Answering Your Questions On The Fiscal Cliff
We asked listeners what they wanted to know about efforts to head off the package of tax hikes and spending cuts set to go into effect Jan. 1, 2012. Today, we get answers from Scott Horsley, Tamara Keith and John Ydstie.
AUDIE CORNISH, HOST:
From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.
MELISSA BLOCK, HOST:
And I'm Melissa Block. Twenty-four days left and there's no clear sign of a compromise.
REPRESENTATIVE JOHN BOEHNER: Well, this isn't a progress report because there is no progress to report.
BLOCK: That's House Speaker John Boehner talking today about the effort to avoid steep spending cuts and tax hikes set to take effect January 1st. At least in public, Republicans and the White House seem worlds apart, confounded by a range of issues.
CORNISH: It turns out many of you are confounded as well by a debate that has quickly devolved into a jumble of numbers and half truths. Last week, we asked for your questions about the looming crisis - yes, the dreaded fiscal cliff - and today, we're going to put some of them to our reporters.
BLOCK: We're going to start with NPR's economics correspondent John Ydstie and, John, you get the first question. This one's from John Vogel(ph) of West Chester, Ohio, who writes this: Why are Social Security and Medicare included in the cuts to balance the budget since, as far I know, these programs are funded by their own tax and don't take from or contribute to the general fund where the deficit is?
JOHN YDSTIE, BYLINE: Well, let's take the case of Medicare first because it's clearest. Both its outpatient coverage and its drug benefit are paid out of the government's general fund, which is running a deficit, so I think we can say Medicare contributes to the deficit. Social Security is more complicated. Right now, the payroll taxes coming into the program aren't enough to fully cover all benefits, so Social Security is tapping its trust fund of special government bonds.
The trust fund was built up over the past three decades when workers paid more into the program than was needed to pay the benefits. Social Security is not yet cashing in the bonds, but it's using the interest being paid on them to help pay current benefits. Now, the interest payments are made from the government's general fund, which, as we said, is running a deficit, so I think you can say the program is contributing to the deficit.
But, you know, this is the way the program was designed, to build up a trust fund that would pay out when the baby boom retired. The problem is that instead of using the excess Social Security revenue to pay down government debt in preparation for the baby boom's retirement, our politicians spent the money on other things.
CORNISH: Now, we're going to turn to the White House and NPR's Scott Horsley. And, Scott, Jimmy Gertzog(ph) of Arlington, Virginia, wants to know which would create more jobs, not raising taxes on the top 2 percent, many of whom run their own businesses, or raising them?
JIMMY GERTZOG: The government presumably isn't going to flush those additional tax dollars down the toilet. Those dollars would give the federal government more buying power to do the things it needs to do. I'm thinking of things like investing in infrastructure improvements, increasing the capability of our armed forces, expanding programs for hiring teachers and opening opportunities in higher education.
CORNISH: Scott, what do you think?
SCOTT HORSLEY, BYLINE: Well, it's certainly a reasonable question that Mr. Gertzog has, but there's no real link between the tax hikes and the level of government spending. It's certainly true, some kinds of government spending can be job generators, infrastructure is a good example, but the government's not going to build any more roads or fix anymore bridges if those taxes go up.
There's just a disconnect in the way the government functions between spending and revenue. That's part of our problem. What we can say is that raising those taxes on only the top 2 percent would not be a major disincentive for job growth. When the Congressional Budget Office looked at this, they said the difference between having those tax rates go up and not having them go up is only about 200,000 jobs.
BLOCK: Another question headed your way, Scott, and also a question about top earners. Let's take a listen.
SETH LEVY: Hi, I'm Seth Levy(ph), and I'm from Collegeville, Pennsylvania, right outside of Philadelphia, and what I wanted to know was for a couple that would be considered in the top 2 percent of earners, would it be a better situation tax-wise for the country to hit the fiscal cliff or for the tax increases to go through with the deals that are currently being discussed?
BLOCK: Scott, a lot's still unknown about what those deals might be, but what would you tell Seth Levy?
HORSLEY: Well, let's just look at the president's proposal, for example, and this is a good illustration of why the president's bargaining position is pretty strong. If the president's offer is accepted, the rates for those top earners would go up to as much as 39.6 percent. If, on the other hand, we hit the cliff, the rates on those top earners would go up to as much as 39.6 percent. So the president gets what he wants whether House Republicans bargain or don't bargain.
Now, a top earning household would actually be better off under the president's proposal than if we actually hit the cliff because at least under the president's proposal, they'd still get the advantage of the lower tax rates on the first quarter million dollars worth of income. That works out to be about $6,000. And the wrinkle here is that the president has also proposed separately limiting the value of tax deductions.
And if you had, say, more than $51,000, give or take, of tax deductions, that would sort of offset the savings from the lower rate, so it kind of depends on what your individual situation is there.
BLOCK: OK. Scott, thanks.
CORNISH: Finally, we turn to our congressional reporter Tamara Keith on Capitol Hill. And, Tamara, Richard Terangello(ph) called from Albuquerque, New Mexico, to ask why the incentives for job creation can't be more targeted.
RICHARD TERANGELLO: If new taxes on job creators hurt small businesses, why can't a way be found to allow deductions or tax credits when job creators create new jobs and then raise taxes on the rest of the wealthy? My second question is if one problem with the mortgage tax deduction is the wealthy milk the system by using it for multiple homes that they own, why not just limit it to one primary residence?
CORNISH: All right, Tamara, let's take those one at a time. First, is it possible to allow deductions and tax credits to continue for job creators in the top 2 percent?
TAMARA KEITH, BYLINE: And first, I think we have to say that the assumption that small business owners would be hurt by higher tax rates and thus be less likely to hire is a matter of much dispute. Many economists and even small business owners I've spoken with say that this argument that is largely coming from Republicans in these negotiations is overblown. In terms of sort of targeting incentives to hire through the tax code, the president has actually proposed doing that in the past.
And those proposals have gone virtually nowhere in Congress. Economists that you talk to will say that those types of ideas are flawed, that it could be that you end up just incentivizing businesses that would've hired anyway and giving them government money to do something they would've already done.
CORNISH: And then the second part of that question, why not simply scale back the mortgage interest deduction for folks who own multiple homes, limit it to one residence?
KEITH: Currently, it is two residences up to a million dollars. Some ideas that have been out there would be to limit it to $500,000 and only one residence. And I called the Tax Policy Center to find out what that would save. They say it would be $80 billion over the next decade to limit it to that $500,000 limit, and then if you only allowed first homes to get the mortgage interest deduction, that would save about another $100 billion.
So that works out to about 15 to 20 percent of the overall cost of the mortgage interest deduction over the next decade. But whenever anyone starts talking about the mortgage interest deduction, the real estate industry gets very loud and very animated, and they are incredibly influential, both in Washington and back home in lawmakers' districts. So whenever this comes up, it gets shot down pretty quickly.
BLOCK: And, Tam, the last question goes to you. It's from Maggie Fortner(ph) of Kimberly, Idaho, and she wrote to ask this: How many members of Congress are part of the 2 percent? Tam, you will remember that President Obama has talked quite often about the fact that he is in the top 2 percent of wage earners.
KEITH: So I have to tell you the answer is going to be really unsatisfying.
BLOCK: Ah, OK.
KEITH: We don't know because members of Congress are not required to report their income. They are required to report their assets. So we know that, according to the Center for Responsive Politics, about 250 members of Congress are millionaires. They have an average net worth of more than a million dollars.
And we also know that just from their congressional salaries, members of Congress make $174,000 a year. That puts them in the top 5 percent of taxpayers without any extra income from their spouses, for instance.
BLOCK: OK. NPR's Tamara Keith, also Scott Horsley and John Ydstie. Thanks so much to all of you.
KEITH: You're welcome.
YDSTIE: You're welcome.
HORSLEY: My pleasure. Transcript provided by NPR, Copyright NPR.