Setting the Stage: The Coming Debate Over Tax and Fiscal Policy

The Tax Policy Center

Published: January 09, 2003     ||   Availability:  Printer-Friendly Version

Moderator:
David Wessel, Wall Street Journal

Panel:
William Frenzel, Brookings Institution
Peter Orszag, Brookings Institution
Rudolph Penner, Urban Institute
Eugene Steuerle, Urban Institute

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ROBERT REISCHAUER, Urban Institute: (In progress) The Tax Policy Center is a joint venture of the Urban Institute and the Brookings Institution. It is an effort to provide the nation and the public policy debate with objective, nonpartisan information on tax and fiscal policy issues, and to provide for the nation a source of objective estimates of the cost of various tax proposals and their distribution and other impacts.

Today we are gathered to discuss the debate that will begin shortly on fiscal policy, stimulus, and economic growth, and the proposals that have been put forth by the president and the Democrats in the House and the Senate. We have an expert panel here with considerable expertise on these topics, and I will give brief introductions for each of them. There is more extensive information in the packets before you.

Going down the row here, we first have Bill Frenzel. Bill Frenzel is a guest scholar at the Brookings Institution, where he's been for a little over a decade. He served as a member of Congress for two decades from the state of Minnesota. He was a leader in the House on Economic matters, and was ranking member on the House Ways and Means Committee, an expert on trade and tax policy.

Next to him is Gene Steuerle, who is a senior fellow here at the Urban Institute. Gene served in the Treasury Department under four different presidents, was responsible for managing the tax reform effort at the staff level in 1984 and 1986 at the Treasury Department, served as deputy assistant secretary for tax policy at the Treasury Department, and is a prolific author, having written over 10 books and 650 columns. His column in Tax Notes is one which many of you are familiar with.

I will skip the next individual and go to Peter Orszag, who is a senior fellow, the Pechman scholar at the Brookings Institution. Peter served in the Clinton administration, both as an economic counselor to the president and as staff on the Council of Economic Advisers.

Last but not least in the line is Rudy Penner, who is the Arjay and Frances Miller chair here at the Urban Institute, where he is a senior fellow. Rudy served as the director of the Congressional Budget Office. He was a managing director of the Barents Group. He was a senior fellow at The American Enterprise Institute and chief economist at OMB [Office of Management and Budget], among his other credits.

The session will be moderated by David Wessel, sitting in the middle. David is the deputy bureau chief of the Wall Street Journal's Washington bureau. He also writes a weekly column for the Wall Street Journal, and he is most recently the author of a book entitled, "Prosperity: The Coming 20-Year Boom and What It Means to You." I think the 20 years maybe begins in 2005.

DAVID WESSEL, Wall Street Journal: Only if we cut taxes.

ROBERT REISCHAUER, Urban Institute: Only if we cut taxes. He wrote this book with Bob Davis, one of his colleagues at the Wall Street Journal. With that, let me turn this over to David, who will moderate the session.

DAVID WESSEL, Wall Street Journal: Thank you, Bob. It's a pleasure to be here, partly because it's an honor to be flanked by four people who have, in the 15 years I've been in Washington, always been ready to take the time to explain to reporters exactly how they thought something worked, and were never—never considered any of our questions too stupid to answer, which does distinguish them from some of the other people in Washington.

And to that end I want to make sure that we have one clear ground rule here, that we're going to start with some—I'm going to ask some questions of the people up here until about 9:30 and then we're going to turn to questions from the audience. But if there is some point during the conversation where one of them lapses into tech speak or starts talking too much like an economist and not enough like a regular person, just raise your hand and we'll get that question answered right away, because some of this stuff—none of this stuff is really complicated once you understand it, but some of it can get complicated when people lapse into shorthand.

And I'd also like to underscore something that Bob said, that in the last couple of weeks as I've been writing about the president's tax plan, that the kind of data that we can now get on the Internet from the Tax Policy Center really makes it much easier to think about taxes and to write about it in a way that's clear. And I encourage people who haven't looked at that web site to do so because sometimes just looking at one of those tables tells you volumes.

The president, when he gave his speech in Chicago the other day, described this tax cut, a $670 billion tax cut over 10 years, as a growth and jobs plan to strengthen America's economy. He said he was offering specific proposals to increase the momentum of our economic recovery, and he made clear that he has an idea about what government does. He said, and I quote, "The role of government is not to manage or control the economy from Washington, D.C., but to remove obstacles standing in the way of faster economic growth." And clearly the president believes that taxes are an obstacle standing in the way of economic growth.

The president's proposal has two big pieces. One of them would accelerate the income tax rate cuts that Congress passed a couple of years ago that weren't said to take effect until 2004 and 2006. The president would have them take effect this year, effective January 1, and on that the president said, and I quote, "By speeding up the income tax cuts, we will speed up economic recovery and the pace of job creation."

The other big piece is a change in the way corporate profits are taxed, among other things making dividends to individual investors tax-free. And the president said that by ending this investment penalty we will strengthen investor confidence; by ending double taxation of dividends we will increase the return on investing, which will draw more money into the markets to provide capital to build factories, to buy equipment, to hire more people.

So the first question I would like to ask our panelists today is, well, what about these goals that the president has set? How does his plan accomplish that, or fail to accomplish that? Simply put, what will be the effect of these tax cuts on the economy, both this year, 2003, and next year, 2004, but also over, say, the next 10 years? And let me start with Rudy Penner.

RUDOLPH PENNER, Urban Institute: Well, thanks, David. I'm probably in the minority, but I don't really think the economy is in such bad shape. It grew over 3 percent in the year ending in the third quarter. We hit a sluggish patch in the fourth, but virtually every economic forecast that I know about has the sluggishness ending before the last half of this year. And none of these proposals are going to have much effect before then.

There is also a fundamental problem in designing a stimulus package. Economists know pretty well that short-term changes in your income don't affect economic spending behavior that much, whereas if you go to long-run changes you of course hurt the budget balance in the long run. The exception to that is supposed to be if you can find people who are short of cash to give money to, but I would argue that's a lot harder than is generally believed. So I would guess that either of these stimulus packages in the short run—and I mean by that, 2004—have a multiplier probably considerably less than one.

I do like the president's long-run notion of easing the tax on dividends, which is not extremely high, but unfortunately I think they've tried to fine-tune the proposal until they've sort of disappeared in an orgy of complexity. So I think it will be very difficult work, the precise proposal, but something along those lines makes considerable sense to me for the very long run.

DAVID WESSEL, Wall Street Journal: So if the package were passed as the president proposed it, it would help or hurt the economy in 2003, 2004, and in the decade—both?

RUDOLPH PENNER, Urban Institute: Well, I think in 2003 it would be barely perceptible. In 2004 it might show up a little bit, but it would be very little per dollar. So, frankly, I don't think either the president's proposal or the Democrats' proposals are really worth the increase in the national debt that you'd have to endure to implement them.

DAVID WESSEL, Wall Street Journal: Peter?

PETER ORSZAG, Brookings Institution: I think, again, it's important to separate the short run from the long run. In the short run, I agree with Rudy that the president's proposal is likely to have minimal effects on the economy. In fact, by the administration's own estimates, the proposal would only generate 190,000 jobs in 2003. Since the beginning of the recession in March 2001, private sector employment has fallen by about two million. So 190,000 jobs is just a blip on the radar screen, and that's by their own numbers.

Over the longer run, I think the way to think about this is that it's a different scenario than, for example, the 1986 tax reform that Gene Steuerle played such a pivotal role in designing. This is not tax reform; this is a tax cut. It's not paid for. And so there are two offsetting effects. It may be that a dividend exclusion allows us to allocate capital more efficiently across the economy, but we'll have less capital to start with because we haven't saved as much.

And on the first part, the efficiency gains, I think there's a lot of questions about exactly what the distortions are from the current tax treatment of dividends. There's the so-called new view of dividend taxation in which the distortions are not severe. And in that case, the gains that you get would be outweighed by the losses from the reduced national saving. And I just want to emphasize that when you argue that the stock market will go up from eliminating dividend taxation, you are embracing this new view of dividend taxation. So to argue that the stock market will go up and that there will be huge long-run efficiency gains from the proposal is internally inconsistent.

DAVID WESSEL, Wall Street Journal: And do you agree with Rudy that the economy probably doesn't need any stimulus?

PETER ORSZAG, Brookings Institution: The central estimate—you know, if we knew for certain that the current forecasts were correct, I would agree with him, but I think the balance of risk is such that a small stimulus package that doesn't have long-run costs would be worth it. In other words, while economic forecasters say that the economy will recover, we are particularly bad at forecasting in these types of turning-point times, and I think it would be worth a little bit of increase in long-term debt, a little bit, basically for an insurance policy.

DAVID WESSEL, Wall Street Journal: Gene?

EUGENE STEUERLE: One has to be very careful when one uses words like "stimulus," because they become buzzwords around this town. If you look closely at the language used by the Council of Economic Advisers in supporting this proposal, they don't really use the word stimulus in the sense of putting cash infusion in the economy. Occasionally there is a couple of sentences to that effect. The more political types in the White House talk about it a little bit more, but the Council of Economic Advisers mainly talks about stimulus in terms of changing incentives, and that's the long-run issues that Rudy and Peter just gave.

But let me mention something by way of background as well—is we have never before had a recession where so much money has been put back in the economy by the government as this one. So we talk about stimulus but we very seldom ask, relative to what? You know, what is the right size of stimulus, especially if you're talking about cash?

And just to give a couple of very quick figures: In the year 2003, the various bills that have been passed by the Congress—and it hasn't just been the tax bills, because there has been a remarkable increase in discretionary spending as well. Basically legislative changes have put back in, for that year alone, close to a quarter of a trillion dollars. And then the decline in the economy, which normally reduces revenues by 30 or 40 percent of the decline, in this case has reduced revenues by a much larger percentage because of the great falloff in the use of stock options and capital gains and income at the top.

So that's putting another quarter of a trillion dollars. So we have, together, already—this is before one even passes a bill like this—close to a half a trillion dollars that in some sense the government has put back in the economy to various people. In fact, the amount of money it's put back in may be in excess of the size of the recession, and that is just remarkable—that by historic standards.

So I think very few people would make a case that an additional, in this case, $100 billion of cash flow, which is what this bill would provide, is what is needed—

DAVID WESSEL, Wall Street Journal: $100 billion is what it would provide in the first year?

EUGENE STEUERLE, Urban Institute: In the first year. I can give you the five-year numbers real quick, too. The various bills that have passed for five years have put in about $1 trillion back in the economy; that a climb in the economy has put another $1 trillion back in the way of lost tax receipts. And by the way, I'm not even counting what's happening on the state level, which is also putting money back in the economy.

So there's a couple trillion over five years put back in the economy, again perhaps in excess of the decline in the economy itself that this bill would put in another $450 billion or so over five years. So it's small relative to what has already taken place; it's still large relative to what legislative discretion Congress has.

DAVID WESSEL, Wall Street Journal: And so, bottom line, if this were embraced in its entirety, would it help the economy in the next year or two or hurt it, or no difference?

EUGENE STEUERLE, Urban Institute: I think in terms of cash flow, that's not the issue. In terms of cash flow, this is not needed for the economy. The big issue for the long run is whether the incentive changes in this bill make a difference in terms of investment savings—

DAVID WESSEL, Wall Street Journal: In incentive changes you mean lower marginal rates that are accelerated?

EUGENE STEUERLE, Urban Institute: Partly lower marginal rates and partly the dividend relief.

DAVID WESSEL, Wall Street Journal: Okay.

Bill?

WILLIAM FRENZEL, Brookings Institution: Yeah, I have some of the same feelings as the others. I am not an economist. On the other hand, I don't mind pretending I'm one because most of them think they're politicians as well.

I believe that the proposal, if enacted, will have a salutary effect on the economy, admittedly small. And, admittedly, $1 billion may be a stretch when we figure out how to make it all work in a timely fashion. It would depend on how fast the Congress can move it along, how fast we can adjust the withholding tables, how we figure out the dividend stuff, et cetera. But, again, putting on a politician's hat for a minute, like Peter I think there's enough of a risk so that I would be very nervous not having a stimulus. And I think the public feels the same way. In addition to economic impact—and maybe the incentive impact, which is ultimately economic—there's a psychological impact. The public obviously wants the president to pay more attention to the economy. He has responded, and that is likely to have something salutary in its effect on the economy.

Long term is less certain to me. I think the relief from double taxation of dividends is a good idea any day, any season. The rest of the proposal is mostly acceleration. It's in there already. You know, if you think the deficit is affected for the out years, and you're talking 10 years, that's already there. You don't want to count it twice and worry about it. But I think it is a good stroke either way. I do not mean to suggest that I think this is going to be ultimately what is enacted and become law, but I think that the government would make a real mistake if it did not give the people the assurance that it was trying to do something, and even though the effect is slight, I think it is a good effect.

With respect to the stock market, I have no way of assessing whether we're going to get a 10 percent bump from this or not. The stock market usually doesn't do what I tell it to do, or what I think it's going to do. It does have a mind of its own. Nevertheless, there seems to be a general suspicion that it is going to improve the stock market. That also is going to improve the good humor of the American public, since more and more the market is being looked at as the proxy for the economy because it is reported so regularly and so monotonously. So I believe this is a good stroke. I believe it will be modified, but I think the modification will likewise be a worthy effort.

DAVID WESSEL, Wall Street Journal: Looking at the specifics of the proposal for a moment—something that we haven't mentioned so far—the president wants to accelerate what they call the marriage penalty relief, the changes to the tax code that undo some features of it that penalize people who are married compared to people who were single and earning the same amount of money, and it also accelerates something called the child credit, which means giving money to people, some of which will be a rebate, who earn less than $10,000 a year and have children. And I wondered, Gene, if I could ask you to talk about, why are we targeting tax cuts specifically at married people and parents, and is this a good idea?

EUGENE STEUERLE, Urban Institute: Well, I think when you get into those proposals you really are dealing more with equity issues in the tax system. The reason for marriage penalty relief—and I actually agree with it—is that we basically operate in an economy now where marriage is largely a decision to commit yourself permanently to another person. And we have all sorts of people who live with other people. They live with other people in nursing homes and dormitories, in out-of-wedlock marriages—sorry. That would be hard to do, wouldn't it?

DAVID WESSEL, Wall Street Journal: That economist stuff again.

EUGENE STEUERLE, Urban Institute: That's right—in relationships that are not marital, and friends living together. And if we decide that the tax code is going to tax, additionally, people who live together, then why do we pick only on those people who take vows? And so I think there's a good reason, in that type of world, to give marriage penalty relief. And we do have marriage penalties that apply to people. That's an equity issue. It does turn out that the way we do it does, to some extent, relieve some marginal tax rate; that it does provide some marginal tax rate reduction.

On the child credit, the issue is a different family issue, and that's whether you adjust the tax system for the size of the family. And it turns out that a family with children generally does have a higher tax—not a higher tax burden, but a higher burden cost of living than do families without children. And I think it's very appropriate to make those types of adjustments. But those are, for the most part, issues that have to deal with equity.

Let me just state, by the way, that there are some games that are played when you look through these budget processes. For instance, the child credit is not indexed for inflation. And what that means is the credit that's available in 2003 and 2004 will, by the time you get to 2010, be worth about one-fifth less. It will also end up taxing—being less available to upper-income families because they don't index what's called a phase-out; that is, that it's going to be available at lower and lower income levels. So there's a number of subtexts to that issue as well.

DAVID WESSEL, Wall Street Journal: Do you want to say something on that, Peter?

PETER ORSZAG, Brookings Institution: Sure, just two comments on these provisions. First, it doesn't strike me as being the immediate priority for the economy right now. If we're trying to get the economy moving—and again, there is some question about what we're trying to do here, but one of the problems is this package tries to be all things to all people, and that's why you end up with interests of, costs of $933 billion over 10 years. We're trying to accomplish too many objectives. I think we should try to focus on that insurance policy that Bill Frenzel mentioned, and not try to fix all these other things.

But on the substance of trying to fix these things, a few things to note. First, in what I consider to be a quite cynical move, the administration excluded from acceleration two provisions that particularly affect lower-income families: fixing the marriage penalty relief in the EITC [Earned Income Tax Credit] and increasing the refundability rate of the child credit. Presumably they're doing this so that they can pick up votes at some point by trading those away.

DAVID WESSEL, Wall Street Journal: Explain what you mean by refundability.

PETER ORSZAG, Brookings Institution: The child credit is currently refundable—partially refundable. The refundability rate is 10 percent of earnings above $10,000. That is scheduled to go up to 15 percent. That's—

DAVID WESSEL, Wall Street Journal: Which means that if you don't owe any income taxes, they give you cash.

PETER ORSZAG, Brookings Institution: Right. And the administration did not include that increase in the refundability rate in the package. What this means is for a family of four with two kids, they get a tax cut of zero. So there are—you know, the illustrative examples that are trotted out are specifically targeted to specific kinds of families, but you're not getting everyone.

Another illustration of that—

DAVID WESSEL, Wall Street Journal: You say a family below a certain income—a family—

PETER ORSZAG, Brookings Institution: At $20,000.

DAVID WESSEL, Wall Street Journal: $20,000.

PETER ORSZAG, Brookings Institution: If you look at heads of households—so single moms or people who are trying to raise kids who are also struggling in the current downturn—49 percent get a tax cut of zero; heads of households with children, 49 percent get zero tax cut.

So there are illustrative examples of large tax cuts that the administration is trotting out. I, again, don't think that this is the top priority for dealing with the economic problems that we're facing—very large long-term costs—and there are lots of people who are not helped.

DAVID WESSEL, Wall Street Journal: But I think the administration would say to you, Peter, that if we're going to cut taxes, we have to cut taxes on people who pay taxes. And we have a tax system that has changed over time, and a lot of wage earners who make $20,000 or $30,000 don't pay any taxes now. It seems to me that the underlying question there is a pretty interesting one, and it's—we know that in the last decade or so we've had a widening of the gap between high-income and low-income people in the United States, and the question is, should we be using the tax code more to try and shrink that gap? Should we be using the tax code more to take money from the rich and give it to the poor?

The president, in this proposal, is saying no. I'm sort of curious whether anybody at this table thinks that's the right answer or the wrong answer. Bill?

WILLIAM FRENZEL, Brookings Institution: I personally do. If this is a real tax cut, with the main purpose to stimulate the economy, then I believe that taxes should be given back to the taxpayers. On the distribution/redistribution thing, the people who worry about these things always look at the distribution of the tax burden by income level before and after. And after, the tax code is, of course, more progressive because the top 1 percent is paying close to 40 percent and is getting back 28 percent of the tax cut. Obviously they're carrying a heavier load after than before.

I really believe, with respect to the Earned Income Tax Credit, which was specifically mentioned, that it is getting to be such a large number now without any effective control, and with a fairly large number of allegations and some proof of fraud, that we may have run that horse about as far as it can run for us, and if you want to do something for those income classes, maybe you need to look to an appropriations process where you have some kind of control over the outgo of the money. The Treasury doesn't know; they just send a check. So I think it is not a good idea in the tax cut to devote the money in that particular way.

DAVID WESSEL, Wall Street Journal: Rudy, do you want to—

RUDOLPH PENNER, Urban Institute: Well, I would just go further and say that I think it would be foolish to try to use the tax code to continually adjust shares of after-tax income. The rich did very well in the '99-2000 boom period. I suspect they won't do so well in 2001. And you obviously wouldn't want to try and offset those kinds of fluctuations from year to year.

PETER ORSZAG, Brookings Institution: But that's exactly what the proposal is doing. If you look at the change in after-tax income, according to the Tax Policy Center's numbers, households with more than $1 million in income will see an after-tax increase in their income of 4 percent; households at $40,000 to $50,000 will see a 1 percent increase. So this is tilting—in terms of after-tax income, this is tilting toward the top end of the income distribution quite dramatically.

RUDOLPH PENNER, Urban Institute: But that isn't what you want to look at. I mean, obviously a person who pays no taxes, you can't adjust for after-tax income. You've got to look at the shares of the tax burden that people have.

WILLIAM FRENZEL, Brookings Institution: You look at the burden and the high end has a higher burden after this tax cut than it had before the tax cut.

PETER ORSZAG, Brookings Institution: That's not true in 2010. The other thing you have to remember is all of the tax cuts for the middle class are temporary and all the tax cuts for the upper class are permanent—the dividend tax exclusion. Accelerating the child credit and all those things provides a temporary tax cut in 2003 and 2004 for the middle class, but then that goes away because those would have taken effect anyway and all you're left with in 2010 is the dividend exclusion.

DAVID WESSEL, Wall Street Journal: I think we can join this again later. I got an e-mail from the Treasury PR people yesterday, inviting a bunch of reporters to a telephone call about the dividend tax. And the instructions were that this was an invitation-only briefing, beyond the record. It was to answer technical questions only; no questions about tax breaks for the rich. I promise that won't be our rule here.

But let me shift a little bit. It seems to me the only reason that one might be against tax cuts—I mean, after all, who wants to pay more taxes?—is if you have some concern about the deficit. The president and his advisers speak very differently about the dangers of the deficit than the Clinton administration did, and I wondered whether—let me start with you, Rudy. You've been around this track a few times, seen the deficit get bigger and smaller and bigger again. Is the president too complacent about the deficit, or is he right not to worry about that so much and to worry about economic growth now more?

RUDOLPH PENNER, Urban Institute: Well, we're obviously not in the same situation we were in the 1980s and early '90s when the deficit in '83 was 6 percent of the GDP. That would be $600 billion today. So I don't regard current deficits as alarming; I merely regard them as being undesirable. And if you put a—I haven't seen the dividend tax relief analyzed in the context of the growth model, but very typically when you reduce the cost of capital somehow, you do stimulate growth for a time, but if you don't make up for the revenue effect, the negative effect of having a bigger deficit grows and grows gradually. How fast depends on the model, but first you've got to borrow to make up for the revenue loss, then you've got to borrow to pay the interest and the interest on the interest, and so forth. So out there 15, 20 years, it all becomes negative unless you do something.

I think one problem right now is that this stimulus package has been cast out totally remote from the president's overall budget strategy, which we won't learn about until—for a couple of weeks. And then I think we've got to worry about if the president will enforce his budget strategy, whatever it happens to be.

In the last Clinton term and early in the Bush administration, presidents didn't pay much attention to their budgets as the legislative session went on, and I think that's a very worrisome phenomenon.

DAVID WESSEL, Wall Street Journal: You mean we get the tax cuts but we won't get the spending—

RUDOLPH PENNER, Urban Institute: Yeah. I mean, even if he put spending restraint into the budget, it is a question of whether he will be willing to enforce that with vetoes. And I don't know at this point, but I do think it important to look at proposals of this type, especially long-run proposals, in the context of your overall budget, to see if you can merge them with a disciplined approach to the budget balance.

DAVID WESSEL, Wall Street Journal: So, Peter, you are, I understand, the emissary from the school of "Rubinomics" now in Washington, who have adopted the old Republican mantra that deficits matter.

PETER ORSZAG, Brookings Institution: It's not that old. The first Bush administration, Marty Feldstein—it's still alive and living in the Republican Party.

I would make a couple of points on this note. First, this is not the only proposal that the administration is putting out in terms of the long-term budget outlook. It wants to make the tax cut permanent. It wants to do this; it admits that we have a looming alternative minimum tax problem. You start adding all of these things together: $933 billion with interest from this proposal, $600 billion plus interest from making the tax cut permanent, $500 billion-plus for addressing the AMT [Alternative Minimum Tax] problem, and you're starting to talk real money.

So I do have some significant concerns about the long-term fiscal outlook. And, again, the reason the fiscal discipline matters in the long term is not saving reduces our income. And there is a lot of debate about the effect of deficits on interest rates, but that's, in a sense, a red herring. The real point is budget deficits reduce the amount that we save, they reduce the amount of capital that Americans own, and therefore they reduce our income. And you have to be—

DAVID WESSEL, Wall Street Journal: In the future.

PETER ORSZAG, Brookings Institution: In the future. And you have to make sure that the purposes for which you're running those deficits more than offset that negative effect or else you're actually doing harm rather than good.

And then, just very briefly, in the short run—I actually kind of find it astonishing that we are putting forward these sorts of proposals that I think everyone on this panel admits has almost no, or negligible, effects in the short run, and yet we're not funding port security, we're not fully funding first responders. There are a lot of other things that we're not doing because of the argument that the budget deficit is too large and we can't afford them, and yet we can afford these.

WILLIAM FRENZEL, Brookings Institution: David?

DAVID WESSEL, Wall Street Journal: Yeah, Bill?

WILLIAM FRENZEL, Brookings Institution: I'm one of those old Republicans that still believe that deficits matter, but I do not believe that they are dependent on tax cuts alone. And I have no objection to tax cuts like these if there is some fiscal discipline applied. And that's the real question. We haven't seen the other part of the program.

And Peter is correct that we've got a lot of unfunded liabilities out there. We've got a lot of Medicare promises on the table for a huge program. We have Social Security, which is obviously headed south at a fairly rapid rate. What I always look at is the percent of GDP that is being paid in taxes. And we're going to be pretty close to 19 percent, plus or minus something, through the next 10 years.

My question is, can we hold spending at that level? If one looks at the congressional record in retrospect, one doubts that. So I think the president, having put forth what I think is a reasonable tax plan, has an obligation to try to administer some discipline in the spending process. I don't know whether it's going to work or not.

DAVID WESSEL, Wall Street Journal: Gene.

EUGENE STEUERLE, Urban Institute: I don't think there's anybody at this table that would say that deficits don't matter. The dilemma is always that when you have a variety of items that don't add up, so we adopt provision A, B, C, D, and E—and it's not just the legislative changes that are coming along; even more importantly are those items that grow automatically. We're scheduled now for most middle aged—or younger people today, we're now scheduled to give them—there are a couple—a lifetime package of Social Security and Medicare benefits of $1 million. That's in current dollars, what we call the present value of what you'd pay an insurance company to get that. And this just keeps going over time.

So we have all these built-in spending increases and tax cuts, and we know that in the end we have to deal with them, not only in terms of dealing with—making sure the deficit doesn't grow too large, but also to make way for other emergencies and other needs in the future. And we haven't, I think, over the past 20 years, really adopted a fiscal discipline that really helps us deal with these issues well. We do occasionally come in with these deficit reduction packages, but I really don't think we have restored to the budget the type of slack that would allow any president or any party—whichever one won—to be able to do those new things they really wanted to do.

And that's the real dilemma, is how do we restore not just fiscal discipline in the short run of making sure the deficit is reduced, but the long run of restoring enough slack to the system that when we do have new proposals coming along, we can fit them into our budget process?

DAVID WESSEL, Wall Street Journal: Right. Although, just to be fair to the president for one moment here, the president does say he's going to come up with a Medicare plan that will make lasting changes to Medicare that will save money. It's a little hard to evaluate since we haven't seen anything on that.

But, Gene, let me ask you to talk about something else. The thing, in this new proposal of the president's, that's really different, and I think hard for a lot of people to understand, is the change in the way we tax dividends. And what we now know is that the president is proposing something—borrowing a proposal that was put forward by the first Bush administration—but only after it lost the '92 elections—to make dividends, when they're paid to shareholders, completely free of income tax, and to give shareholders some credit when they're doing their capital gains taxes for earnings that the company has bought and paid taxes on but hasn't paid out in dividends.

So maybe you can put in perspective for us a little bit, since I'm sure this was an issue that came up in earlier tax reforms, what's this all about and what should we be thinking about to understand this better?

EUGENE STEUERLE, Urban Institute: Well, one of the prime authors of this proposal is Glenn Hubbard, who is now chair of the Council of Economic Advisers. And he was one of the authors of the earlier Treasury study, and Treasury has a long history, through Republican and Democratic administrations, of favoring what is called corporate integration. Integration means you're trying to integrate together and think about personal and corporate taxes at the same time. So, in fact, we proposed this type of proposal—not exactly the same form—in the 1984 Treasury proposal that led to the Tax Reform Act of 1986. It was proposed under the Carter administration. I can't remember when they finally proposed it, but it was part of their analysis and their initial proposals.

So it has a long, long history. And the reason for the history is that there is a tradition in Treasury that you want a tax system that is transparent. And just as Treasury tends not to like to hide a lot of expenditures and subsidies in the tax system because it makes the system say one thing but then do another, Treasury also doesn't like trying to tax income through the back door various ways. And what we end up doing is having a system that taxes income earned by corporate shareholders first, as owners of the corporation. I mean, corporations don't really pay taxes as the standard-line individuals do, but then it tries to tax them again at an individual level.

And not only does it do this, but it sort of catches some people. The people who have more dividends, the people who invest in mutual funds as opposed to retaining shares where they don't sell their assets and get their capital gains, they're the ones that pay a lot more of the tax. The little old widow and widower who need more dividends pay a higher tax than the person in a corporation that doesn't pay dividends.

So there's a strong tradition of trying to remove this double tax and create a single layer of tax. And the proposal put forward by the administration does it in a somewhat neat way, although I don't want to indicate that there is not a lot of complexity as well, but the neat way is to try to solve this issue at the corporate level; let the corporation pay the rate of tax on behalf of the individuals and then, for the most part, be done with it. So you don't then have to have the individual come through later on and pay either the additional tax on it, or if you want to and you don't have the corporation imputing all this income to the individual with all the complexity of dealing with the IRS and later adjust it and everything else, you try to solve this at the corporate level.

So that's the general theory and that's the general idea behind the proposal. But I'm skipping over a lot of details, given our time.

DAVID WESSEL, Wall Street Journal: Right. Both Bill and Rudy have suggested that the form of the proposal is too complicated for Congress to actually buy and for the IRS to actually administer. I mean, I hope I'm not putting words in their mouths. Do you agree with that or not?

EUGENE STEUERLE, Urban Institute: It's very possible that the complexity will prevent it from being adopted. I will say that the current law is exceedingly complex as well. I was just talking to a lawyer friend of mine today who was indicating that, you know, a tremendous amount of the activity of corporate tax lawyers involves making deals where they try to avoid the double tax by rearranging dividends—so their capital gains, and a lot of other things.

So it's sort of like, yes, the proposal is going to have a lot of complexity, especially during a period of adjustment. But it's not as if the current system does not have an extraordinary kind of complexity built within it. And so I think the end question is, do we like the new incentives that this system will create? And in some areas I really do. I mean, for instance, I think it will encourage a more explicit recognition of income by the corporation. It will discourage—

DAVID WESSEL, Wall Street Journal: Be more explicit. You mean they'll play fewer tax games because—

EUGENE STEUERLE, Urban Institute: I think there will be fewer tax games played. I think also it will encourage equity ownership—not just equity ownership among individuals, but it will encourage corporations to float more equity than debt. That has implications for such things as airline bailouts. There is a number of industries that highly leveraged themselves. They will be now encouraged to have more of an equity share. That means they will be less likely to go bankrupt. It also means we'll be less likely to come in with bailouts.

So I think there are a lot of positive effects of trying to create a system that is transparent and does recognize the income upfront in one time only.

DAVID WESSEL, Wall Street Journal: It seems to me the burden on the advocate is to say that the economy will grow faster over time, over a decade or two, if we adopt this tax initiative than if we don't. If it doesn't increase the rate of growth over time, either by encouraging equity instead of debt, or encouraging people to invest, then it's a failure.

Do you think it will do that? Do you think it will increase the rate of growth over time?

PETER ORSZAG, Brookings Institution: I think it's hard to know. We don't know the exact details of the proposal, and a lot of the details will affect its ultimate impact on the economy. I think it's certainly plausible that the effect will be negative, and I think, given the fiscal gap that we face over the longer term, there is indeed a strong burden of proof that should be on those advocating this that it will cause a significant increase in growth.

Let me just briefly mention two of the things that—two of the areas of complexity that could be created here.

One example: the corporate tax rate we normally think of as 35 percent, but it's actually lower at lower levels of corporate income. Up to $50,000 its only 15 percent, and it's 25 percent for some range. You would need special protections to make sure that, for example, people with consulting companies don't just run and set up three or four of these consulting companies and pull all of the income out as dividends, effectively taxing it at 15 or 25 percent. And, yes, you can come up with rules that try to limit that, but there are a lot of complicated rules that are involved.

The second level of complexity: foreign corporations and foreign investors. How are dividends paid by foreign corporations treated, and how are foreign investors in U.S. corporations treated? We've actually seen, over the past few years, movements of several European countries away from this type of proposal, scaling them back because of problems dealing with international capital flows. And it's not entirely implausible that the distortions you create in cross-border capital flows offset a significant portion of any efficiency improvements internally.

RUDOLPH PENNER, Urban Institute: I don't think there's any doubt that it will improve growth over the shorter run. And it will improve it more if you do something about the revenue loss, but I'd question your premise that that's the only issue. I think Gene raised a lot of equity issues as well. I mean, how much is it fair to tax a stream of income, regardless of how wealthy the person is that receives it? Do you really want tax rates well above 50 percent when you look at the total stream of income?

WILLIAM FRENZEL, Brookings Institution: David, may I comment?

DAVID WESSEL, Wall Street Journal: Please.

WILLIAM FRENZEL, Brookings Institution: You indicated that I'd suggested it might be too complicated. My guess is that Congress is basically going to like this and want to get it enacted. What has been lacking in the past is the president to propose it. And I believe that they're going to tweak it and play with it, and I think Democrats will want to put a cap on it, and there will be all sorts of ways you can fuss with it. But I believe that some sort of relief of double taxation is going to be enacted, and that, as Rudy and Gene have suggested, is going to have a number of good effects on the economy.

DAVID WESSEL, Wall Street Journal: Let me ask you about two things that were discussed at the White House but didn't make the plan. Actually, I think they show up in some Democratic alternative. One is to give some money to state and local governments to offset the budget cuts and tax increases that they're facing in the next year or so, and the other is to sweeten a temporary tax break to encourage investment the Congress passed already to make it even more of an incentive for businesses that are thinking about buying software or machinery or building an office or a factory to do it in the next year or two. Does anybody think that this proposal would be better off or worse off if these provisions are added by Congress?

WILLIAM FRENZEL, Brookings Institution: I do. At least I—

DAVID WESSEL, Wall Street Journal: You think it would be worse off?

WILLIAM FRENZEL, Brookings Institution: No, I think it would be better. I'd like to talk about expensing. I think one of the things about the economy that's made us a little nervous is that businesses aren't investing and buying capital equipment. And there are good arguments why they might not if given an incentive, but I believe that tax incentives are powerful. And if that 30 percent one-year expensing feature were extended and enhanced, it is not expensive, but I think it would add very powerfully to the near-term stimulus. This is one that works right away, in my judgment, and would be a great addition. Don't ask me how you'd fit it in or what you would have to take out to get it or whether you could stand another addition, but I myself was disappointed that that particular feature was not in the plan.

DAVID WESSEL, Wall Street Journal: Peter?

PETER ORSZAG, Brookings Institution: I agree that—I'm not sure exactly how potent it would be, but that it's not a bad idea to increase—currently under current law for 2003 and 2004, businesses can immediately deduct 30 percent of their investments. I think it's not a bad idea to up that 30 percent for 2003 and then reduce it in 2004, with the logic being that you want to be encouraging investment now. You know, when you hear a store has a sale, they don't say a sale on shirts for the next four years; they say sale this weekend, to try to get you in to buy the shirts this weekend. And the same thing would apply with regard to the investment incentives.

On the states, again, my impression is there were early rumors that this was included—I think it's not impossible that the administration would ultimately include a provision here, but this may be part of a larger political strategy to, again, pick up votes for other components of the package by then adding back in $5 [billion] or $10 billion for the states.

It is important to realize the states are facing very large deficits, with estimates, you know, ranging up to $70 billion. In Kentucky they're letting prisoners out of prison because they can't afford to keep them in prison. Other states are raising taxes and cutting spending, exactly the opposite of what we would want to do, I would think. From a macroeconomic perspective, I think that some degree of fiscal relief is warranted. I would be cautious about numbers that get up past $30 [billion] or $40 billion, just because of the incentives that you're creating for states to not keep their houses in order during the next business cycle, but I think a significant fiscal package for the states would be more than, frankly, any of these other provisions to boost the economy now.

DAVID WESSEL, Wall Street Journal: Okay. Let me open the floor to questions. We'll start with Jodie Allen over here. Let me ask that you say who you are and where you're from, and that you try and ask a question. It would be better if you stood up.

JODIE ALLEN, U.S. News and World Report: Okay. I wanted to address the corporate dividend exclusion provision on both the equity and efficiency fronts. Gene mostly talked about this, but others did too. On the equity front, he and Bill Frenzel say, well, it's not fair for dividends to be double taxed, and yet we know that most dividends are not double taxed, either because the corporation pays no taxes or because they pay, as the great bulk of middle-income recipients, into 401(k)s or other retirement plans, in which case they're not taxed until the money is withdrawn, and they will then still be taxed.

So I'm not quite sure about the equity, especially since the little old lady who is now, you know, routinely on a fixed income, is, as Jim Poterba shows, less likely to receive dividends than any other age group, and she probably doesn't pay much tax anyway. So is this equity argument real?

And then on the efficiency side, the problem that's usually been pointed to, and for which this is offered as a cure, is that a corporation has a much larger incentive to borrow money because it can deduct the interest costs and it can't deduct the dividends that it pays out through equity. But it won't be able to deduct them now anyway. Moreover, we'll now be under great pressure to pay dividends rather than keeping the money for internal investment, so I'm not sure why this is expected to improve incentives for capital investment.

RUDOLPH PENNER, Urban Institute: I think on the equity thing it's fairly obvious to me, the very fact that a lot of people escape it means that you want to give some relief to the people who pay it, and that's a strong equity point.

On your other point, I think you are assuming that corporations are really very naive and that they don't look at the total taxation of the income stream that they push out. I would think that just dividend relief alone, forgetting about what they're doing on reinvested earnings, but just dividend relief alone would result in higher payouts. And I think that's a good thing to submit the corporation to the discipline of the capital market more.

Q: (Off mike)—a confidence thing. I mean, now we have a situation where if Larry Ellison or Scott McNealy or Bill Gates can persuade a compliant board—as we know, most boards are compliant—to pay even a tiny dividend—

DAVID WESSEL, Wall Street Journal: Right, but I think it's really important to understand how the proposal works, because I think your criticism is fair criticism of the proposal if it was understood in the one or two sentences in the president's speech, but not as the Treasury is explaining it.

Gene?

EUGENE STEUERLE, Urban Institute: This is the complexity that my fellow speakers up here have alluded to, is that the proposal is not really dividend relief. It really is relief from double taxation of this corporate income, whether it shows up as dividends or as retained earnings, because there is a provision in there that I'm told came about in part because a number of companies complained that they would have incentives not to retain earnings. That provision says that if the income is retained within the corporation under certain provisions, that in fact there is a step-up in basis for the individuals so they will not have to pay a capital gains tax as well.

One thing that I only learned over the years, and really thought about it the first 10 years I was even in public finances, that there is really a double tax, not just in dividends, but of retained earnings to the extent that shows up as capital gains. If a corporation earns $10 and as a result your share goes up $10 per share, as a result your value of your share goes up from $100 to $110, and then you sell that share at $110, you're paying capital gains tax on income you've already paid tax on. So this adds to the complexity in order to deal with that particular issue. But David is correct. In fact, it is probably a mischaracterization to really call it just dividend relief. It's really not just the proposal; it's really corporate income relief.

DAVID WESSEL, Wall Street Journal: There's a question over here. Can we have a mike over here? And, again, please stand and say who you are.

GERALD CHANDLER, ITech Consulting: Well, my question is follow-up on this dividend exclusion. Supposing that it is enacted and there is temporarily a tax loss, and later the tax loss is made up by both a combination of growth in the economy and new taxes. What would you guess this would do to the overall distribution of who pays the taxes? Would the rich be better off or worse off, or would the retiree be better off or worse off?

DAVID WESSEL, Wall Street Journal: Well, I think there's a lot of assumptions you have to make to answer the question. The question is, assume the dividend tax break is adopted as the president proposes it, and some of the lost revenue is made up in the future, either by growth in the economy or by higher taxes, then who gets the benefit of this thing? Is it the rich, or other people? Is that fair? Does anybody want to take a stab at that?

PETER ORSZAG, Brookings Institution: Well, again, not incorporating all the dynamic effects, just looking at who would receive it, the tax breaks and the dividend exclusion itself, it's very clearly tilted toward the top because the higher earners receive the bulk of taxable dividends. Most middle-class families that have shares have them in retirement accounts, so this provision would not apply. In fact, among households with incomes under $75,000, 79 percent do not own any stocks in taxable accounts, and in the long run, then, the question really becomes, how do you make up this—you know, this entire package will cost, again, $933 billion over 10 years and more as you look out. How do you make up for that loss, and what part of the budget adjusts? We don't know the answer to that, but what we do know, and as Gene Steuerle has shown us, there are a lot of pressures on the budget from Social Security, Medicare, and Medicaid that existed even before we did something like this. We're just making the gaps bigger, and so there would be a bigger hole that we'd have to fix. And, again, this does not strike me as a very—it's a step in the wrong direction.

DAVID WESSEL, Wall Street Journal: Over here.

KEN FEINGOLD, Urban Institute: I want to go back to something Peter said earlier and see if I heard right, that if you believe that the dividend proposal will raise stock prices you are buying into the new theory that the current system does not distort taxes. Was that right?

PETER ORSZAG, Brookings Institution: The new view of dividend taxation says that dividend taxes are capitalized or reflected in share prices, and that as long as firms finance their investment out of retained earnings on an ongoing basis, there's no additional distortion created on their investment decisions. Now, there's a big debate about where firms finance their investments from: do they finance them from retained earnings or from new share issues? So the new view and the traditional view, which is that dividend taxation does distort investment decisions, are kind of difficult to separate.

But what's unambiguously clear is if the stock market goes up in response to this, what you're doing is you're providing a windfall gain to shareholders who purchased shares under the previous dividend tax regime, and that reflects the inefficiency in the proposal. You are, in a sense, wasting money on giving money away to people who had invested in the shares already, and not affecting incentives on an ongoing basis.

Q: Right, but if you want to argue then you've got to be careful not to argue both sides of the same question. If you're arguing that this can't help middle-class people because all their money is in 401(k)s and they're going to—aren't they going to benefit if the price of the shares that they have in their 401(k)s go up?

PETER ORSZAG, Brookings Institution: Sure. Again, let's look at the families under $75,000. I think a reasonable estimate, even without an interest rate effect for the stock market increase, may be about 5 percent. Again, 79 percent of the families have no taxable stocks—

Q: No, but if I have a 401(k) and my stock goes up, I'm better off even if it goes down.

PETER ORSZAG, Brookings Institution: But, again, even including retirement accounts, the median amounts in these accounts are not overwhelming. If you have $20,000 in a taxable account or a retirement account and the stock market goes up by 5 percent, yes, you do gain $1,000. But you have to weigh that against the costs that are imposed on an ongoing basis from the loss of revenue and the failure to be able to fund the other things that we've already committed ourselves to.

EUGENE STEUERLE, Urban Institute: I can address this so-called new view in a way that I think is very understandable. It sounds like a very abstract, esoteric issue, and in some ways it is, but I think for the most part people have abandoned it. Their view says dividends don't matter because that's the—only corporations get money out of corporate solutions. And if you look at the data, what has happened in recent years is corporations have paid out a lot less in the way of dividends, but their share repurchases, which is a way to get money out of the corporations, have expanded enormously. And once you can get money out through share repurchases, it sort of dissipates this argument that corporations can only get the money out of—that this money is trapped in the corporation and they can only get—there's this trap so the government can get the money one way or another; they've got to pay the tax eventually. That's not true.

The amount of share repurchases in the economy to me is an indication of the inefficiency of the current system in encouraging dividends. So corporations go through back doors. As I mentioned, lawyers create an extraordinary number of deals and reconfigurations of corporate behavior so they can avoid this type of attack. So I think, again, this type of proposal deals with that. Whether you agree with the new view or not, it's going to get at this game of having to do so much in the way of share repurchases as a way to get money back out of corporations.

PETER ORSZAG, Brookings Institution: I don't want to get esoteric, but I just want to note that I don't think the new view has been dismissed to the degree that was just suggested.

ROSEMARY MARCUSS, Bureau of Economic Analysis: My question has more to do with timing, if indeed there is a goal for pushing the economy. Does the administration plan to change withholding or anything that would presumably allow for a quicker input of the tax cut to people on an undeniably complicated set of tax cuts?

DAVID WESSEL, Wall Street Journal: Well, the president's proposal that's outlined in the White House fact sheet and all has withholding tables changing as soon as the thing passes and showing the effect as of the first of January. That's their idea; whether Congress moves that fast, I don't know. And of course this increase in the child credit, which is now $600 a child, goes up to $1,000 a child effective January 1, and their idea is the Treasury would actually send out checks sometime this year, $400 per kid per eligible family. But I think a lot depends on how quickly Congress acts, and I don't believe anybody here—even if they say they know what it is.

WILLIAM FRENZEL, Brookings Institution: Well, there's a double problem. Not only does Congress have to act, and they have to act in the face of possible Democrat filibuster—(audio break)—payroll systems. And, you know, usually you think of doing this on no more than a quarterly basis. I suppose you could do it at the beginning of any month. But it's very complicated, and it seems to me the most reasonable way it would happen is that if the Congress really hustled and passed the bill in the first half of the year, and they got the withholding tables set up for the last six months of the year, based on the full year, you know, you'd probably get the impact that they have here. But nobody knows whether you can do that.

DAVID WESSEL, Wall Street Journal: We have a question here. Say who you are, please.

MICHAEL KAHN, National Education Association: One reason I hear the businesses are not investing is the high level of debt that they have accumulated. And I'm just wondering, this accelerated depreciation provision, how much that would be helpful in this situation when the debt levels are not going down—consumer, business, everybody?

DAVID WESSEL, Wall Street Journal: Does someone want to try that? Rudy?

RUDOLPH PENNER, Urban Institute: Well, actually, corporate balance sheets are coming back into shape and looking a lot better than they did a few months ago—or a few quarters ago, I should say, and people are finding, you know, $1.5 trillion or so of investment opportunities under current conditions. So if you were to have an extra investment incentive, you'd just be trying to increase that more than $1.5 trillion.

DAVID WESSEL, Wall Street Journal: A question in the back.

DERMOT FINCH, British Embassy: Can I focus on the very short term, since that's allegedly one of the concerns of the White House? Can you give us a rough estimate of what you think the package will do to boost personal incomes in the coming year, and compare that with the 2001 tax cut—the rebates, the checks that went out the second half of 2001, just to get a comparison? I appreciate that there are a lot of variables and things still to be agreed, but a rough comparison between this package and 2001. Thanks.

DAVID WESSEL, Wall Street Journal: Gene?

EUGENE STEUERLE, Urban Institute: All I can give you—I think I gave you some of the numbers in terms of just the cash flow that's thrown out in the economy—

DAVID WESSEL, Wall Street Journal: But how does it compare to the first year of the first batch?

EUGENE STEUERLE, Urban Institute: Well, most of the legislative—let me see if I can find my numbers here—most of the legislative numbers that I gave you was this first bill. There was a second bill which included the provision that Bill referred to earlier, which was this acceleration of depreciation allowances. But over a 10-year period there was almost—there was very little cost because it all came back in.

I have the tax bills in 2003—that is mainly the 2001 bill and little bit of the 2002 bill—as putting out about $126 billion in 2003. This bill would put out—in 2003, because it accelerates so many provisions—would put out about $102 billion. However, if I take all that has gone on in terms of the discretionary bills, the tax bill, the economic changes—I was commenting that 2003 has about $500 billion that has already been put back in the economy. There is some question of how to deal with what some analysts call technical re-estimates, and whether those are part of the economy or not. But $400 [billion] to $500 billion is already being put out in 2003. This bill would put out about another $100 billion. I'm talking cash flow only; I'm not talking about the incentive effects of any of this.

RUDOLPH PENNER, Urban Institute: But you don't want to look at cash flow. I mean, the really big difference is the 2001 tax cut was long lasting, and that tends to affect behavior a lot more than the kind of one-shot infusions of cash that we're talking about in this bill.

DAVID WESSEL, Wall Street Journal: Yes?

BOB WILLIAMS, Congressional Budget Office: It's been suggested that the bill, as proposed by the administration, is just a stalking horse, a first bid in a longer process. What things would you trade off to improve the bill over time as they go through the negotiations?

PETER ORSZAG, Brookings Institution: Good question.

DAVID WESSEL, Wall Street Journal: Peter would get rid of everything.

PETER ORSZAG, Brookings Institution: Yeah, I'd get rid of everything and replace it with state fiscal relief and something else, but I guess that's not where the administration would be.

DAVID WESSEL, Wall Street Journal: Bill, what about you? What would you chuck first?

WILLIAM FRENZEL, Brookings Institution: As I told you, I think the proposal, as presented, is satisfactory and I would support it. But I really believe that the expensing extension and expansion is really—would take priority for me over all of the other elements that are now in the bill, and for a variety of reasons.

There isn't much you do for smaller—well, there's a slight increase in expensing for very small companies, but there isn't much you do for smaller companies that don't pay dividends or for the techs who feel left out of this game, and I think expensing would be very helpful to the manufacturing and the tech sector, which it seems to me probably would be willing to take advantage of it right away.

What would you take out? Oh, I don't know. I guess—you know, I'm not against any of these things, but I guess I'd say the child care credit would be a candidate.

PETER ORSZAG, Brookings Institution: It's good that we're not negotiating.

DAVID WESSEL, Wall Street Journal: For all those years at Brookings they still haven't made you a Democrat.

WILLIAM FRENZEL, Brookings Institution: But I don't think it's up to us to do the negotiating. The Congress is going to have a lot of fun with that.

DAVID WESSEL, Wall Street Journal: Gene, what would you chuck if you had to chuck something?

EUGENE STEUERLE, Urban Institute: Well, if you're asking from just a pure tax policy standpoint, I think it's a relatively clean bill. I mean, the issue is whether you can deal with the complexity of the corporate—so-called corporate integration proposal, which I tend to favor for economic reasons.

But for the rest of it, it's a relatively clean bill. It's not one of these bills that has, you know, 47,000 provisions to every little—

WILLIAM FRENZEL, Brookings Institution: Just wait; we'll get there yet.

EUGENE STEUERLE, Urban Institute: It might be there. I think what I would deal with more are the issues that are still off the table, because we have a number of these extensions, Bill mentioned one with respect to this expensing, 30 percent expensing of capital equipment. The really big one, which people like Peter and a number of my other colleagues at the Tax Policy Center have dealt with, is we have huge issues coming along in the alternative minimum tax, and even this bill exacerbates them by giving a little bit of what's called AMT—alternative minimum tax relief—and then it ends it in 2005.

And so there are a lot of issues like that that are held in abeyance, a lot of simplification issues. I'm guessing we will see, coming forth from the administration, some attempt to have some tax—what we often call "pay-fors"—are what are going to be tax increases to help pay for them. Generally, when budgets come forward, presidents never tell you about what they're going to take back; initially they tell you what they're going to give forward. And those might be directed at trying to get at a number of corporate tax shelters, because I think if there's relief to corporations there will be a lot of attempts to make sure that corporations who have positive earnings do pay tax. It's going to be interesting to see if those are done efficiently and in a way that makes sense.

So I think there's a lot of stuff that's not on the table yet that's going to come up this year, and if it doesn't come up this year it's going to come up in the next couple of years. And those are the big issues that I see that are not yet on the table.

DAVID WESSEL, Wall Street Journal: Over here.

JOHN GIST, AARP: On the dividend proposal again, some have suggested that the dividend proposal, what it should have done was eliminated the corporate-level tax and retained the individual-level tax. What are the merits of that argument, and doesn't this set up an inequity in the treatment of dividend and interest income at the individual level?

RUDOLPH PENNER, Urban Institute: I think that's a good point. I think it would have been a lot neater in many ways to do it by just allowing a corporate deduction, and that could have eased the complexity a lot, but it very probably would have cost a lot more money. But I would be inclined to just allow a proportionate corporate deduction as opposed to the way we're going, whatever proportion they thought they could afford.

DAVID WESSEL, Wall Street Journal: Can you explain why it would be more expensive to give the corporate—

RUDOLPH PENNER, Urban Institute: Well, primarily because of the point that Jodie made. A lot of these dividends flow into tax-deferred accounts of one kind or another—and the rate, too. I mean, there are a lot of—granted, there are a lot of losing corporations to whom this would be irrelevant in the short run, but there are also a lot paying 35 percent taxes.

EUGENE STEUERLE, Urban Institute: This does put the whole issue of pension policy back on the table, because a number of analyses, I think some in your paper in the Wall Street Journal as well, have already indicated that if you're investing in stock it may actually be disadvantageous now to put stock into a 401(k) plan as opposed to holding it directly. So there are a lot of these issues I think that still remain to be addressed.

PETER ORSZAG, Brookings Institution: And just briefly, for example, on preferred stock, at least according to initial reports, dividends paid on preferred stock are treated as interest income, and it's not clear whether they would be exempted or not under this proposal.

DAVID WESSEL, Wall Street Journal: In the back?

AL MILLIKEN, Washington Independent Writers: Does anyone have a sense of how foreign governments and corporations based outside the United States are reacting to this proposal? And how should they be reacting in terms of international trade and investment?

DAVID WESSEL, Wall Street Journal: I think a lot of the reaction that we've had so far is somewhere between totally confused and baffled, because it's been very hard to get—we don't have the details yet. I'll let Peter answer this, but what the Treasury has said to the reporters is that foreign companies will be allowed to give tax-free dividends to their shareholders to the extent the income is earned in the United States and taxed in the United States. That's a really easy thing to say in principle and really hard to say in detail.

They've also told us that the money that a company has, from which it can pay tax-free dividends or give this capital gains tax break, has to be profits that were taxed. And they don't only have to have been taxed in the United States. What the Treasury says is that if they—they will be able to use their foreign tax credits. Taxes that they paid overseas will be counted as tax to some extent.

Now Peter's going to tell you it's really complicated compared to what I said.

PETER ORSZAG, Brookings Institution: Well, I just want to emphasize the importance of this point. At the end of the third quarter of 2002, which is the most recent data that we have, foreigners own more than $1 trillion in U.S. equities and Americans owned more than $1 trillion in equities of foreign corporations. So this is not a footnote; this is a big deal. And it's precisely because of the complexities introduced by how you handle these sorts of cross-border transactions that—Japan, Germany, and the U.K. have been scaling back their dividend exclusions because of the problems associated with capital flows in cross-border transactions.

So I would just put a very firm underline on the point that we need to figure out exactly how this is going to work. The Treasury study that was mentioned earlier in 1992 basically was consistent with what apparently the administration is telling reporters, and I would presume that would be the way that the administration would go for now. But this is a very difficult problem.

DAVID WESSEL, Wall Street Journal: Actually, it's interesting. The original Treasury study in 1992 didn't count the—you couldn't count your taxes you paid to foreigners, and then when they refined it they put that in. So this was a swing issue then, and I'm not sure we're really going to know how it works until the Treasury puts on paper exactly how this is going to work, which they haven't yet.

EUGENE STEUERLE, Urban Institute: My understanding is some of this is up in the air.

DAVID WESSEL, Wall Street Journal: Yeah.

EUGENE STEUERLE, Urban Institute: I mean, let me just add that when it comes to the treatment of both foreign-source income by Americans and the treatment of American income earned by foreigners, that the tax system is replete with inconsistencies. And so, anytime you come in with any change, you can start saying, "Oh, my gosh, what's it going to do to this particular type of incentive versus that one?" I mean, for instance, our very system has two ways we tax income. One, we have one set of systems which is the corporate tax, where we tax the source—we tax where you earn the income—but we have another system where we tax where you receive the income.

And even the issue that Peter raises about some of the foreign countries moving away from so-called corporate integration has to do with the fact that they already had a lot of it. And what they were concerned with was, well, if we do only source, then we're not going to get our residents when they get receipts, but if we do only receipts, then we're not going to get source, and so they end up with somewhat of a hybrid. But it's not that a hybrid is a very pure system either.

And so it's tough to sort of address a proposal and say, "Oh, my gosh, it's going to change this incentive for this particular owner." Of course it is because the system is so complex and has so many inconsistencies that you're inevitably going to change a lot of incentives for a lot of people. You have to ask whether or not you think the net effect is good for the economy.

DAVID WESSEL, Wall Street Journal: Bill Galston in the back there, and then Howard.

BILL GALSTON, University of Maryland: As a Democrat trying to function politely in mixed company, I'm not even going to try to raise fairness and equity issues, and we'll remain on the lofty plane of macroeconomics. But there's something I don't understand about what is not in the administration's proposal. Right now we're talking about efforts to stimulate the economy at the federal level while states are being forced to move in exactly the opposite direction at very large numbers. Estimates range from $60 [billion] to $85 billion for the year going forward, which, if not dealt with, it seems to me will cancel out a very substantial portion of the effects of whatever happens at the federal level, at least for 2003 and 2004.

So, as a matter of sheer macroeconomics, what is the case against including substantial aid to the states in whatever the Congress produces?

DAVID WESSEL, Wall Street Journal: Rudy, do you want to—

RUDOLPH PENNER, Urban Institute: Well, I think the case against was sort of alluded to by Peter, that you're essentially rewarding bad behavior, and there is strong feeling within the Congress—I know, whether just or not—that the states really were profligate during the good times, and that they really—and the Congress is very hesitant to bail them out during the bad times. And obviously if you do bail them out, you will encourage profligate behavior in the longer run.

I think there are other problems as well. Obviously some states have been more irresponsible than others, and you—you know, you'll be giving money to some states that aren't in much trouble, like Colorado and—

DAVID WESSEL, Wall Street Journal: That's going to hurt your chances of winning an election in Colorado.

RUDOLPH PENNER, Urban Institute: Well, it could be.

I think there is, too, some question about the economic effects of all this. If you look at the extent to which governors are resorting to sleight of hand and blue smoke and mirrors to deal with their problems, it's not crystal clear that all of the aid will go to preventing tax increases and spending cuts. Some of us may just reduce the blue smoke and mirrors that we see going on with great proliferation right now.

DAVID WESSEL, Wall Street Journal: Peter.

PETER ORSZAG, Brookings Institution: Three brief comments. First, I think there would be a concern with the so-called moral hazard and incentives that you provide the states if you were providing $80 [billion] or $90 billion. I think at $30 billion those are quite modest. We seem to be perfectly willing to bail out investors, so I don't know why bailing out states would be such a problem.

Secondly, I think that the states have been in fiscal difficulty for several years now, and my understanding is that they have largely run out of the sleights of hand and the smoke and mirrors, and we're now talking about real things. You don't let prisoners out of prison when you're—you know, that's real. There are cuts in Medicaid and other things that are happening, in tax increases that are happening, that are real, and I think a very large percentage of federal assistance to the states would flow through and be immediately beneficial.

And finally, I just want to mention, again, on the dividend exclusion, this would actually harm the states. Forty-three states and the District of Columbia would base their income taxes off of the federal definition of income taxes, and exclusion at the federal level would reduce revenue in those states and the District of Columbia by about $4 billion a year unless they explicitly decoupled from the federal definition, which, again, would be more complicated and would mean that there would still be double taxation of dividends, end quote, at the state level. So it's not only not helping the states, it's actually harming them.

DAVID WESSEL, Wall Street Journal: Let me just throw one thing in. It seems to me if I were a governor and someone said we're not going to give you any money, we're not going to send you a check but we're serious about helping you figure out how to make the Medicaid system work better so it provides better care and doesn't go up so much in cost, I'd be happy to leave Peter $30 billion on the table. There is nothing in this proposal—we haven't seen the president's budget yet.

Gene?

EUGENE STEUERLE, Urban Institute: Just a quick advertisement, Bill, or anybody else that's interested, on April 3rd we're going to have a conference here where we have a number of papers examining a number of these state issues, including what's going on with pension funds, whether there's better ways to design rainy day funds, whether you could have a better revenue system. As you know, the current revenue system with the states also has—especially some states like California and New York, where you hear a lot of the protest—has wild fluctuations, partly due to their treatment of capital gains, and a whole set of issues like this. So, just by way of a short advertisement.

DAVID WESSEL, Wall Street Journal: Bill.

WILLIAM FRENZEL, Brookings Institution: I went through the Richard Nixon period of the new federalism in which, in part, the revenue sharing with the states was developed. I must say that Congress was never happy with that.

EUGENE STEUERLE, Urban Institute: Got rid of it seven years later.

WILLIAM FRENZEL, Brookings Institution: Exactly. And I believe the White House may have had some strong advice from the Congress not to be taking any of their spending money and sending it on out to the states, then would not be accountable for how they had to spend it. Congress just, even though they passed it, never liked it. The appropriators are death on it. And it may be a good idea, but I don't think it's going to fly.

DAVID WESSEL, Wall Street Journal: Howard, did you have—

HOWARD GLECKMAN, BusinessWeek: There's an interesting undertow to the dividend proposal involving tax reform, and I wonder if you all could talk a little bit about how that takes us in that direction and whether it's the first step or some sort of a dead end, as we've seen before.

DAVID WESSEL, Wall Street Journal: "Mr. Tax Reform," Gene Steuerle.

EUGENE STEUERLE, Urban Institute: I think over—again, I've mentioned this—I think over the past, I would say, almost 10 years, almost since Clinton tried health reform, the attempt, either on the spending or the tax side of the budget, to engage in what I'll call major structural reform, where you engage serious trade-offs among people, create losers as well as winners, has really been off the table. And it just wasn't the availability of the surplus. I think there was some notion after health reform that these types of things weren't doable. You have to go almost back to '83 Social Security reform and '86 tax reform to get these types of structural reforms the government's willing to engage, where it says here's the broad trade-offs and the fact that we're going to recognize that everything in the end is budget neutral; eventually everything has to be paid for.

So that type of tax reform is not on the table. However, just as in the early '80s, when people were starting to say tax reform is the impossible dream, there were a number of stimuli out there that are sort of forcing the issue on the table, the primary one of which is this alternative minimum tax, which is soon going to be the dominant tax—or I should say the dominant tax—but it's soon going to be paid by almost every middle-class American, especially those families with children. And that to me is going to force tax reform on the table. I don't think if it comes on the table that the Congress is going to be able to just do AMT relief, and because the liberals don't like it, because it's not progressive enough and the conservatives don't like it because they prefer to have rate reductions.

So I think it basically forces them to deal with broader issues in sort of a funny backdoor way. And that may not be that different in some ways than the early '80s were. There were other issues, tax shelters and other things, that forced us to have to get to tax reform. So I'm not totally a pessimist. We haven't been willing to engage in broad structural reform for a number of years now. I'm hopeful that at some point we can. Whether we do is an open issue.

WILLIAM FRENZEL, Brookings Institution: It's not even clear, though, what basic philosophy of tax reform this is consistent with. I mean, there are two basic philosophies: one, you move to a very broad-based income tax. Well, the purest of pure income taxes would of course integrate corporate and personal income taxation, so maybe it's consistent with that. On the other hand, the other broad philosophical thrust is to move more toward a consumption-based tax. You might say it's consistent with that in that it does reduce the overall taxation of capital, but I think we have a long way to go before we know what this may be the first step in, if it's the first step in anything at all.

PETER ORSZAG, Brookings Institution: I would just add that basically this isn't tax reform; it's just a tax cut. Tax reform would be revenue-neutral. It would be more on the '86 type of approach. And in terms of uses of the revenue that this proposal would consume, I just see much higher priorities. We face deficits in Social Security, Medicare, Medicaid. Addressing those long-term deficits will save money in the long term, but it's inevitably going to require money upfront, and instead we're spending the revenue on a proposal like this when I think we should be spending it as a down payment on getting real reform in those programs which will do more to help the budget than certainly this proposal would.

DAVID WESSEL, Wall Street Journal: Over there by the window. We'll take the one in the back first and then we'll go to the one in the front.

BOB BIXBY, Concord Coalition: Actually, Peter was reading my mind, I think, from the back here because the question that I was going to ask is the effect of this on the long-term entitlement reform agenda, because that's the other big one out there.

It seems to me that this—the thing that concerns me about this tax cut is not necessarily short-term deficits, but the psychological effect says that we don't need to make any trade-offs. I mean, last year's tax cut, at least you could say it was fiscally responsible to the extent that it was postponed in some respect until presumed budget surpluses would take care of it. So that didn't happen, but now we come along with another tax cut that's not in any way offset, and there's not even any concern about the deficit anymore.

Now, I'm wondering if that sends a very bad signal on the verge of entitlement reform that we really don't need to make trade-offs anymore, and that we'll get a lot of—we'll have sort of a free-lunch effect on the entitlement reform agenda, which affects, obviously, Medicare right up front with a prescription drug proposal, but also the Social Security agenda, which hopefully will come along soon to follow.

DAVID WESSEL, Wall Street Journal: Bill Frenzel, do you—

WILLIAM FRENZEL, Brookings Institution: Well, I mentioned that earlier, that Medicare and Social Security are huge problems for the future, and normally you don't settle huge, expensive problems in a time of so-called emergency, with nervousness about wholly emerging from even a short recession at the time you may be fighting a new war, and are certainly fighting an old war against terrorism. So you don't—I wouldn't expect to see a lot of "profiles in courage" written about taking on those entitlement reforms at the moment, except that if you look at the president's position on Social Security, he may come forward with something—I have no idea whether he will or not—but if he did I think that would at least raise the visibility of the question and make all of us reconsider how difficult that situation is and what it's going to require to fix it up.

So it seems to me Social Security, there is some minimal prospect of having the president raise the question, and with other things I think it's going to be very difficult.

RUDOLPH PENNER, Urban Institute: Before I raise the question of judging this, I would cite the context of an overall budget proposal, which I think is difficult in that it talked about the president. But I really worry a lot that the budget process in the Congress has collapsed to such a degree. They have no process whatsoever for judging various trade-offs and for evaluating a long-run comparison between total revenues and total expenditures—not even any process for adding them up these days as functioning.

DAVID WESSEL, Wall Street Journal: In front of Mr. Bixby.

KEVIN BORDEN, Center for Community Change: And I know we're not supposed to get into tax equity issues, but I—

DAVID WESSEL, Wall Street Journal: You can get into tax equity; it just has to have a question mark at the end.

KEVIN BORDEN, Center for Community Change: It does have a question mark. So the question mark is related to the fact that a lot of the sort of underlying philosophy that's being used for this tax cut proposal is based on the fact that the top 1 percent—I believe actually Mr. Frenzel raised it—you know, the top 1 percent is now paying 40 percent of the tax burden; back in '86 they were paying, whatever, 26 percent of that tax burden. I guess part of the question is based on a little bit of math confusion. Is really the tax being paid by the top 1 percent—has their tax liability increased over the years, or has their income actually increased so they're paying a larger percentage of the share of the federal bucket that's being paid in taxes?

So I think—I'm just very confused about that philosophy and would actually like to hear Peter's response to that.

DAVID WESSEL, Wall Street Journal: Well, the short answer is yes—they are making more money and they are facing higher tax rates than they did a decade ago.

PETER ORSZAG, Brookings Institution: Yeah, when you look at—I mean, I think the right way to look at this might be in effective tax rates, and they're—at least according to the most recent CBO [Congressional Budget Office] data that I've seen, the vast bulk—and I forgot whether it's all or more than all, or nearly all of the gain in the tax share of the top 1 percent comes from income gains.

DAVID WESSEL, Wall Street Journal: Since 1986 we have raised the top marginal income tax rate.

PETER ORSZAG, Brookings Institution: It depends on the time comparison, yes. We've also cut the capital gains rate, and there have been offsetting changes. When you add it all together, the income—the pre-tax income gains dominate the changes in the taxes, at least according to my memory, and I'd have to double-check that.

EUGENE STEUERLE, Urban Institute: Let me just mention at the low-income end, which is obviously something you're concerned with, if you do look over the previous history—and this goes back to something I've worked on quite extensively in various areas of family tax reform—we have substantially lowered taxes on, say, the bottom 20 percent of people; not only lowered them to the point where they're not paying income tax—to the point where, at least if they're families with children, where they are having a tax credit that offsets Social Security tax to the point now where they have, in many cases, very negative taxes. Now, if you can do that across all poor people, not counting families with children, there is still a substantial shift, and it's probably, for that group, that bottom 20 percent, it's probably the biggest shift we've had over the last 20 years, has been this decline.

So it's not as if that agenda is off the table. And as Peter says, it's not clear to me that by the time you get this bill through, that that agenda won't be actually a small part of this bill as well.

DAVID WESSEL, Wall Street Journal: Over there in the back.

RICH MALTOP (ph.), I was formerly with the Office of the House Democratic Leader when Mr. Gephardt was leader. My question is about how the dividend tax proposal, in particular, might interact with another leftover tax issue, corporate tax issue, from last year, and that is the extraterritorial income issue.

Last summer, Ways and Means Chairman Thomas made a proposal that essentially shifted about $100 billion of corporate taxes around in a very complicated way, having to do with foreign taxation of corporate income—or taxation of corporations' foreign income. And now we have this proposal, which seems to have some foreign tax implications as well for corporations. One of the reasons that that bill never got out of the Ways and Means Committee was that it was perceived to be creating a series of winners and losers among different kinds of businesses, whether they were operating in this country and exporting, or whether they were operating abroad.

Do you see any kind of an interaction of this proposal with that proposal? And since we have the WTO decision against our extraterritorial income regime, what do you see happening with that this year?

DAVID WESSEL, Wall Street Journal: In one-syllable words.

EUGENE STEUERLE, Urban Institute: Confusing, complicated, and I don't know. Just a little anecdotal story. When I was coordinator of the Tax Reform Project—this was the proposal that led to the Tax Reform Act of '86—I went around to like 20 different groups in Treasury, and one of the groups was the international group—you know, pensions and things like that—and they worked months and months to come up with a proposal. And when they finally came up with a proposal they said, "All right, what we've got, we want a per-country limit." This was not extraterritorial at all. And that's what actually happened in the proposal. And then, like, about two months after—maybe it was a month after the proposal went out—they came back to me and said, "You know, we don't think that works either." So that's my very shorthand version of dealing with these complexities with foreign taxation. They're extraordinarily difficult.

I don't know that, given that this bill is present, you're going to see any movement at all toward, on political grounds, toward extraterritoriality. And in fact, you're quite correct; there are a lot of very big losers as well as winners among businesses who oppose the shifts. I can't see some issue like that being thrown in with this, although the Congress has to deal with some of the issues because of the—at least the particular subsidy in the tax system already being declared illegal under the General Agreement on Tariffs and Trade [GATT].

DAVID WESSEL, Wall Street Journal: Bill Frenzel?

WILLIAM FRENZEL, Brookings Institution: The determination by the WTO [World Trade Organization] panel that the ETI [Extraterritorial Income Exclusion] successor to FSC [Foreign Sales Corporation] was not concordant with the terms of the GATT have put a lot of pressure on us, and we have to change our tax law at some point; nobody is quite sure when. The EU, who is the plaintiff in this case, has the authority, under the treaty, to retaliate against us to the tune of several billions of dollars. The ETI tax preferences are supposed to be something over $4 billion.

It's very hard to write a new bill. I don't see—despite the fact that there are some extraterritorial aspects attached to this dividend question in this bill, I don't see any relationship between this bill and ETI-FSC, and I believe this bill will have priority, and Congress will dispatch it before it begins to take up the ETI-FSC question again. There are ways to solve that problem, but there is no way to solve it and keep all of the people who are enjoying benefits under it now happy, and all of those who would like to enjoy benefits under its successor happy. So it's a hard thing for Congress to work on. They may do it this year, maybe not.

EUGENE STEUERLE, Urban Institute: The only connection that—and, again, I think we're violating the rule when we start throwing out FSC and ETI—

DAVID WESSEL, Wall Street Journal: And GATT in one sentence?

PETER ORSZAG, Brookings Institution:—and GATT in one sentence—WTO. But the basic point is that those decisions and any legislative response to them has to do with how much income is taxed in the United States of the worldwide, global income of corporations. And since this proposal does link the dividend exclusion to taxes paid in the United States, there are potentially important—although, again, we don't know exactly what the details are—interactions between the two because of that specific way in which the dividend exclusion would operate.

DAVID WESSEL, Wall Street Journal: Belle, then down here.

ISABEL SAWHILL, Brookings Institution: I'm still having difficulty figuring out what the theme or purpose of this package is. I mean, it is not a very good stimulus package, as several people have noted. It doesn't frontload the stimulus enough for that. It doesn't have a long-term structural reform consistency. As I understand, it doesn't even make their last year's rate cuts permanent, so at least all to all of this uncertainty that conservatives have normally worried about, and it doesn't move us to a consumption tax, or something else that you might consider really bold: structural reform.

And you read in the newspaper—at least I read in the New York Times yesterday—this is a bold package, but it seems to me to be a very mixed-up package. It's bold only in that it's expensive, the $900-plus billion. If you were a cynic you might say the major purpose here is simply to deprive government of the revenues it needs to do government-type things.

So I guess I'd like some more comments on where is the political energy and consistency and theme behind this? Who are all the people who are so desperate for dividend tax relief, for example? Why was that made the major component of the package? I really don't understand that.

DAVID WESSEL, Wall Street Journal: Which one of the administration insiders wants to take this?

(Cross talk.)

DAVID WESSEL, Wall Street Journal: I'm not going to speak for the administration. I have a hard enough time speaking for the Wall Street Journal, and I only speak for some parts of the Wall Street Journal. I think that if Glenn Hubbard were here he would say that—first of all, he'd be happy to make all the president's tax cuts permanent, if that would make you happier. So we'll add that. He would say that, in general, the economy functions better with lower marginal tax rates, the sooner the better; in general, we tax capital too much and we ought to tax capital less; and in general, the dividend tax is part of a broader move to restructure the income tax, following on the stuff that the Brady Treasury did to lighten the burden on capital, encourage equity investment, and so forth.

But without having someone else from the administration here to really articulate it, I think we should move to the next question. Can we get the mike down here? And I think maybe we'll take one more question after this, and then turn it over to Bob.

JAN RICHTER, Connect for Kids: Aside from the complexities of the impact of this package as tax reform, or for stepped tax reform, is it—and this is kind of a follow-up; Belle asked the question much better than mine is, but I think I'd still like some answers—is it a wise jobs and growth plan? And if it is, can you factor in—in your answer, can you factor in the price tag and the risk of deepening deficits in the future?

DAVID WESSEL, Wall Street Journal: Rudy, do you want to try that?

RUDOLPH PENNER, Urban Institute: Well, as I've said in response to the first question, I don't think there's much short-run stimulus here, and I don't think it's worth the negative effects of increasing the national debt. The one clearly long-run proposal—and the "late" Larry Lindsey used to be more careful about differentiating between stimulus elements and growth—

DAVID WESSEL, Wall Street Journal: I thought there was life after the White House.

RUDOLPH PENNER, Urban Institute: But in any case—I mean, that was just my overall conclusion. The "late" Paul O'Neill might refer to all as being show business.

DAVID WESSEL, Wall Street Journal: Bob Reischauer, do you want to do the closing benediction?

ROBERT REISCHAUER, Urban Institute: Okay, let me take this opportunity to thank David and the four panelists for their contribution to enlightening us all on these complex issues, and invite all of you to the next Tax Policy Forum, which will be held Tuesday, January 14, in this room. And we'll deal with the estate tax. It will feature William Gates Sr. discussing some of the issues raised in his new book, which he wrote with Chuck Collins, and a panel, who will discuss the issues raised in that book, and others associated with the repeal of the estate tax: Bruce Bartlett, from the National Center for Policy Analysis; Len Burman, one of the co-directors of the Tax Policy Center; Bill Gale, another one of the co-directors from Brookings; and finally, Ray Scheppach, who is the executive director of the National Governors Association.

Finally, for those of you who are interested in the analysis and wisdom and estimates that the Tax Policy Center has been producing, and will produce in the future, I urge you to go to the web site, which is www.taxpolicycenter.org, or it can be accessed through either the Urban Institute web site or the Brookings web site.

Thank you, and I hope to see all of you again.

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