Ezra Klein: Let me begin with a technical question. How do you avoid a massive tax cliff as people move from making a taxable income of $999,999 to $1,000,001? Because if the rise is too steep, the bill will encourage tax evasion.
Sheldon Whitehouse: Two things. I suppose I could put up with a certain amount of that because it’s a lesser problem than having people making $270 million a year paying a lower tax rate than the plumbers who come to fix their sinks. But the more specific answer is that in the course of our discussions over the bill, that problem has emerged, and we’ve adapted the bill to have a phase in between one and two million. So you pay a portion of the tax the Buffett rule adds as you go up the line between one and two million and it doesn’t kick in fully until you get to two million.
EK: So if it’s not 30 percent, what’s the minimum effective tax rate someone making $1,000,001 would pay?
SW: It’s hard to do the math on that because it would be highly specific to their situation. If they were paying 18 percent now, and if they only went over one million by one dollar, they would be 18 percent plus one one-millionth of the Buffett rule adjustment. And if they were one dollar short of two million, they would pay the full 30 percent minus one one-million of the full adjustment. So there’s a ramp.
EK: In addition to raising taxes on the very rich, the Buffett rule radically simplifies them. So why only focus on the very rich? Why not go for full tax reform and simplify the code for everyone?
SW: I would prefer to do that and try and redo our complicated and to a degree corrupted tax code. In order to get that done, I think it’s an important marker to have this effective alternative minimum for the really high-end folks who have been able to game their income as capital gains. So even if you’re going the large tax reform route, this bill and its principles will help inform that discussion and get us there.
EK: The other argument you hear on that front is that by flattening and raising the tax code for the rich, you give them an incentive to fight for, rather than against, tax reform going forward.
SW: That’s the other side of it. If you’re not going to do comprehensive tax reform then you need to do this because I would say it’s the most outrageous loophole in the tax code. But it has the added benefit that if we get it done, it eliminates one of the incentives for some of these super high-income folks to use their political influence against tax reform.
EK: All of the attention has been on the Buffett rule. But in the State of the Union, President Obama also expressed support for Sen. Tom Coburn’s idea to wipe out deductions and tax breaks for people making more than a million dollars. And in his State of the Union response, Gov. Mitch Daniels made much the same suggestion. So it seems like there’s a possibly large area of agreement that’s being mostly ignored here. Are their discussions on this that I’m simply missing?
SW: I have not heard a lot about it. It’s a lot more vague and complicated as a notion. Tom Coburn goes beyond the tax code into a lot of other provisions in the farm bill and so forth that provide benefits of various kinds to people who are making a million and over. In principle, a lot of people are sympathetic to the idea, but it hasn’t been defined legislatively. And second, you can take deductions away from Warren Buffett till he’s blue in the face, but he’s still paying the low rate, less than his secretary and plumber and driver.
EK: For the last two decades, Republicans have taken a very dogmatic stance against taxes. Most of them have even signed a pledge promising to oppose new taxes in any and all circumstances. But more recently, Democrats have begun pledging to never raise taxes on anyone making less than $250,000, and now they’re really focusing on people who make more than $1 million. So with Republicans opposing taxes in all circumstances and Democrats pretty much confining themselves to arguing for a form of tax fairness, I worry there’s no one left looking at taxes as a revenue measure, and asking what should be the basic question: what level of taxation do we need to fund the government we think we want, and what’s the best way to get there?
SW: Kent Conrad is fond of pointing out that in God knows how many years, 50 years or something like that, America has never had its budget in balance with revenues less than, if I remember correctly, 21 percent of GDP. So if you’re looking at the times in the past when we’ve gotten our act together and gotten our budget balanced, you come in at 21 percent. If you’re substantially below that, you’re doing protracted deficits or cutting very significantly into spending. So I think it is an important point, but in the meantime, I think it’s important that we restore some confidence in the tax code on the part of the American public by getting rid of the egregious loopholes.
EK: It also seems to me that Democrats have let themselves get locked into the frame of the Bush tax cuts. Rather than using their expiration as leverage for tax reform, or a very different composition of tax cuts, Democrats have promised to keep almost all of them, but try and get rid of the ones for the rich. That seems like a pretty narrow and backwards-looking approach to tax policy.
SW: I think you’re right that during the course of this year we have the opportunity to develop a more coherent and broader strategy for taking advantage of the January 2013 sequestration and tax changes, and, frankly, behind the scenes, I’m trying to influence that discussion as we try and settle on what the strategy and the proposal to come out of that will look like.