Transcript of President Obama’s Press Conference

The New York Times, November 14, 2012

Q (Jessica Yellin): Mr. President, on the fiscal cliff — two years ago, sir, you said that you wouldn’t extend the Bush-era tax cuts, but at the end of the day, you did. So respectfully, sir, why should the American people and the Republicans believe that you won’t cave again this time?

PRESIDENT OBAMA: Well, two years ago the economy was in a different situation. We were still very much in the early parts of recovering from the worst economic crisis since the Great Depression…

But what I said at the time is what I meant, which is this was a one-time proposition. And you know, what I have told leaders privately as well as publicly is that we cannot afford to extend the Bush tax cuts for the wealthy. What we can do is make sure that middle-class taxes don’t go up…

And what we can then do is shape a process whereby we look at tax reform, which I’m very eager to do. I think we can simplify our tax system. I think we can make it more efficient. We can eliminate loopholes and deductions that have a distorting effect on our economy.

Q: You’ve said that the wealthiest must pay more. Would closing loopholes instead of raising rates for them satisfy you?

PRESIDENT OBAMA: I think that there are loopholes that can be closed, and we should look at how we can make the process of deductions, the filing process easier, simpler.

But when it comes to the top 2 percent, what I’m not going to do is to extend further a tax cut for folks who don’t need it, which would cost close to a trillion dollars. And it’s very difficult to see how you make up that trillion dollars, if we’re serious about deficit reduction, just by closing loopholes in deductions. You know, the math tends not to work.…


Taxing the 1%: Why the top tax rate could be over 80%

By Thomas Piketty, Emmanuel Saez, Stefanie Stantcheva
Vox, December 8, 2011

Top income tax rates on upper income earners have declined significantly since the 1970s in many OECD countries, again particularly in English-speaking ones. For example, top marginal income tax rates in the United States or the United Kingdom were above 70% in the 1970s before the Reagan and Thatcher revolutions drastically cut them by 40 percentage points within a decade.

At a time when most OECD countries face large deficits and debt burdens, a crucial public policy question is whether governments should tax high earners more. The potential tax revenue at stake is now very large.

There is indeed a strong correlation between the reductions in top tax rates and the increases in top 1% pre-tax income shares from 1975–79 to 2004–08 across 18 OECD countries for which top income share information is available. For example, the United States experienced a 35 percentage point reduction in its top income tax rate and a very large ten percentage point increase in its top 1% pre-tax income share. By contrast, France or Germany saw very little change in their top tax rates and their top 1% income shares during the same period. Hence, the evolution of top tax rates is a good predictor of changes in pre-tax income concentration. There are three scenarios to explain the strong response of top pre-tax incomes to top tax rates. They have very different policy implications and can be tested in the data.

First, higher top tax rates may discourage work effort and business creation among the most talented – the so-called supply-side effect. In this scenario, lower top tax rates would lead to more economic activity by the rich and hence more economic growth. If all the correlation of top income shares and top tax rates were due to such supply-side effects, the revenue-maximising top tax rate would be 57%. This would still imply that the United States still has some leeway to increase taxes on the rich, but that the upper limit has already been reached in many European countries.

Second, higher top tax rates can increase tax avoidance. In that scenario, increasing top rates in a tax system riddled with loopholes and tax avoidance opportunities is not productive either. However, a better policy would be to first close loopholes so as to eliminate most tax avoidance opportunities and only then increase top tax rates. With sufficient political will and international cooperation to enforce taxes, it is possible to eliminate most tax avoidance opportunities, which are well known and documented. With a broad tax base offering no significant avoidance opportunities, only real supply-side responses would limit how high top tax rate can be set before becoming counter-productive.

Third, while standard economic models assume that pay reflects productivity, there are strong reasons to be sceptical, especially at the top of the income distribution where the actual economic contribution of managers working in complex organisations is particularly difficult to measure. In this scenario, top earners might be able to partly set their own pay by bargaining harder or influencing compensation committees. Naturally, the incentives for such ‘rent-seeking’ are much stronger when top tax rates are low. In this scenario, cuts in top tax rates can still increase top income shares, but the increases in top 1% incomes now come at the expense of the remaining 99%. In other words, top rate cuts stimulate rent-seeking at the top but not overall economic growth – the key difference with the first, supply-side, scenario.

To tell these various scenarios apart, we need to analyse to what extent top tax rate cuts lead to higher economic growth. There is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s. For example, countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark. Hence, a substantial fraction of the response of pre-tax top incomes to top tax rates may be due to increased rent-seeking at the top rather than increased productive effort.

Naturally, cross-country comparisons are bound to be fragile, and the exact results vary with the specification, years, and countries. But by and large, the bottom line is that rich countries have all grown at roughly the same rate over the past 30 years – in spite of huge variations in tax policies. Using our model and mid-range parameter values where the response of top earners to top tax rate cuts is due in part to increased rent-seeking behaviour and in part to increased productive work, we find that the top tax rate could potentially be set as high as 83% – as opposed to 57% in the pure supply-side model.

In the end, the future of top tax rates depends on the public’s beliefs of whether top pay fairly reflects productivity or whether top pay, rather unfairly, arises from rent-seeking. With higher income concentration, top earners have more economic resources to influence social beliefs (through think tanks and media) and policies (through lobbying), thereby creating some reverse causality between income inequality, perceptions, and policies.

An important result of the election is that now both Republicans and Democrats agree that an increase in tax revenues will be one requirement to avoid plunging off the fiscal cliff (i.e., avoiding the trap that Congress set for itself that would result in spending cuts that neither side wants).

There does remain a sharp divide over what should be the source of those increased revenues.

The Republicans prefer to broaden the tax base primarily by reducing tax expenditures (reducing deductions for home loan interest, charitable contributions, state taxes, etc.), but they are adamantly opposed to any increase in income tax rates. In fact, they want a further reduction in tax rates, obviously creating more deficit that must be made up by further broadening the tax base, even though there really isn’t much leeway, if any.

Democrats have supported allowing the temporary Bush tax cuts to expire for those with over $250,000 in income. They have indicated that they are willing to negotiate, suggesting that they might leave the rates at 35% instead of the reversion to 39.6%, if they could achieve similar results through the broadening of the tax base.

This is why the work of Piketty, Saez and Stantcheva is so important. They show that we should do both. We should broaden the tax base by eliminating tax avoidance opportunities, and we should increase tax rates to a level that will fully fund all important public functions. We could set top tax rates as high as 57% without having any adverse impact on the economy, or we could set rates even higher at 83% if we wanted to compensate for rent-seeking (simply stated, the means by which the wealthy extract large amounts of money from the rest of us without providing any substantial value in return).

Although we could easily eliminate our budget deficits through these two tax policies – eliminating tax avoidance opportunities and increasing tax rates for the highest income bracket – our politicians are also proposing spending reductions. Of particular concern to health reform advocates is that some politicians want to reduce “entitlement” spending for Medicare. It is not just the Republicans since President Obama already had agreed to significant Medicare reductions in his tentative “grand bargain” he made with Speaker Boehner. This attack on Medicare should be opposed vigorously since we need to protect Medicare until we are able to replace it with a better program.

So what does this all have to do with single payer? Quite simply, it provides an answer to those who say that we cannot afford the taxes that would be required to fund equitably a single payer system. Clearly, not only could we collect enough taxes to fund the system without having a negative impact on other sectors of the economy (and health care is one of the most important sectors), but we would also accomplish two other important economic goals: 1) establish a transfer from the wealthy to fund health care for low- and moderate-income individuals and families who can not longer bear their full equally-divided share of our national health expenditures, and 2) finally begin to reverse the unfair and inequitable distribution of excess wealth to the rent-seekers.