Politics: Economic Recovery
With John Berthoud
National Taxpayers Union President
Friday, May 16, 2003; 1 p.m. ET
Senate Republicans secured just enough votes Thursday to reduce and then suspend taxes on stock dividends for three years, reviving the centerpiece of President Bush's formula for stimulating a languid economy. The House approved similar legislation last week that would reduce taxes by $550 billion over 10 years but did not entirely abolish the dividend tax. Lawmakers will meet next month to merge the two bills.
John Berthoud, president of the National Taxpayers Union, was online to discuss tax cuts and stimulus plans in Congress.
The transcript follows.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Washington, D.C.: Good afternoon. Can you tell us a little bit about the National Taxpayers Union?
John Berthoud: Good afternoon!
We have a lot of excellent questions. Let me start with this basic one.
Founded in 1969, the National Taxpayers Union (NTU) is America's largest taxpayer organization with 335,000 members in all 50 states. NTU is a nonprofit, nonpartisan 501(c)(4) organization. Through lobbying, research, advertising, media work, and our NTU Rates Congress scorecard, we work to influence Congress and America's state legislatures on behalf of America's taxpayers.
The National Taxpayers Union Foundation (NTUF) is the research and educational affiliate of NTU. Founded in 1977, NTUF publishes research, collects data, and educates the public with respect to fiscal and economic policy. Two of our flagship programs are BillTally and VoteTally which report the amount of dollars in new spending that Members of Congress propose and vote for.
To learn more, visit our website: www.ntu.org.
Also, NTUF is hosting our National Taxpayers Conference this June here in Washington - more info is available at www.ntu.org.
Washington, D.C.: I don't understand how raising the national debt to reduce taxes is fiscally responsible. I hear a lot about job creation, but didn't Bush have a 1.35 trillion dollar tax cut in 2001? Didn't we lose about 2 million jobs since then? I just don't see any jobs being created by this. People will invest their money where they get the best return -- which may or may not mean investing anything in the United States.
John Berthoud: Opponents of this very modest tax relief package have tried to frame it as "fiscally irresponsible." The reality is that most Congressional opponents of the tax cut just want to keep the money in Washington to spend it.
NTUF's Demian Brady did a study using our BillTally tracking system. He looked at the legislative agendas (the bills sponsored and cosponsored by Members) of opponents and supporters of the tax cut bill. Senators who voted to slash the tax cut in half (out of "concern for the deficit") had agendas that, on average, would raise spending by $89.9 billion per year.
The ten year cost of these agendas ($899 billion) would exceed the size of even the original Bush tax proposal. And that increase in spending is almost 3 times the size of yesterday's tax cut bill.
If we're worried about deficits, we should focus on the true culprit - spending. Even with the recession and the 2001 tax cut, Washington today still has over 30 percent more money (above and beyond inflation) than just 10 years ago. 30 percent! The federal government has deficits not because Americans aren't paying enough in taxes, but because Congressional Republicans and Democrats have been spending too much.
Washington, D.C.: Hello!
The propaganda is that this is a tax cut. It's not, it is merely taxes deferred onto future generations through massive borrowing. It is like claiming that using credit cards is "saving money."
I hope the NTU is not shilling for this subterfuge.
John Berthoud: Sorry to disappoint you, but yes, NTU is a strong supporter of tax relief and a strong supporter of the President's tax cut package.
The average American pays more in taxes than for food, clothing, shelter, and transportation combined. This tax relief package goes a small way towards addressing that unfairness.
If we're worried about future generations - and we should be - the two things we can do today are a) go after the real culprit behind federal deficits which is runaway spending, b) maximize economic growth.
We can maximize economic growth through economically wise provisions such as ending the double taxation on dividends and lowering marginal tax rates (which are a disincentive for economic activity.
Keeping the tax burden on families, investors, and workers excessive just to feed the spending appetites of reelection-crazed Members of Congress doesn't make economic sense for people today or for future generations.
Mt. Rainier, Md.: Okay, fine, if we're not going to bring the taxes in, then start cutting the spending. Creating a huge hole is irresponsible. We elect these people to make the hard decisions, so they'd better get at it.
Then we'll find out just how desperately we want those programs and if we're willing to pay for them. The conservatives are deathly afraid that we DO want to pay for them.
John Berthoud: Much of Washington's spending profligacy has come at the behest of special interests. Obscene farm subsidies and much of the nonsense spending that oozes out of the Department of Commerce come to mind as two quick examples.
So, NTU, at least, is not afraid of a debate on these matters. I think a full and fair debate on much of the federal budget would be a very, very good thing.
Silver Spring, Md.: Why do politicians say that the government can't "afford" tax cuts? Will these tax cuts cause the government to stop functioning? Are they really that large?
John Berthoud: NTU's Paul Gessing did a very nice study of the size of the tax cut (available on our website - www.ntu.org). He puts the 2001 and 2003 tax cut proposals in the context of the entire federal budget and the U.S. economy. By those measures, what Congress is debating is actually very modest.
As a share of Gross Domestic Product, the President's original $726 billion tax cut plan would have reduced taxes by an annual average of just 0.44 percent over ten years. Hardly draconian.
Even combined with the 2001 tax cut, President Bush's combined 2001 and 2003 proposals are less than half the size of President Reagan's 1981 cuts (3.3 percent of GDP vs. 1.6 percent of GDP) and are smaller than President Kennedy's tax cuts (which were 2.0 percent of GDP).
And remember, when we use the word "afford," it is the people's money. The question is not whether Washington can afford to return to the people what they rightly earned, but whether the people can afford our bloated federal government!
Washington, D.C.: Your organization favors reduced -- but fair -- taxes for everyone. Do you realize that Fannie Mae and Freddie Mac only pay Federal income taxes? They're exempt from state and local business activity taxes. Yesterday Pete Stark (D-Calif.) introduced legislation that would repeal that exemption. Although it increases taxes on Fannie and Freddie, it provides fairness to their competitors who pay state and local income tax and states could relieve individuals of taxes elsewhere. Would you support that bill?
John Berthoud: Fannie and Freddie claim that their exemption from state and local income taxes is only fair since otherwise, they'd have to pass along the costs to homeowners. That's partly true, although some of that cost would be passed along to Fannie and Freddie employees (including their many, many six-figure salaried lobbyists and public relations people). And also remember that taxes on any business ultimately hurt that business's consumers and workers (this isn't just true for Fannie and Freddie). It's hard to see any reason why they should be tax-exempt when their competitors are not.
As I've made clear in previous questions, we think the aggregate tax burden in America is too high. So we couldn't support Rep. Stark's bill that would add to the tax burden.
That said, it certainly would make economic sense if we could end the exemption as long as every single dollar of those new tax revenues was returned to homeowners in the form of property tax relief. With skyrocketing property taxes across America, homeowners are in much greater need of relief than Fannie and Freddie (organizations which enjoy great special benefits courtesy of the federal government). And if we want to have government tax policy help homeowners, this swap I'm suggesting (ending the tax exemption for Fannie and Freddie and having those dollars turned into property tax relief for homeowners) would be a much, much better way to do it.
Fannie's and Freddie's gaggle of lobbyists like to crow that all the special breaks they get from Washington are of great benefit to home buyers, but the reality is that these breaks are very inefficient in terms of delivering help for homeowners.
Rockville, Md.: If the current tax bill is passed and signed into law the foreign earned income exclusion will no longer exist, how are people to adjust for this change mid way through the year?
John Berthoud: The Senate has added a number of tax increases into their package, including one that would end the exemption on taxation of the first $80,000 in income earned overseas, if people already pay tax on that to a foreign government.
During next month's Conference Committee on the final tax bill, NTU will work hard to kill all the tax increases that the Senate has just passed. If part of the purpose of this tax bill is fairness in the form of ending double taxation, it's hard to justify adding a new type of double taxation!
If the final bill includes the Senate's provision, the impact on your current year taxes will depend on the effective date of the new tax.
Arlington, Va.: I've noticed from your responses -- which I assume are based on NTU's philosophy -- that you haven't mentioned the big lie of both this tax cut as well as Bush's earlier one: that the tax cut has in absolutely no way helped the economy. Every important economic indicator has suffered since the first Bush tax cut -- in particular, the huge loss of jobs -- and the administration has had a difficult time finding many economists that believe the latest tax cut will do any better. Wouldn't you agree that NTU in its zeal to support tax cuts (and justifying it by telling us how much waste there is in government) is failing to look at the bigger (and far more important) picture?
John Berthoud: Numerous economic studies have clearly shown that the larger share of the economy that a government takes, the slower that economy will grow. High taxes = lower economic growth. Lower taxes = higher economic growth.
You can see this clearly in the states - many of NTU's and NTUF's publications present research showing that higher-taxed states have seen lower economic growth. States that avoided higher taxes during the last state budget crisis (about a decade ago) had much higher economic growth over the subsequent decade.
Proponents of tax cuts don't argue however that they are the only variable that determines economic growth. Obviously, the tremendous economic shocks to the U.S. and world resulting from 9/11 have had a tremendously adverse impact on the economy.
The 2001 tax bill and this tax bill will mean higher economic growth - and more job creation - than would otherwise have been the case.
Baltimore, Md.: The federal government is in deficit. The states are in deficit -- even worse. If the federal government wants to stimulate demand, isn't the best solution to just aid the states? Two birds with one stone, right?
John Berthoud: The federal government can help the economy best by returning to Americans more of the money that they earned in the first place. And by removing some of the most economically-debilitating elements of our Tax Code, such as high marginal tax rates and double taxation of dividends.
The states most definitely do not need the money. Do they have less money in 2003 than they projected 1 or 2 years ago? Sure, but by almost any historical standard, states have an incredible amount of revenue. The problem is that they - like their federal counterparts - wildly overspent in the 1990s and now don't want to make the choices to cut programs.
A recent Cato Institute study showed that the states would currently have a $100 billion surplus if during the 1990s they had held their expenditure growth to the rate of population and inflation growth.
Colorado Governor Bill Owens is absolutely right when he said, "The states don't have a revenue problem, they have a spending problem."
Boston, Mass.: You forgot to mention in your little intro that NTU also says that taxes are "your money and the government should return it to you" and that your organization advocates the abolishment of the IRS.
Sounds as though NTU is an arm of this Republican administration. Please provide full disclosure next time. Thank you.
John Berthoud: Five minutes of research through our website would have set you straight on your claim that NTU is an arm of the Republican Party. If you'd bothered to do that, you would have seen numerous instances where NTU has dumped on Republicans.
A quick "for instance" list would include:
1) we've repeatedly slammed Congressional Republicans for spending too much (see some of my previous answers today!),
2) we've beat up on Republicans in New Jersey (including Christie Whitman) for raising taxes,
3) we repeatedly slammed Republican Governor Don Sundquist in Tennessee for his awful proposal to institute an income tax in that state,
4) we've been criticizing Republican John Rowland this year for his new-found addiction to tax hikes,
5) we criticized John McCain heavily several years ago when he tried to institute a massive federal tobacco tax.
And we've had lots of good things to say about Democrats when they do the right thing. A lot of Republican Governors could learn a thing or two from Democrat Jim Doyle of Wisconsin who is holding the line on taxes.
Washington, D.C.: Well if government is spending too much (and spending money foolishly as it is -- I know -- I work with them). What do you propose to eliminate? It isn't enough to 'cut spending,' there needs to be proposals on what to cut, otherwise it becomes a rhetorical statement. Does your organization have anything they think could be eliminated?
John Berthoud: In so many ways, and in so many places, we need to cut back.
I've mentioned farm subsidies. I've mentioned corporate welfare in the Department of Commerce.
But beyond those obvious targets, we need to look at spending in the politically popular areas too.
Teacher unions have led the drumbeat for an endless upward spiral in spending on K-12 education. Take my home state of Virginia for instance. In 1978-79, Virginia spent $4,325 per pupil (in 1999 dollars). By 1998-1999, Virginia was spending $6,044 per pupil. This is a 40 percent increase in per pupil spending over 20 years (again, this adjusts for inflation).
We need to stop focusing on inputs - and stop throwing money at schools - and look at other ways of improving education (vouchers and charter schools, for instance).
Let me quickly mention one other area: while it's a small amount of money, NTU lobbied hard for Congress to forego their hefty pay raise last year. For all of their big talk about making sacrifices for the War on Terrorism, this didn't seem to extend to their own hefty paychecks, as they went ahead and took the money. Shame on them.
Boston, Mass.: Going back to the Internal Revenue Code as it existed on 1/21/01, what tax cuts would you have said should have been the highest priority for economic efficiency and fairness given, say, $2 trillion in revenue effects over 10 years? Because we aren't politicians, assume none of the silly phasing tricks to make the numbers fit the PR campaign, like bringing back the estate tax or dividend tax after they have been phased out or the backloading of cuts so the overall size of the package meets the demands of "moderates." Should we have focused on the alternative minimum tax? Various payroll taxes? How does an estate tax reduction compare to aid to states that cut property taxes?
John Berthoud: Maybe the top two items on my list would have been:
1) cutting top marginal income tax rates - high tax rates reduce the incentives to undertake productive activity (work, investment),
2) ending the double taxation on dividends.
Of course, an even better approach to improve our tax system would have been fundamental reform. For instance, entirely ending the income tax and replacing it with a national sales tax. One such proposal is the FairTax.
With the FairTax, we would entirely end taxation on productive activity and thereby spur long-term economic growth.
We also needlessly spend tens of billions of dollars annually on our tax system (compliance costs, etc.) These would go away.
Arlington, Va.: Does your organization support closing the loop holes that enable gigantic corporation like Enron to not pay any taxes at all?
Isn't this "double taxation" argument really a red herring? My income is taxed and then I pay sales taxes when I buy things. Isn't that double taxation? Don't we tax "transactions" and not "money?"
John Berthoud: All corporations, including Enron, should conduct their business - and pay their taxes - in accordance with the law.
In terms of corporate income taxation, we'd like to see lower rates and fewer deductions. This would be of great benefit to the U.S. economy.
But I wouldn't get too worked up about corporations not paying enough in taxes. Remember, when any corporation pays taxes, that tax bill is passed onto workers, shareholders, and customers. By "sticking it" to corporations (as many propose), we're actually just hurting ourselves.
Omaha, Neb.: When can we expect some kind of real tax reform? Taxes seem so complicated these days. Why can't we have a flat tax or something like it? I think it would be better for the economy and would be easier for average people to understand and deal with.
John Berthoud: Amen.
Fundamental tax reform would be great for the economy, great for Americans. Of course, it's not so good if you're a tax lawyer!
NTU will continue to press for fundamental reform of our Tax Code in the coming years.
John Berthoud: We've run out of time.
Thank you for the excellent questions and thanks to washingtonpost.com for providing this forum.
For more information on the National Taxpayers Union, please visit our web site - www.ntu.org.
While you're there, I'd invite you to join 70,000 other Americans who are now on our email list. It's free! Or even better, go to our member sign-up page and join the 335,000 Americans who are members of NTU.
© Copyright 2003 The Washington Post Company