being taxed much less yet still squealing about every dollar. Yet, the U.S. seemed to be fairly prosperous with higher taxes on the rich. Every time that raising the minimum wage has been discussed, opponents would howl that it would harm small business and there would be fewer jobs, yet that never has happened. I'm sure certain specific taxes have an impact, but does taxing the wealthy more harm the economy? Maryland, often criticized for high taxes, was recently noted as having the second largest number of millionaires of any state. Hmm.

Steven Pearlstein: Indeed.

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Washington, D.C.: So where is the Republican Plan for health care reform?

Kudos for your excellent article this morning!

It seems the GOP wants to be able to switch arguments against health care reform at will, arguing as convenient that "it costs too much" and immediately afterwards, "it doesn't reimburse at high enough levels".

Would actually putting a plan out for review cause the GOP claims to be shot down?

Steven Pearlstein: Their arguments against are often rationalizations. They don't want health reform, so they find things to criticize about it, except that they offer no credible or politically realistic alternative. That's why they call it the minority party.

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Centreville, Va.: From your column this morning: "What's needed is not more money but the political will to lower the costs of the health-care system while redistributing its benefits."

Without more specifics, this sounds a bit facile. I apologize if I've missed it in previous columns, but could you flesh this out a little? I hope that this is the type of thing that can be done, but I'm not sure how to get it done. Thanks!

Steven Pearlstein: Well, you have missed quite a number of columns. Some people get too much health care that is unnecessary, while others don't get enough. Doctors are paid more than they need to be, and than they are in any other country. Hospital profits are higher than they need to be. Insruance profits and drug company profits, too. Redirecting that money to subsidies for low income people so they can buy health insurance is what health reform is about. Not surprisingly, doctors don't think their pay is too high, hospitals and drug companies and insurers don't think their profits and executive salaries are too high and people who get too much health care think it is just right, so they naturally oppose a process that would do that.

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not Harvard...: Your piece today brings a welcome bit of reality to the tax discussion. It is refreshing to see this in the Post.

Yesterday, Martin Feldstein got op-ed space in the Post to present the opposite perspective. The GOP and their pundit economists claim that cutting tax rates (like the Bush tax cuts) raises revenues and raising tax rates cuts government revenues. This has been repeatedly shot down with actual facts. What is your response to Feldstein's claim that "The result [of higher marginal tax rates for the rich] would be larger deficits and higher taxes on the middle class"?

He says, "Although the president claims he can finance the enormous increase in costs by raising taxes only on high-income individuals, tax experts know that this won't work. Experience shows that raising the top income-tax rate from 35 percent today to more than 45 percent -- the effect of adding the proposed health surcharge to the increase resulting from letting the Bush tax cuts expire for high-income taxpayers -- would change the behavior of high-income individuals in ways that would shrink their taxable incomes and therefore produce less revenue. The result would be larger deficits and higher taxes on the middle class."

Steven Pearlstein: Marty did not repeat the old argument that tax cuts pay for themselves in terms of government revenue. That's the good news.

He argues that raising marginal rates reduces economic growth and increase tax avoidance. There is some plausibility to that argument, particularly when you raise taxes for a high amount to a very high amount. But in the US I don't think we're there yet. I agree that letting federal rates get much above 40 percent begins, when you add in state taxes, to get to that tipping point where people do begin to actively look for ways to avoid paying taxes, or avoid making very risk investments, some of which pay off. But I don't agree that going from 35 percent to 40 percent is going to have a big effect, particularly if the money is used as part of an effective health care reform plan that in the long run will make for a less costly and more efficient health system. In fact, if you compare the dead weight loss, as Feldstein would put it, of higher marginal rates to the dead weight gain of reforming the health system and having a healthier country, I think you'd find that the economy would be better off, not worse off, and tax revenues would be higher, not lower, by using a reasonable amount of higher taxes to finance reform.

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Taxes are needed for revenue: I don't understand the big angst over raising taxes to 40% on certain levels of income. It is still not 40% of gross income, it is not like all deductions are being eliminated.

Steven Pearlstein: Well, its 40 percent of the last dollar.

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Fairfax, Va.: My concern about paying for health care at least partly through this surtax is what happens to all this debt we're taking on? If we raise taxes for this vast, new health care expenditure, doesn't that make raising taxes to help get the deficit back in line (along with other things like entitlement reform) unwise since we'd be getting close to 50% rates by that point? Thanks - really enjoy your column.

Steven Pearlstein: Yes, that's the other reason for not using the surtax to pay for health reform -- we need that money for the other priority, deficit reduction.

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Atlanta, Ga.: Steven: Why not tax the 40+% of people who pay no taxes at all? And no, they don't pay payroll taxes, because those are refunded from them via tax 'credits' (or, um, welfare).

That's how Obama was so successful, right? Getting a little bit from a lot of people? Why keep taxing the 'rich'? (I am far, far away from earning $350k, let me tell you). It's getting tiresome.

When Greenspan testified to Congress, after the bush tax cuts, he talked about how revenues went UP from expectations. Congress was baffled, but, um, it was what was happening.

And check out this Fortune Story before you say it's those people who can 'afford' it. They're tired of paying all the time. And that money isn't so much in San Francisco or New York. Really.

Steven Pearlstein: The 40 percent of households that pay no income tax aren't doing so great. I actually agree with you -- I think it is important that they pay at least a little income tax, because its part of citizenship. But in truth they don't have much money left over after just paying for the basics. And their incomes haven't gone up, as a group, in a long time.

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New York, N.Y.: Steven, I am always puzzled by those who say that small business will hire if their tax burden is reduced. I have spent most of my 30-some professional years working for businesses of under 50 employees, and I can tell you that the small business owners I worked for hired only when market conditions warranted it. When the orders start coming in again, they'll hire an extra person. When health insurance costs come down, maybe they'll hire two. But hiring someone because you got a tax break just makes no sense. Thanks.

Steven Pearlstein: Thank you, thank you, thank you.

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Fairfax, Va.: Appreciate your comment sense outlook on all of this. My opinion -- if I could make a million dollars a year, I'd be pleased as punch to write a check to the government for 400,000. Last I checked, no one was proposing a marginal tax rate of 100%.

Steven Pearlstein: Indeed.

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Princeton, N.J.: The overall tax rate of the US is 26.2%, which is lower than any other industrialized country except Japan which is 26% (I think).

Steven Pearlstein: Thanks, Leonard.

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Washington, D.C.: "Well, its 40 percent of the last dollar."

Plus state and, in some cases, county taxes. So you are looking at 50 percent, or in the case of NYC, more.

Steven Pearlstein: That's right, which is why I think 40 is probably as high as we should go.

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Reston, Va.: Steve, I'm a long time reader of yours and though I lean more libertarian and Republican than you, I've always thought you were reasonable and made me think. Since Obama has come in power and you won your prize, I've detected a big shift left by you. What gives?

Steven Pearlstein: The prize has nothing to do with anything, I'm fairly certain about that. You probably didn't know I am as liberal as I sometimes can be because I just didn't write much about economic policy during the Bush years. I just didn't take them seriously enough to comment on what they were doing, which wasn't much until the financial crisis came along.

I'm actually not that reliable a liberal -- just as the liberals, they will tell you that. I think of myself, actually, as a radical centrist. On taxes, for example, I'd rather close loopholes which are economically distorting and not raise the marginal rates. But sometimes the real world presents us with less than optimal choices.

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Reston, Va.: Off the top of my head, I can't recall who said this, but one of the billionaires noted that if he had lived isolated in a third world nation - he would be dirt poor. He noted that since third world nations lack the infrastructure to make money, you can't get rich.

Thus, personally, I have felt that those who benefit the greatest from society, should feel some obligation to fund and perhaps expand the system. So a progressive tax code makes sense to me.

But that is just me. Societies can be engineered to function in many ways.

I think that if a society can be engineered to function with a large, healthy, optimistic middle class (a nice bell curve), then the quality of life would be rather pleasant for just about everyone.

Steven Pearlstein: That is the classic liberal argument for a progressive tax system in an advanced industrial country. And it is a good one. The only thing is that it doesn't answer the question of how progressive, which remains a judgment call.

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Princeton, N.J.: View from the left:

1. During the period 1946 - 1973, taxes were much higher. Marginal rates averaged 70%; they were 93% under Eisenhower. The economy was better than what we now have. For example, median wages went up 50% during this period, and only 25% since then. Also, I recently saw a graph of the national debt as a percentage of the GDP from 1946 to the present. It started high, went straight down until 1973, and then flattened out and in 1980 made a sharp turn and went straight up except for a wiggle during the Clinton administration. CEOs earned 50 times what their workers earned; it is 500 times today. Starting in 1973, the percent of wealth and income taken by the richest 10%, 1%, and 0.1% has gone up at an ever increasing rate

2. We are now told that taxes were too high during the Clinton administration, and it would be terrible to go back to them, but the economy was better then than what we have now. For example, 20,569,000 private sector jobs were created during Clinton's terms while Bush created 417,000 with 2 trillion in tax cuts.

3. If you look at other countries, you will see that many have much higher taxes, but also higher growth rate. For example, our total tax rate is 26.1% while Sweden has a total tax rate of 50.2%, the average per capita growth in the GDP 1995 - 2005 was 2.1% for the US and 2.6% for Sweden. Spain had a 50% higher tax rate and 50% higher growth. Japan, on the other hand, had a lower tax rate and its growth was less than half of our growth.

Steven Pearlstein: Again, thanks, Leonard.

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Manhattan, Kan.: You said in an editorial today that: "The bulk of the proposed surtax would be paid by doctors, lawyers, investment bankers, corporate executives and people with lots of investment income."

How will the income surtax affect their behavior? Will they continue to invest as much of their earnings? Are investments good for economic growth?

Steven Pearlstein: The tax will change their behavior in that they'll have a bit less money to spend on vacations and new cars, or less money to invest in a venture capital fund or the stock market or Treasury bonds. They'll have a bit less wealth and less after-tax income.

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Washington, D.C.: To the lefty poster who said DeMint said this would break Obama, I encourage him and all other people who only heard that one small part of his speech to read the full thing. He said that by breaking Obama on this, we can start talking about real health reform proposals. Such as, what you want to do, tax those outsized health benefits.

Steven Pearlstein: You'll pardon me if I say that Jim DeMint's idea of health reform is thin gruel. It will do little toward moving toward universal coverage, little to bend the cost curve on health care expenditures and little to improve the quality of care and the efficiency of the system. It will also be regressive in its effect. As a health reformer, Jim DeMint is a fraud, and for the last 10 years he and his party have done exactly zero about this huge problem for the economy and for the American people. Nothing. Nada. His ideas also are not supported by a majority of the elected people in Congress, so in addition to being inadequate in a policy sense, they have no political viability. Other than that, though, they're swell.

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Alexandria, Va.: Hi Steve,

Every column I read, you recommend higher taxes as the solution to everything. How about streamlined services? I'm not talking about cutting police and firemen, but rather an honest look at programs to find efficiencies.

Steven Pearlstein: Actually, there are way too many firemen in this country. And there's plenty of waste in government and things government is doing that are of low value that we should eliminate. I'm all for that and could give you a long list of targets. Want to start with public pensions.

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Austin, Texas: Enjoyed the article this morning, Steven. On the topic of Republicans' tactics of first claiming taxes on the rich are bad because they slow trickle-down benefits and now the claim that taxes on the rich will also hit small business...Do they know this to be a false argument (in which case they are flat-out lying to promote their agenda) or do they sincerely believe this is true (and as such are merely wrong)? If the latter, why are they not more educated on economics by their staff? If the former, why are they not called out on this more vigorously?

Steven Pearlstein: Actually, I think they probably think it is true, but won't listen to anyone who tries to explain that it isn't. Its a sort of well meaning but stubbon stupidity about economics.

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Steven Pearlstein: Got to go now. Thanks for a good discussion. "See" you next week.

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