Pres. Biden's Budget Proposal and Comparing Tax Policies

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Brian Lehrer: It's The Brian Lehrer Show on WNYC. Good morning again, everyone. Now that Biden and Trump have both won enough delegates as of last night, in case you missed that, to clinch their nominations, one of the issues that will be a real contrast in the election is taxes. President Biden has just proposed his annual budget for the next fiscal year, and I know, Yon, that can sound dry and wonky when you say budget, but it's also a campaign document that sets up a populist showdown that he wants between him and Donald Trump.

Trump has his brand of populism, which is largely, let's say, culture war populism and election denial. Biden has his brand, which is more economic, reflected in this excerpt from last week's State of the Union address.

President Biden: There are 1,000 billionaires in America. You know what the average federal tax is for those billionaires? No. They're making great sacrifices. 8.2%. That's far less than the vast majority of Americans pay. No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker, or a nurse.

[applause]

President Biden: I propose a minimum tax for billionaires of 25%. Just 25%. Do you know what that would raise? That would raise $500 billion over the next 10 years. Imagine what that could do for America. Imagine a future with affordable child care millions of families can get that need to go to work to help grow the economy. Imagine a future with paid leave because no one should have to choose between working and taking care of their sick family member. Imagine, imagine the future of home care and elder care and people living with disabilities so they can stay in their homes and family caregivers can finally get the pay they deserve.

Tonight, let's all agree once again to stand up for seniors. Many of my friends on the other side of I want to put Social Security on the chopping block. If anyone here tries to cut Social Security, Medicare, or raise the retirement age, I will stop you.

Brian Lehrer: Biden from the State of the Union, a clip that didn't get enough coverage, I thought, because of all the focus on his exchange with Marjorie Taylor Greene about migrants and his fiery tone in general but this is core Biden. Donald Trump, meanwhile, on the business channel CNBC, after the State of the Union, stated his openness to cutting Social Security.

Donald Trump: There is a lot you can do in terms of entitlements, in terms of cutting, and in terms of also the theft and the bad management of entitlements, tremendous bad management of entitlement.

Brian Lehrer: Now, Trump later tried to walk back that remark by saying he only meant cutting waste and fraud, not cutting benefits, but his own budgets as president suggest he would leave Social Security and Medicare eventually underfunded. It's game on on taxes and senior benefits in the presidential campaign. Don't let it all be about age. Let's discuss. With me now Michael Graetz. He's been a tax policy official at the Treasury Department. He's a professor emeritus of tax law at both Columbia and Yale and has a new book called The Power to Destroy: How the Anti-Tax Movement Hijacked America. Professor Graetz, thanks for joining us. Welcome to WNYC.

Michael Graetz: Thank you, Brian. It's nice to be back.

Brian Lehrer: Let's do some book interview first, the history that your book is about because I think it will give the listeners some context for the campaign debate of today that I just laid out. The anti-tax movement that your book is largely about began in the 1970s. What were they rebelling against? What were personal or corporate tax rates like in the period before that from World War II until the '70s?

Michael Graetz: The individual tax rates at that time were as high as 70%, although it was only 50% on earned income, so it was 70% on investment income like interest and corporate dividends. The origins of the anti-tax movement were in California, and the revolt there, which was a populist revolt, was against property taxes, which had been going up because of inflation in California, which was extraordinary. It wasn't just inflation, it also had to do with the fact that the proponents of the anti-tax movement basically framed the issue as us paying for benefits that are going to them.

This had a lot to do with the changes in the composition of schools in California that had become much more Latino and African American than they had been in the past. The California Supreme Court had basically said that you couldn't have a huge difference in funding between rich property tax districts and poor districts based on their wealth, and therefore, people were thinking that they were not paying taxes for their own children, they were paying taxes for someone else's children. When this moved into the federal government after Ronald Reagan's election in 1980, it obviously became about that it was about federal taxes.

Reagan came into office with a 70% top tax rate as I mentioned. When he left office, the top tax rate was was 28% on individuals and the corporate rate had dropped from 48% to 35% on corporations. The corporate rate has now dropped to 21% after the Trump tax cuts of 2017 and the individual rate has gone up to 37% I guess from 28%. It went up to 39.6% during the Clinton administration, and then up to 37% in the Trump administration.

Brian Lehrer: When this jumped from a California anti-property tax referendum to the national Reagan campaign in 1980, race was central to that too, right? This idea that taxes were high because the poor were getting over on everyone else, getting a free ride on everyone else's hard-earned income, and those undeserving poor were explicitly or subtly coded as disproportionately Black, you say Black and Latino in the case of California, like the so-called welfare queens in the Reagan campaign. Do you agree?

Michael Graetz: Yes, absolutely, Brian. Not only was it the welfare queen business, which got most of the publicity, but the big change that Reagan introduced based on race was that the IRS was in a battle with white segregation academies in the South to desegregate those schools or to deny them the tax exemptions and the deductible charitable contributions that had been their financial lifeblood. As a result, Reagan opposed the IRS' decision to deny those tax benefits to segregated schools, and in doing so, he brought the Christian Evangelicals into the Republican coalition, into the anti-tax movement.

It became, in part, an anti-IRS movement, because they were able to blame the IRS for these changes, even though they stemmed from the Supreme Court's decision in Brown v. Board of Education. Race was a huge issue during the Reagan administration over taxes. The Supreme Court ultimately held that segregated schools were not entitled to these tax exemptions and that the IRS was right, but in the meanwhile, it enabled Reagan to bring the Christian Evangelicals into an important part of the anti-tax movement and an important part of the Republican coalition, where they have remained ever since.

Now, of course, they took the position that it was all about abortion and social issues and not about taxes, but that's not the real history of that story.

Brian Lehrer: You anticipated my next question because I was going to note that another conservative backlash that began in the '70s was the religious right. Why did they get brought into the anti-tax coalition? One could argue that Christianity, in particular, is based in part on Jesus' wanting to help the poor, and if the narrative was the poor are getting over on the middle class with the current tax rates, how did that fit into evangelical thinking?

Michael Graetz: In the southern Baptist community, which was the main target of the Republican operatives who were able to bring Jerry Falwell into the coalition and got him actually on the tax issue to create the moral majority, Falwell often preached something that he called the Prosperity Gospel, which was that the more money you made, the better Christian you were. That's a summary of it. There were other conflicting views and the anti-IRS view that took hold at that time in the Christian Evangelical community has been the dominant mode of their connections to the Republican Party. They've never given up that anti-tax movement regardless of the Jesus Gospels that you mentioned.

Brian Lehrer: Listeners, we can take your calls on tax rates. Do the tax rates seem fair to you? Are you moved by that Biden State of the Union excerpt that we play? Are you old enough to have lived through a whole bunch of tax rates? Maybe 1970s tax rates, and then the changes during the Reagan and Bush one years. Then Clinton raised taxes again a little bit, and Bush too lowered them again, the famous Bush tax cuts. Then Obama raised them again a little bit, and then Trump lowered them again. Who thinks tax rates are fair to you today or fair to the country as a whole? What do you want to say or ask about taxes?

212-433-WNYC as an issue in the presidential campaign and also in history with Columbia and Yale Law School professor emeritus and former Treasury Department tax official, Michael Graetz, who's the author now of The Power to Destroy: How the Anti-Tax Movement Hijacked America. 212-433-WNYC. Let me jump way ahead in history from where we just were 1970s, 1980s into the 21st century. If it weren't for the war in Iraq as the centerpiece of George W Bush's legacy, I think it would be the Bush tax cuts.

Then we had the Trump tax cuts, as I just mentioned, that President Biden criticized in the State of the Union. How different are tax rates today than let's say, in the year 2000 before Bush became president?

Michael Graetz: In the year 2000, the top tax rate was 39.6% on individuals and Bush just lowered it to 35%. As I say, it's now 37% under Trump, but there are some curtailment of deductions in New York. In particular, the disallowance of state and local tax deductions has meant that many people are paying much higher taxes in New York and in California and other high-tax states than they were before the Trump tax cuts. It was really an attack on the blue states in a Republican bill that ended up raising those taxes. The key difference between the George W Bush tax cuts and previous tax cuts is that George W Bush went heavily in favor of repealing the estate tax, which is the only federal tax on wealth.

It taxes wealth that is transferred at death to heirs or by gift during a wealthy person's lifetime. In 2000, before Bush came into office, the exemption from the estate tax was only $675,000. Bush managed to raise it, the $3.5 million. Then today after the Trump tax cuts, the exemption is now $13.6 million a person or $27.2 million an individual, which means that instead of applying to the wealthiest oh, 80,000 or 90,000 people who die in a year, the estate tax applies to only about 8,000 people a year. The very [crosstalk] a lot of money.

Brian Lehrer: Let me jump ahead a little bit again because here we are today, and Biden, as we heard in the clip from the State of the Union, is running in part on raising taxes on billionaires in addition to wealthy corporations. Let's talk about the individual billionaires who would not have to die in order to be affected by what Biden is proposing. The language on the 25% minimum tax proposal is on what they call unrealized income according to what I read about Biden's budget proposal this week. A 25% minimum tax on unrealized income. Can you translate that into plain English?

Michael Graetz: I'll try. The Biden minimum tax applies to people who have wealth over $100 million dollars, so it's not quite limited to billionaires. You have to have a thousand million to be a billionaire, and it is a 25% rate, and it applies based on the appreciation in assets that you have which are now not taxed at all until they're sold. The phrase unrealized depreciation is a technical phrase that basically suggests that for people with this much wealth, they would pay a 25% rate on the gains in their assets, whether they sell those assets or not.

During the last few years, ProPublica in particular has issued a number of analyses that show that there are many millionaires and billionaires who borrow against those assets that are appreciated either for further investments or to pay their consumption expenditures, maybe to buy a yacht or houses. They're borrowing, which is not taxed, and then they hold the assets that they've got until death, and then the capital gains that would otherwise apply on those assets is forgiven under current law. Biden would eliminate that forgiveness at death, but would also, as you've indicated, Brian, impose a minimum tax of 25% on the gains of assets whether they're taxed or not.

Now, it's worth saying that there is a case in the Supreme Court in which the plaintiffs have argued that would be unconstitutional. That case is waiting decision. It's a case called Moore v. United States and we probably won't get a decision from the Supreme Court until May or perhaps June. If the court rules that tax is unconstitutional, that will, of course, put a major crimp in Biden's ability to impose this tax beyond the crimp that the millionaires and billionaires who opposed it will put into it in Congress.

Brian Lehrer: Let's get a few phone calls in here. Luis in the Bronx, you're on WNYC. Hi, Luis.

Luis: Hello. Good morning. Hello?

Brian Lehrer: Good morning to you. We got you, Luis. Hi.

Luis: Okay. I'm from Europe and your guest will tell you European rich, and if you go and look at the top richest people in the world, 40% of them they live in Europe and they pay between 30% to 50%. Let me just give something that your listeners are familiar. Trader Joe's brothers, they live in Germany. They don't live Germany. They have never moved to United States. They don't buy condo in United States, and they are very, very German. Another one owner of the Porsche. I can go on and on. My problem is this, just like yourself, which I have on dear respect because I've been in '80s, I was against Reagan tax cuts, we do not educate our people that we need to pay our taxes.

Not to help the queens of the welfare, build our roads, build our infrastructures, build our bridges, create a free education like Germany up to the bachelor degree. That's all I want to say. I hope your guests continue on my point. Thank you

Brian Lehrer: Luis, thank you very much. I think because your point was very clear-- Well, actually, I guess there's an implied question there, which is how different is it in other countries that we compare ourselves to?

Michael Graetz: It's hugely different. As my book points out, the US tax burden is lower than all but six other industrial countries. The only one in Europe that is lower is Ireland. The other five are Costa Rica and Turkey, Chile, Colombia and Mexico. The European taxes are much higher than they are in the US, but as Luis pointed out, the Europeans pay for education through college, which we don't, and they pay for universal health care, which we've done better on, but are not completely up to them. Then the big difference is that there are constraints in Europe on how much you can borrow and how deeply you can go into a hole.

The US is now paying interest on the federal debt, which is at a level it's never been except toward the end of World War II, paying interest on the federal debt that is 3.1% of the total economy greater than the growth in the economy. Every dollar that the economy grows is now going to pay interest on the federal debt. 30 to 35 cents of every dollar that we pay in interest is going abroad. We have a hidden tax actually in the form of the federal debt, which Europe has accumulated some debt, but largely not nearly to the extent that the US has, and so we have a borrowing problem in the US because of the failure to pay for the kinds of things that Luis has mentioned.

Brian Lehrer: In fairness to the Republicans, they've put out an alternative budget, I don't know if you've seen it, to Biden's. Biden's budget says that his would reduce the national debt by a few trillion dollars over the next few years. The Republican budget claims that it would reduce the national debt by $14 billion over the next X years. Have you had the opportunity to compare and contrast?

Michael Graetz: I haven't. I have seen some Republican documents. As I understand it, they claim that they're going to do all this by reducing spending and not raise any taxes. The Republicans have signed, as you know, Brian, Grover Norquist's famous pledge, never to raise taxes even if they pose loopholes unless there's an offsetting tax cut. Their reductions in the national debt are going to come all from spending. The spending of the federal government, as I mentioned, the fastest-growing expenditure of the government is interest on the federal debt, and it's only exceeded by Social Security, but it's faster than Medicare or defense.

I don't see how they're going to get there without eliminating or cutting back on Social Security, Medicare, Medicaid. They've never liked the Obama health care benefits which get working people who are not eligible for Medicare or Medicaid health insurance coverage. They're going to cut back on retirement, security, they're going to cut back on health insurance. It's a completely unrealistic idea that you're going to cut spending by $14 trillion, without raising any taxes, but I haven't seen the budget, so that's just based on where they have been. I'll have to look at their alternative.

Brian Lehrer: Melissa in Brooklyn, you're on WNYC. Hi, Melissa.

Melissa: Hey, Brian. Thank you so much for taking my call. I appreciate your show. I love the conversation. I just want to throw it out there, I'm not an economist. I've never been extremely wealthy, but what I've never understood about the whole tax thing is there's a tax rate, and it's a percentage. A percentage like 10% or 20%, if I made $1,000 and the federal government took 20% of that, and there's somebody else who makes $10,000 in a month and they take 20% of that, and so you make $100 million in a month and they take 20% of that, would that not be enough money to cover all of these things?

Fund universal health care, free public education, and all these things, while being the most equitable result of all because we would all be paying the same exact percentage.

Brian Lehrer: Melissa, thank you. That's the flat tax argument, which is usually a Republican argument, Professor Graetz, that, hey, the fair thing is the same tax rate for everybody. Because if you make a lot more money, then that same rate is going to produce a lot more taxes, so why not?

Michael Graetz: There are two answers to that question. One is that all of the flat tax proposals that have been made so far would tax what you spend and not what you earn, so they're really not income taxes. Even if you had a flat rate tax on income, the question, which is one that we just talked about a little bit with regard to millionaires and billionaires, is how are you going to measure that income?

If somebody's sitting on $1 billion of wealth, Elon Musk could be an example, billions of dollars of wealth, but is not paying taxes because they're borrowing for their current expenditure, and we're not taxing the increases in wealth over time, and we don't have a wealth tax that applies, then you're going to distribute the tax burden down from people like Musk to people like Melissa who is arguing for a flat rate tax. The problem is, how are you going to define the base if you have a flat rate? The American public since 1913 has really always preferred as some progressivity in their tax rates, but the real problem is that we're not taxing any wealth and we're not taxing fully the increase in gains that we have.

The Biden budget, to its credit, has a number of loophole closers. Just to give you one example, it closes the famous carried interest loophole that allows managers of private equity and hedge funds to pay capital gains taxes, which are much lower than taxes on wages and ordinary income, but that's just one. There are just lots of loopholes in the existing system, including the fact that we don't tax gains on assets as they occur, and certainly we didn't forgive all those taxes if you hold the assets until you die, which really only wealthy people are able to do because middle-income people are not transferring a lot of wealth to death.

Brian Lehrer: By the way, just one other headline from the Biden proposed budget just so we don't give the false impression that it's all about tax hikes. He also proposes tax cuts for some lower and middle-income Americans. Do you know what the heart of those would be, and then we're out of time?

Michael Graetz: Yes. He proposes cutting taxes for first-time homebuyers. He increases the child credit, makes it fully refundable so it will take more kids out of poverty. He gives single people access to the earned income tax credit that is really available now only to people with children. He continues the [inaudible 00:28:34] for childcare supplied by employers, so there are some benefits for the middle-income folks in his budget. It's just worth saying, Brian, before we leave that Trump has basically suggested a big middle-class tax increase in the form of tariffs.

I know we don't have any time to talk about that, but tariffs will raise prices for the American consumer. As Grover Norquist himself said, tariffs are taxes, and they hurt the American consumer. There's a sharp distinction between the two presidential candidates.

Brian Lehrer: I'll ask you one quick follow-up question on that. Supposedly, tariffs, which would be basically taxes on imported goods, would level the playing field between the US and, say, China so that more manufacturing could be done in this country because the tariff on the import would make it not as attractive to buy cheap overseas goods. Does it not balance in your opinion?

Michael Graetz: It doesn't balance because Trump is suggesting a 60% tariff on Chinese imports in addition to a 10% tariff on everybody's imports. What will happen is that with a 10% folks, the prices will go up of imported goods and that will enable people who are producing competitive goods domestically to also raise their prices to the consumers who are going to end up bearing the burden of it. It may help domestic manufacturing a bit. A 60% tariff on Chinese imports, which is really an extraordinary idea, would basically eliminate or cut way way back on the goods that are imported for China.

People who are manufacturing in China would simply move to Vietnam or Cambodia or India, some other country, probably in Asia, but not necessarily in Asia, and import from there because of the differential tariffs. You might get some increase in domestic manufacturing, but at a huge cost to the American consumer.

Brian Lehrer: Michael Graetz has been a tax official in the Treasury Department. He is a tax law professor emeritus at both Columbia and Yale, and he's now the author of the book The Power to Destroy: How the Anti-Tax Movement Hijacked America. Thank you so much for joining us.

Michael Graetz: Thank you, Brian.

 

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