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Raising Revenues Or Taxes — What's The Difference?

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Transcript

AUDIE CORNISH, HOST:

We're going to dig into some of those policy differences now between Republicans and Democrats. When it comes to reducing the deficit, both sides insist it's time for compromise. But President Obama says tax cuts for the richest Americans must end.

PRESIDENT BARACK OBAMA: When it comes to the top two percent, what I'm not going to do is to extend further a tax cut for folks who don't need it.

CORNISH: So, raise taxes on the rich. Republicans say don't raise taxes on anyone. But here's House Speaker John Boehner explaining there is something Republicans are willing to raise.

REPRESENTATIVE JOHN BOEHNER: Because the American people expect us to find common ground, we're willing to accept some additional revenues via tax reform.

CORNISH: But what's the difference between raising revenues and raising taxes? Either way, don't Americans effectively give more money to the government?

Here to help us out with those questions is Adam Davidson of our Planet Money team. Welcome, Adam.

ADAM DAVIDSON, BYLINE: Hey, Audie.

CORNISH: So how much of this is an issue that economists actually care about? I mean, precisely how the government increases taxes.

DAVIDSON: This is a big, big issue for economists. We at Planet Money recently surveyed a bunch of economists from the far left to the far right, and everywhere in between. We were looking for something that all these economists agreed on. And the number one thing that they all agreed on is the best tax system is one that has very few loopholes, very few deductions; that has set rates that everyone expects to pay, and not lots of special gifts to certain special interests or other shifts that affect different groups differently.

CORNISH: But what's the difference between a dollar raised through a loophole being cut versus a dollar raised by raising the tax rates?

DAVIDSON: The issue is politics. These tax loopholes are generally the outcome of some special interest persuading Congress to support their cause. And what we want as an economy is companies and people, you know, working hard to come up with creative ways to be more productive. We don't want companies and people working hard to lobby government for special tax cuts.

CORNISH: So, Adam, you've talked about this in terms of a long-term economic policy. But what about the short term, I mean, does it really matter for 2013?

DAVIDSON: I think it does matter, yes. I mean - so, for example, economists as a group, if there's one deduction I think all economists or many, many economists hate the most, it's the mortgage interest tax deduction. The feeling is that that is a gift to the rich because the more homes you own, the wealthier you are, the more likely you are to take advantage of those tax deductions. It creates an over-reliance on the housing industry, which, as we know, is not always a healthy thing for an economy.

So if economists could get rid of one deduction, it would probably be the mortgage interest tax deduction. It also happens to be the single most popular deduction and politically is pretty much impossible to get rid of.

But let's say they did get rid of it. That might make for a healthy economy over the coming decades. But the immediate effect would be to make every home in the United States worth a little bit less, because without that interest deduction fewer people are going to buy homes; people are going to buy cheaper homes than they would otherwise. And so, with less demand, all homes will be worth less.

Well, that would be very violently destructive, potentially, to the economy overall. See, the tax system has such a big impact on so much economic activity, you can't change it without having some dislocation somewhere in the economy.

CORNISH: And as you were saying, there is political support for, it seems like, each and every one of these loopholes. But if closing loopholes can cause trouble, can raising tax rates cause similar trouble? I mean, Republican leaders have been quoting an Ernst & Young study that says an increase in rates on rich Americans would destroy 700,000 jobs fairly quickly.

DAVIDSON: I do not know why these respected accounting firms are willing to do these incredibly dubious studies for lobby groups. That's exactly what happened here. Ernst & Young conducted a study for the National Federation of Independent Businesses, basically a small business lobbying group. Nobody who doesn't work at the lobbying group or at Ernst & Young believes this study. But the general consensus is yes, if you raise tax rates it could cost something like 200,000 jobs. That's roughly what the Congressional Budget Office says.

And that might sound like a lot of jobs, but in an economy that has over 150 million jobs it's actually very tiny percentage - much less than one percent. And those jobs will eventually come back through overall economic growth. So, I think, the sales pitch that raising rates will devastate the economy, it's unlikely, unless they raise the rates, you know, far, far more than anyone is talking about.

CORNISH: Adam Davidson of our Planet Money team, Adam, thank you so much.

DAVIDSON: Thank you, Audie. Transcript provided by NPR, Copyright NPR.

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