Jason Furman, Shaping Obama's Economic Agenda

DATE July 24, 2008 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM
NETWORK NPR
PROGRAM Fresh Air

Interview: John McCain's senior adviser for economic policy,
Douglas Holtz-Eakin
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

There's a lot of reasons to worry about the American economy, and most
Americans are worried about their personal finances. To get a grip on Barack
Obama and John McCain's plans for taxes and the economy, we're going to talk
with the top economic adviser from each campaign and the director for the Tax
Policy Center, which provides independent analysis of tax issues.

Let's start with John McCain's senior adviser for economic policy, Douglas
Holtz-Eakin. He directed the Congressional Budget Office from 2003 to 2005
under President Bush. That's the office that prices proposed legislation and
analyzes its economic impact. Holtz-Eakin resigned a year before his
four-year term was up and went to the Council on Foreign Relations.

Douglas Holtz-Eakin, welcome back to FRESH AIR. Now, correct me if I'm miss
characterize this, but as the Congressional Budget Office director you took
issue with President Bush cutting taxes while raising spending, and you said
no way the math was going to work out on that. John McCain wants to keep the
president's tax cuts and extend them. Why?

Mr. DOUGLAS HOTLZ-EAKIN: Because he understands that, this point in time the
most important way to evaluate any policy is through the lens of creating
jobs. And even though we've lost 400,000 jobs, over 400,000, in the past six
months in the United States, we've seen over that period small businesses,
those under 50 employees, actually create nearly a quarter of a million jobs.
So step number one is do no harm to the small business sector, much of which
is taxed through the individual income tax. So don't raise taxes, don't raise
the marginal tax rates on those individuals, don't raise dividend and capital
gains taxes when they're going to need equity investments in a world where
debt is going to be hard to get a handle on because of the credit crunch. And
we've got the second highest corporate rate in the developed world. The
combination of that rate and some other features are driving good jobs, the
kinds that have health insurance and retirement benefits, overseas. He wants
to keep those jobs in America.

So the proposals are oriented around the very first step to being successful
over the long term, which is have an economy that's growing, creating jobs.
Those jobs will be the foundation of all the prosperity that Americans hoped
for, but also the foundation for a better fiscal outlook.

GROSS: Let me read a criticism of the McCain tax plan from the Tax Policy
Center, which is a program at the Brookings Institution. "The McCain tax plan
would make the tax system more regressive, even compared with the system in
which the 2001 to 2006 tax cuts are made permanent because it would give huge
tax cuts to households at the very top of the income distribution, but little
tax relief to those at the bottom of the income scale." Your response?

Mr. HOLTZ-EAKIN: This reveals all that is wrong with budgeting in
Washington, DC, and why this city needs a vast cleanup effort. John McCain's
tax proposals are very simple. Under the present system the top marginal tax
rate is 35 percent. Under John McCain, 35 percent. Current dividends, top
rate, 15 percent. John McCain, 15 percent. Current capital gains rate, 15
percent. John McCain's, 15 percent. No tax cuts there anywhere. John McCain
does want to cut the corporate tax rate. Now, in a Tax Policy Center view of
the universe, that benefit goes to some fat cat who never had to worry about
losing their job. But out in the real world, what's happening is people are
not keeping their jobs. Those jobs are being moved to other parts of the
globe. And the burden of that tax is being borne by the worker. That tax cut
will benefit those people by keeping their jobs here, keeping their benefits
intact and helping the economy grow.

GROSS: Senator McCain thinks that we should not have a timetable for
withdrawal in Iraq and that we'll have to remain there, our troops will have
to remain there for an extended time. How do expenses for the war get figured
into his proposed budget?

Mr. HOTLZ-EAKIN: Our proposals are built off the CBO baseline projections
and augmented to reflect the current deployments overseas in Iraq and
Afghanistan. It is the senator's views that, having devised the
counterinsurgency strategy, the surge that is working and that will allow the
United States to leave in victory as opposed to a hasty withdrawal that would
require a third Iraq war, we can achieve savings by 2013. It would be his
hope that we'd have about 75,000, half the number now, stationed overseas, or
even do better than that. That'll reduce federal spending in the defense
area. And that would be a very beneficial thing, from a budgetary point of
view.

GROSS: Former Senator Phil Gramm, who was the former chair of the Senate
Finance Committee, stepped down last week as co-campaign manager of the McCain
campaign after his comments that Americans are experiencing a mental recession
and that we're a nation of whiners. Until he resigned he'd played a major
role in crafting McCain's economic policies and he was being mentioned as a
possible Treasury secretary if McCain wins. Is he still informally advising
John McCain, and is he still a possibility for Treasury secretary?

Mr. HOTLZ-EAKIN: He is not advising the campaign. He is not affiliated in
any way. He properly made the decision to step down after remarks that were
unfortunate and completely at odds with the senator's view of what is going on
in the economy and how the American public is viewing their situation. So he
is not affiliated with the campaign. And obviously it is premature to discuss
appointments of any kind, whether they be Treasury or other possible agency
appointments in a McCain administration.

GROSS: So you're not ruling it out?

Mr. HOTLZ-EAKIN: I am not ruling it out. I'm not ruling it--well, I guess I
am ruling it out. I don't know what the decisions are that are going to be
made on staffing, but it's premature to discuss names.

GROSS: Now, Gramm was criticized for his recent comments, but let's talk
about the policy that he stood for. In 2000 he co-sponsored a bill called the
Commodity Futures Modernization Act that deregulated the banking industry,
making it possible for commercial banks, investment banks and insurance
companies to merge. This bill also deregulated some of the complicated
financial instruments that are behind the mortgage meltdown and the financial
crisis like credit default swaps, and it enabled certain losses to be kept off
the books through complicated things called structured investment vehicles.
The bill also prevented the regulation of energy futures, and that part of the
bill became known as the Enron loophole. It's been blamed for the California
energy crisis a few years ago and subsequently for the whole Enron collapse.
But this whole bill that Gramm co-sponsored was added as a rider right before
the Christmas recess to a big omnibus spending bill. And a lot of people
think that most of the senators who voted on it didn't really understand it or
didn't really know what was in it. So since Gramm was so highly placed in the
McCain campaign, do his views on deregulation reflect John McCain's views,
and...

Mr. HOLTZ-EAKIN: Well, obviously not. I mean, Senator McCain has, first of
all, been a long-standing critic of that style of doing business, large
omnibus spending bills that aren't scrutinized, provisions dropped into bills
in the dead of the night without proper vetting. His view of the way that
Congress should work is defend a proposal on its merits in the House, defend
it in the Senate, agree on it in a conference, have it passed by both houses
and signed by the president of the United States. And to do things in any
other way is to really betray the trust of the American public.

He has further, you know, voted to close the Enron loophole in 2003. The
senator's economic views are his own. He has lots of advisers, whether it be
Jack Kemp, Steve Forbes, Martin Feldstein, you know, John Taylor. There are
an enormous number of people with whom he converses. He's fond of getting
direct input from experts and is perfectly content to make up his own mind
about the best path forward.

GROSS: And the deregulation of the banking industry? I mean, right now the
government policy seems to be that there are some banks and institutions,
including Fannie Mae and Freddie Mac, that are just too big to fail, that the
consequences would be cataclysmic for America and the global economy as well.
So some economists say we've kind of done this backwards. For instance, the
bill that Phil Gramm co-sponsored, we deregulated part of the financial
industry because the government was said to have no place there. But then
when the big banks are in trouble, that's when the government has to step in
and help them out.

Mr. HOLTZ-EAKIN: We've seen two particular instances in the United States
recently. One, Fannie Mae/Freddie Mac literally attribute to Washington and
the worst aspects of Washington. This is a lobbyist-driven operation that's
showered favors across the board to make sure that they could continue to
expand at the taxpayers' expense. In the private sector we saw the Fed make
the decision--in the Bear Stearns case, they were privy to the details that
others are not. But presumably the tenant that guided that decision was, is
it worse to leave the situation alone and allow the financial system as a
whole to be threatened and the stability of that system thus threaten all of
Main Street and American families, or is it better to provide the steps that
they did and allow the precedent of shoring up a private institution? The
senator is certainly not happy with the idea that the taxpayers are backing
private institutions. But it's important to make sure that we don't further
hurt the public by not stepping in at the right moment.

GROSS: John McCain has said that the economy is not his strong point, that he
doesn't know that much about the economy. Is that a fatal flaw for a
president? Does it matter?

Mr. HOLTZ-EAKIN: He has a phenomenal grasp of the economy. And the remark
he made is self-deprecating. That's John McCain in his truest form. But he
is comparing himself to a standard of excellence on international affairs and
national security that no one could meet. He's the preeminent expert in those
areas. He's been chair of the Commerce Committee. He's a superb policymaker
in economics. And the US economy is in good hands with John McCain.

GROSS: This is not a direct campaign question, but while you're here I'd like
to know your impression of, how far away is our economy from hitting bottom?
How close are we to hitting bottom so we can start going back up again?

Mr. HOLTZ-EAKIN: It's hard to say. The basic contours of the economic
outlook right now are that if you make something in America, if you produce
and sell a product or service, you're hanging in there. It's not great. And
outside of the housing sector, you know, we have strong exports. We have some
places where things are going OK, but they're hanging in there. If you
finance something in America, you're in a world of hurt. The financial sector
is clearly a battleground. And the real question is, can the Main Street
folks hang in there until the financial sector gets its house in order, or
will the credit crunch and the restrictions on lending bleed over into Main
Street and further depress the economy? That's one that I don't think the
science allows us to answer. It's one that we monitor every day. It's
clearly a concern about the outlook. There's nothing that looks like strong
growth in the near term, and the question is whether we can go through with
something that looks like moderate growth over the second half.

GROSS: Douglas Holtz-Eakin, thank you very much for talking with us.

Mr. HOTLZ-EAKIN: Great. Thank you.

GROSS: Douglas Holtz-Eakin is the top economic adviser for John McCain.

Coming up, we'll hear from Barack Obama's top economic adviser. This is FRESH
AIR.

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Interview: Jason Furman, Barack Obama's economic policy director
TERRY GROSS, host:

We just heard from John McCain's chief economic adviser. My next guest is
Barack Obama's economic policy director, Jason Furman. Before that he
directed The Hamilton Project at the Brookings Institution which focused on
economic policy, and he was special assistant to the president for economic
policy in the Clinton administration.

Jason Furman, welcome to FRESH AIR. The government helped bail out Bear
Stearns, extending the lower interest rates to investment banks to help them
through this crisis. The government is likely to, in one way or another, bail
out Fannie Mae and Freddie Mac because of the mortgage crisis. These are
institutions that are considered too big to fail. What does Barack Obama have
to say about what the government role should be in bailing out such
institutions, and if there should be more regulation of these institutions in
return for the help the government is giving?

Mr. JASON FURMAN: Well, first, Terry, Barack Obama thinks we should also be
worried about people that are too little to fail. If you're a homeowner and
you've been foreclosed upon, that's enormously difficult for you. It's
happening to 7,000 homeowners every day. And it has repercussions beyond that
individual family to the whole community and the national economy and hurts
all of us whether or not we're directly affected or not.

Then when you look at the financial sector, we're going to need to make some
major regulatory changes going forward to reflect the increased complexity of
these institutions, the fact that many more institutions have access to
federal borrowing than had them in the past. That's a real privilege. But in
exchange for that privilege we need to know what those institutions are doing,
and we need to place some limit on what those institutions can do when they
take gambles that, heads they win, tails the taxpayer loses.

GROSS: So with the tax system the way Obama would like to see it, would we be
getting more or less money from taxes in the long run?

Mr. FURMAN: The Obama plan includes a very large tax cut for middle-class
families. High-income families making about $250,000 a year would be paying
more in taxes. When you take the plan as a whole and include the tax credits
to help make health care more affordable--because the whole Obama health plan
is centered around tax credits--it would actually reduce taxes relative to
where they are today. And that would be paid for by a set of spending
reductions.

GROSS: What programs would you cut or reduce?

Mr. FURMAN: Well, the biggest one is ending the war in Iraq responsibly.
We're spending $10 billion a month. Even budgeting very conservatively,
that's an area where we could save $90 billion a year by 2012, probably more
than that. And that's money we could put towards better uses for our national
security, as well as towards this overall economic plan.

In addition, there's several other areas, for example, private plans within
Medicare get really large subsidies right now. We should move those subsidies
down so that they're competing on a level playing field with the public plans.
Same things with banks that make student loans. They get oversubsidized. We
can reform our farm payments to some of our wealthiest farmers, cut back on
earmarks for foreign procurement and no-bid contracts. There's quite a lot we
can do on the spending side.

GROSS: Barack Obama has said that Afghanistan is where he'd really like to
focus his attention on the war on terror. So if we get troops out of Iraq,
won't some of those troops have to go to Afghanistan, and won't that offset
some of the savings from the war in Iraq if the plan proceeds that way?

Mr. FURMAN: Terry, you're absolutely right. The conservative set of
savings, the $90 billion a year that we project we save on Iraq, most of that
money actually goes back to our national security. It goes to transfer troops
to Afghanistan. It goes to increasing the size of our standing Army with more
special forces, Army and Marines, some of the areas where we're short right
now. And it also goes to something that's just as important to our national
security, which is foreign assistance to win the hearts and minds of countries
around the world. So a lot of that money is about taking the money we save
from ending the war responsibly in Iraq and using that money in a way that
will better promote our national security and deal with some of the areas that
we've seriously been neglecting over the last eight years.

GROSS: How does Senator Obama propose fixing Social Security now that the
baby boom is starting to collect, keeping Social Security solvent?

Mr. FURMAN: What Senator Obama has said is three things. Number one, this
is our most important public program. It's really important that we protect
it, not just for people today, but for generations to come. Second of all,
middle-class families, a lot of them, it's their only source of income, or the
overwhelming source of their income. So it's really not something you would
want to burden them with in the course of adjusting to that. So what he's
said is we should look at people making over $250,000 a year and ask them to
pay a bit more, and that money would go into Social Security. In terms of
exactly how much more, that's something he would want to work with Congress on
a bipartisan basis to get it done, to strengthen the program.

GROSS: Senator Obama has said he would bring down health insurance premiums
by $2,500 for the typical family and that his plan would be in place by the
end of his first term as president. How would he accomplish that?

Mr. FURMAN: There are a lot of different causes of rising health costs, and
to bring them down you want to do a whole bunch of different steps at once.
Some of the steps involve taking on some of the insurance companies which are
responsible for some of these costs. So reducing the overpayments to private
plans and Medicare, which we were discussing earlier. And if you just tell
insurance companies `you have to cover everyone who shows up,' you save a lot
of money that they're currently spending deciding who they'll cover, who they
won't cover and what they won't pay for. So that set of reforms will save
money. Everyone...

GROSS: Can I just stop you for a second?

Mr. FURMAN: Sure.

GROSS: I'm sure a lot of health insurance companies would say that the
bureaucratic part of deciding whether I'm worthy of an MRI or a CAT scan might
be cheaper than actually giving me that CAT scan if they decided I didn't
really need it because there are so many really, really expensive procedures
now.

Mr. FURMAN: Well, first of all, part of what I was talking about was
deciding whether or not when you show up they're going to give you health
insurance or not. That's something that insurance companies spend money on.
Under the Obama plan they'd be required to offer health insurance.

GROSS: I see what you're saying, mm-hmm.

Mr. FURMAN: So that you'd save. There would obviously still be claims
management, and you'd have to decide what you would honor and what you
wouldn't, and there would be administrative costs in the health insurance
system. The question is, can you bring them down and can you bring down some
of those administrative costs that are spent on things that take away from
health and hurt the system? But obviously, we would still need some of the
other ones.

GROSS: I asked John McCain's campaign adviser if it concerned him that John
McCain had confessed that the economy wasn't his strong point. Let me ask
you, Barack Obama is, you know, relatively new to national politics. Are you
concerned that his experience with national economic issues has been very
limited?

Mr. FURMAN: I'm not concerned about that at all, Terry. I can tell you, I
talked to Barack Obama a lot about economic policy, and if he had more time he
could do my job far better than I can do my own job. He really understands
the economy. He's really interested in it. He's worked significantly on the
issue in the Senate. It's something he's written extensively about in his
book. I have absolute faith that he would be outstanding on the economy.

GROSS: This isn't a direct policy question, but since you know a lot about
the economy I would just like to ask your opinion. How far do you think we
are from actually financially hitting bottom? How far away are we from
beginning to like go back up again economically?

Mr. FURMAN: Well, Terry, I think forecasting an economy, especially one as
uncertain as this, is a fool's game. The credit strains we have, though, are
ones that will take a long amount of time to work out, and they'll have
ramifications for investment and economic activity for a long time to come.

What is important to understand, though, is that the choices we make today
really could have an impact on the direction that the economy goes over the
near term. We're in better shape today because of the fiscal stimulus we
passed back in February. We'd be in better shape still if we move vigorously
to address the problems in housing, to help relieve families from some of
these energy prices, to deal with the contractions at the state level, and to
really focus on job creation. So there's a lot we can do that really affects
the answer to your question of where the economy is going.

GROSS: Well, Jason Furman, thank you so much for talking with us.

Mr. FURMAN: Thank you.

GROSS: Jason Furman is Barack Obama's top economic adviser.

We'll get an independent view of the Obama and McCain tax plans in the second
half of the show. I'm Terry Gross, and this is FRESH AIR.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Interview: Len Burman from the Tax Policy Center talks about
and compares the McCain and Obama campaigns' tax plans
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

After hearing from the top economic advisers to the McCain and Obama
campaigns, we wanted an independent point of view on their tax plans. My
guest Leonard Burman is the director of the Tax Policy Center, which is a
joint project of the Urban Institute and the Brookings Institution. Yesterday
the Center updated its analysis of the McCain and Obama tax plans. Burman
served as deputy assistant to secretary for tax analysis at the Treasury from
1998 to 2000, and as senior analyst at the Congressional Budget Office from
1988 to '97.

Leonard Burman, welcome to FRESH AIR. In the report you write, "No one, not
even inside the campaigns, knows exactly what the proposals are." What do you
mean by that?

Mr. LEONARD BURMAN: Well, the kinds of things you say on the stump and that
generate huge applause lines don't actually make legislative proposals.
`We're going to provide universal health care coverage, we're going to exempt
old people from tax.' There're a lot of details that matter in terms of how
you estimate these things. Like in health proposals, it really depends very
critically on what you're going to do with the nongroup market, the place
where people buy health insurance who don't get it at work. A lot of those
details aren't specified. The actual subsidy schedule. Senator Obama is
interested in making it very affordable for low-income people to get health
insurance. But as far as I can tell, his campaign hasn't specified what
subsidy you get at what income levels.

GROSS: President Bush's tax cuts expire in 2010. So that means that the next
president will have a lot of sway in deciding who pays what taxes, how much
they pay. So in the Obama plan and in the McCain plan, how is the tax burden
distributed compared to how it's distributed now?

Mr. BURMAN: OK, so Senator McCain would basically extend all of President
Bush's tax cuts and he also has other cuts for businesses. And instead of
eliminating the estate tax he would cut it somewhat. Senator Obama would
extend most of the Bush tax cuts that would otherwise expire at the end of
2010. But he'd raise taxes on high-income people, return the levels of tax to
what they were before 2001. And he has a bunch of tax cuts targeted at low-,
middle-income people.

So, for example, the middle 20 percent, say, middle-class taxpayers, under
Senator McCain they'd get a $1400 tax cut, under Senator Obama they'd get a
$2,100 tax cut in 2012. The bottom 20 percent, these are pretty low-income
people making less than about $19,000 a year, they'd get an average tax cut of
about $100 under Senator McCain's plan and almost $700 under Senator Obama's
plan. So there's a big change in the tilt in the tax schedule. There's a big
cut at the bottom for Obama and a big increase at the top. And under McCain
there's a tiny, tiny cut at the bottom and huge cuts at the top.

GROSS: When you look at the bottom line of each of those plans, do they
generate an equal amount of money in taxes?

Mr. BURMAN: No. Senator Obama's plan would add up to about $2.8 trillion in
tax cuts over the next 10 years. Senator McCain's plan would add up to about
$4.2 trillion in tax cuts. When you add the interest that would accrue, we're
talking about an increase in the national debt of about $5 trillion under
Senator McCain's plan and $3.4 trillion under Senator Obama's. I should point
out that the candidates object to my saying that because they say, well
they're--they both say they're going to cut spending. And if they do then the
situation would be better. They won't be generating such large deficits. A
lot of people are skeptical about their claims of spending cuts. But all of
our numbers are just looking at the tax side.

GROSS: So you're not looking at the spending side; you can't pass judgment on
that?

Mr. BURMAN: No, not as an expert. As a casual consumer I can be skeptical.

GROSS: Now, there's something called the alternative minimum tax, which was
meant to be a tax for the wealthy, but it was never adjusted for cost of
living, and it now raises the taxes for many middle class people. How do
Obama and McCain plan to deal with the alternative minimum tax?

Mr. BURMAN: That's actually one area where there's some confusion. Senator
Obama actually hasn't said much about the AMT. What we decided was that we
would model his plan as if it would just be a continuation of what's been
happening over the last four or five years. Congress has patched the AMT,
which means they raised the exempt amount of income, the minimum income level
at which the AMT might kick in every year to keep millions and millions of
Americans from being subject to the tax. And we assume that Senator Obama
would just continue to enact this patch, increase it for inflation every year
so that the number of people on the AMT wouldn't increase too much. But he's
never been specific about that. The campaign doesn't object to our
characterizing their plan that way.

Senator McCain's staff has been very specific. Doug Holtz-Eakin, who you've
talked to, says that what they're going to do is also extend this AMT patch,
but they're also going to increase that over time so that the number of people
on the AMT will drop. But Senator McCain has continually talked about
repealing the AMT, eliminating it altogether, and which they do matters
because if you repeal the AMT that's another $400 billion in lost tax
revenues. But we're not entirely clear on what happens.

GROSS: Let's talk about capital gains. Taxes on earnings and stocks are 15
percent. And if you're in a high tax bracket, if you make a lot of money and
you're a high tax bracket, that 15 percent tax on capital gains is
considerably lower than what you would pay on income earned through a job. So
what does each campaign plan to do about capital gains?

Mr. BURMAN: Well, Senator McCain would just leave the rate at 15 percent for
capital gains and for dividends, the money that's paid the shareholders from
companies. Senator Obama would raise the capital gains rate to 25 percent or
so--again, there's a little squishiness on what the actual number is--and
leave it there permanently. I actually wrote a book about capital gains
taxation, it's a huge best-seller. That was a little joke, yeah. I wrote a
book about capital gains called "The Labyrinth of Capital Gains Tax Policy,"
and it's a pretty fascinating issue, actually, because it's kind of a
religious crusade. There's some people who believe that cutting capital gains
tax rates is absolutely essential to encouraging investment and producing
economic growth. There are others who believe that low capital gains tax rate
is just inherently evil because the benefits almost all accrue to very
high-income people.

And my view has kind of been the middle, that cutting the capital gains tax
rate produces some good outcomes and some bad ones. It does encourage some
more investment than would occur otherwise. One of the bad things about
taxing capital gains is it gives people an incentive to hold onto things
longer than they would otherwise. But the bad thing about the low capital
gains tax rate is that it produces a huge incentive to try to make other
income look like capital gains. If you're a high-income person and you earn a
million dollars as regular income, it's taxed at a 35 percent rate. If you
can make that look like a capital gain, it's taxed at a 15 percent rate and
you save $200,000 in taxes.

And there's a whole industry that's devoted to coming up with cleaver ways to
make that million dollars look like capital gain rather than ordinary income.
And that's very wasteful. First of all, the geniuses who come up with the
schemes to make income look like capital gains could otherwise be doing
socially productive things like working in think tanks or working at radio
stations, or maybe even figuring out a way to make a car that somebody would
want to buy somewhere else, and they're not doing that. They're just coming
up with these tax shelters.

But the other thing is the tax shelters themselves often involve really
dubious investments.

GROSS: Let's look at the estate tax, and opponents of the estate tax, people
who want to eliminate it or, you know, reduce it to a very minimal amount,
often describe it as the death tax. Where does each campaign stand on the
estate tax, and why is that important in the overall vision of the tax plan?

Mr. BURMAN: Neither one of them would eliminate the estate tax altogether.
Right now the schedule is that in 2010 the estate tax is supposed to disappear
altogether and then in 2011 return again, which has produced a lot of ghoulish
humor about, you know, economic incentives at the end of 2010, If you have a
rich relative that might productively die and save you a lot of tax liability
on the estate.

Senator McCain actually has been a long-standing critic of eliminating the
estate tax. He's always voted against it. And his plan would keep the estate
tax, but at a very low level. It wouldn't apply until you had an estate of $5
million. We estimate that about only 4,000 decedents would be subject to that
tax in 2009, and the rate would be 15 percent, the same as applies to capital
gains. Senator Obama would set the level at what it's supposed to be in 2009,
which is a $3 1/2 million exemption and 45 percent tax rate. So for couples
that would correspond to seven--you know, with some planning--a $7 million
exemption in the case of Obama, and a $10 million exemption in the case of
McCain.

I think the estate tax is actually an important part of the overall tax
system. First of all, it's the most progressive tax that there is. It only
applies to very, very wealthy individuals. And it only applies after they're
dead when they don't need the money anymore. The other thing is that it
reduces the incentive to engage in tax shelters because it's sort of like
a--it's a back stop to the income tax, that if you manage to avoid tax all
through your life, you're still going to have to pay it under the estate tax.
And by really cutting it back dramatically or eliminating it altogether, you
could encourage a lot of inefficient tax sheltering activity. So I think
preserving the tax at some level is a good idea.

GROSS: My guest is Len Burman, the director of the Tax Policy Center. We'll
talk more about the McCain and Obama tax plans after a break. This is FRESH
AIR.

(Announcements)

GROSS: Let's get back to our interview about the Obama and McCain tax plans.
My guest Leonard Burman is the director of the Tax Policy Center.

The Tax Policy Center's new report on the economic programs of McCain and
Obama includes a preliminary analysis of their health care plans. So why
don't you tell us what you think the centerpiece of each of their plans is?

Mr. BURMAN: The plans are pretty interesting. One thing that Senator McCain
and Senator Obama agree on is that the tax subsidies for health care should be
targeted more at low- and middle-income people than what they are right now.
The current system we have is that there's a huge tax subsidy for getting
health insurance, but it's in the form of an exclusion from income. If your
employer provides you health insurance, the value of the insurance isn't
included in your taxable income. You save income taxes and Social Security
and Medicare taxes, too. That's worth the most to pretty high-income people.
The higher your tax bracket is the more benefit you get. And it's really, in
a lot of ways, an upside-down subsidy. The people who most need help get next
to nothing from the current system.

So Senator McCain would replace the income tax exclusion with a tax credit of
$2500 for a single policy or $5,000 for family coverage, and it would be
refundable, meaning that you'd get the tax credit even if you didn't have any
tax liability. So under that proposal, low-income people would get a
substantial benefit if they got insurance either at work or bought it
themselves. Another change in this proposal is that you get the subsidy even
if your employer doesn't offer insurance. A lot of people complain that the
credits are too small for lower-income people to be able to afford insurance.
But this would be a big improvement over current law.

The other thing that it would do, which would be an improvement, is that the
credit doesn't depend on how much you spend on insurance. So you'd have an
incentive to get relatively inexpensive insurance. The reason that's
important is that there are a lot of people who think that very, very generous
insurance coverage encourages people to spend too much on health care because
it doesn't cost them anything; everything's covered by insurance. And the
idea is that by having a credit that's fixed in dollar terms, you'd have an
incentive to shop around for a cheap policy.

The drawback of the McCain proposal is that a lot of people would probably end
up in this individual market that, you know, a lot of employers would probably
say, `I don't have to offer insurance anymore for my employees to get a tax
break; they can buy it themselves.' If you're young and healthy you'll be able
to get a really good deal on insurance. But if you have serious health
problems, you might have a hard time finding affordable insurance. Senator
McCain has a proposal to cover people with serious health problems, but there
are no specifics on how that works. And our analysis suggested that if that
high risk pool is not very comprehensive that Senator McCain's proposal would
not actually end up covering that many more people. There'd be a lot of
people who would get insurance in the individual nongroup market, but a lot of
people would end up losing coverage through employers.

GROSS: What's the centerpiece of Senator Obama's health care plan?

Mr. BURMAN: Senator Obama is also proposing refundable tax credits that
would benefit low- and middle-income households who get insurance in a new
health insurance exchange that he would create. It would be a pool of
insurance plans that would be available to anybody who buys insurance using
these tax credits. The credits would be available to people with incomes up
to about four times the poverty level. That's roughly $80,000 for a family of
four. There'd be very large subsidies for low income people, people below the
poverty line, and then they would decline as income increased.

Senator Obama also has a mandate for covering children. You'd be required by
law to cover your children with health insurance. He would expand a public
program that provides insurance for children called SCHIP, State Children's
Health Insurance Program, for families with incomes up to three times poverty.
He would expand the Medicaid program for very low-income people.

And he'd also put in place a mandate on employers to provide insurance. It's
this thing that health geeks call pay or play. And the way it would work is
that if an employer did not provide insurance, they'd have to pay a payroll
tax. We assumed it would be about 6 percent, but again, there are no details
on this from the campaign. And under the assumptions of our analysis, this
plan would cover virtually all kids and many adults, although it wouldn't come
close to reaching universal coverage. There'd still be about 30 million
adults in the year 2018 that didn't have health insurance coverage.

I should mention, and this is important, in our analysis of both of these
plans, that there are important details that we didn't know about, that we
didn't get from the campaigns, and we just made stuff up so we could do the
analysis. I'm sure the campaigns would say, `Well, the actual plan is a lot
better in several respects from what you modeled.' A problem, of course, is
that a lot of ways you could make these plans better to cover more people
would also cost more money. Our estimate is that Senator McCain's plan would
add another, you know, it would add up to about $1.3 trillion over the next 10
years. Senator Obama's plan would add up to about $1.6 trillion. And that's
a lot of money, especially when you consider that they're, you know,
spending--that they've got three of $4 trillion in tax cuts already for the
rest of their package.

GROSS: So it sounds like, in the Obama plan--and tell me if I understand this
correctly--if an employer decides not to pay for health insurance for its
employees, it would then have to pay a separate tax that would be put into the
kind of the common pot for funding health insurance?

Mr. BURMAN: Yeah, and as I said, the details aren't exactly clear, but we
assumed it would be a 6 percent tax. So if somebody was making $50,000 and
the employer didn't provide insurance the employer would have to pay $3,000 in
taxes into this pool, and that would go to reduce the overall cost of the
package or allow for larger subsidies for people who get their insurance
outside of work.

Also, Senator Obama has said that his pay or play plan would exempt small
employers. Definition of "small" is not entirely clear. We assumed it was
employers with fewer than 10 employees.

GROSS: My guest is Len Burman, the director of the Tax Policy Center. We'll
talk more about the McCain and Obama tax plans after a break. This is FRESH
AIR.

(Announcements)

GROSS: My guest Len Burman is the director of the Tax Policy Center.
Yesterday the Center issued a new report updating its analysis of the Obama
and McCain tax plans.

Overall, looking at the entire tax and economic plan that you've examined so
far, what would you say is the greatest strength of each plan?

Mr. BURMAN: Senator McCain obviously intends to spur economic growth.
Probably the best feature of his plan is cutting the corporate tax rate. We
have the second highest tax rate in the developed world at 35 percent. And
that probably encourages a lot of bad behavior in trying to keep income
overseas so that it's not subject to US tax, and encourages a lot of tax
sheltering by companies. And even though we have a very high tax rate, we
don't collect very much revenue from the corporate tax because of all the tax
sheltering that goes on.

My preference would have been for the plan to include many more loophole
closers at the same time that the rate was cut, but I think it's a good idea
to cut the corporate tax rate. One of the big issues over the last couple
decades is that high-income people have been taking home almost all of the
economic gains that we've got, and the economy has been growing dramatically.
But most of those gains have been going to the people at the very, very top.
By one measure the richest 1 percent of Americans now earn something like 16
percent of the overall income in the United States. And that's the highest
level since the eve of the Great Depression. So it really is a legitimate
issue to talk about whether we should be doing something to share the economic
gains more equally.

One of the points that Senator Obama makes is that, at the same time that the
income distribution has been getting more and more skewed, that high-income
people have been taking home a larger and larger share of national income,
that we've been cutting taxes on those very high-income people and not doing
very much for people in the middle. And his proposals are aimed at providing
help for low- and middle-income people so they can share more of the economic
gains.

GROSS: What do you think is one of the greatest weaknesses of the Obama and
the McCain plans?

Mr. BURMAN: Well, one obvious criticism is that they both would increase the
deficit by a lot. Will Rogers once said that when you find yourself in a hole
the first thing you should do is stop digging. And they both would dig the
hole a lot deeper. You know, just the nonhealth parts of the plans would add
between three and a half and $5 trillion to the national debt over the next 10
years. And you say well, maybe that's not a big deal, we're a rich country,
but we're actually heading into what's going to be a really challenging period
for us because the baby boomers are starting to retire, they're going to put
unprecedented demands on the government, and we're going to need more
revenues, not less. We also need to figure out what to do about Medicare and
Social Security, which so far nobody's been able to do. The best thing we
could do for our kids, if we can't fix Social Security and Medicare, would be
at least not to saddle them with a huge amount of additional debt so that they
would, you know, they won't have to pay back our borrowing with interest at
the same time as they're paying for our Medicare and Social Security.

You know, I worry in Senator Obama's plan that he's got all these special
targeted breaks. He's got one provision that would exempt senior citizens
earning under $50,000 from income tax. Well, right now most senior citizens
don't pay tax. The ones who are making 30 or 40 or $50,000 are doing
relatively well. They have income from pensions and other assets that make
them subject to a little bit of tax. And, you know, we've made these huge
promises to seniors we have no way of paying for and now we're saying that
almost all seniors won't have to pay any income tax either. We might decide
that's a bad idea five or 10 years down the road, and if we've set this
precedent that almost all seniors don't pay tax would be very hard to reverse
that.

GROSS: Do you think that either McCain or Obama has said anything really
meaningful about how to address the huge national debt that we have, the debt
that has just been accumulating and accumulating since the star of the war in
Iraq?

Mr. BURMAN: Not since they've been running for president. Senator McCain,
at times in the past, has been very responsible. You know, he was a deficit
hawk. He voted against President Bush's tax cuts, the things he would now
make permanent. There's a problem during a campaign. There's a lot of
pressure on the candidates to just make people happy, which is proposing tax
cuts and proposing new spending programs to do stuff for people, and
recognizing fiscal reality apparently has been determined to be a losing
strategy for somebody who wants to be president.

I don't quite understand that. I would like to have a president who would
respect the public's intelligence and say, `We can't do everything, we can't
cut taxes and increase spending, and if I'm going to tell you that I'm going
to pass huge tax cuts but I'm going to pay for it by cutting spending, I'm
going to be very specific about what I'm going to cut and how I'm going to
make that happen and how I will be successful when every president before me
has talked about making the government more efficient, getting rid of
agriculture subsidies, and has had a really hard time of getting those things
through Congress.'

I mean, I have no doubt that McCain would like to cut spending a lot, but he
has to deal with Congress. And, you know, I think it would be a good idea to
get rid of all the agriculture subsidies, but the Senate is a huge
constituency for those and it's probably implausible that you'll eliminate
them. He's said that he wants to hold discretionary spending fixed, below the
levels where it is right now in real terms. Well, what that means is that it
wouldn't even keep up with inflation. And that means that a lot of things
that people have come to rely on from government won't happen anymore. Maybe
it's a good idea to get rid of those things, but he ought to actually raise
some specifics and say how he's going to do that.

Senator Obama, on the other hand, has talked about all these new spending
programs he'd like to put in place. He wants to spend on education, on
infrastructure and on health care. And his campaign says that, well, they're
going to cut spending too. They want to make the government more efficient.
They're going to save $50 billion by making health care system work more. It
sounds kind of optimistic to me. And, you know, you can't be simultaneously
increasing spending and cutting taxes and expect to be able to keep the
deficit under control. And it is a concern.

And I think actually fiscal prudence ought to be a bipartisan issue;
Republicans and Democrats both have children. And the policies over the last
10 years, the policies that both of these candidates are proposing, which
would saddle our children with thousands and thousands of dollars of
additional debt that they have to pay back. And I don't think Republicans or
Democrats should be happy about that.

GROSS: Well, Leonard Burman, thank you very much for talking with us.

Mr. BURMAN: Thanks.

GROSS: Leonard Burman is the director of the Tax Policy Center, a joint
project of the Urban Institute and the Brookings Institution. Earlier in the
show we heard from the top economic advisers to the Obama and McCain
campaigns.

You can download podcasts of our show on our Web site, freshair.npr.org.

(Credits)

GROSS: I'm Terry Gross.
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