The Bipartisan Policy Center and Yahoo Finance team up to break down where tax policy might go in the years ahead. Featuring Yahoo Finance's Rick Newman, Douglas Holtz-Eakin, Jason Furman and Ben Gitis of the Bipartisan Policy Center.

Video Transcript

BEN GITIS: Hello, and thank you for joining the Bipartisan Policy Center and Yahoo Finance for today's conversation about taxes and the 2020 race. My name is Ben Gitis, and I'm a senior policy analyst at BPC.

BPC is partnering with Yahoo Finance to bring you a series of conversations leading up to the November election focused on critical economic policy issues facing the United States with perspectives from both the right and the left. The shape and scope of the US tax code will be a critical component of US economic policy over the next four years. Changes to our tax system impact economic growth and business decisions to invest and hire. The tax code also has implications for workers' wages and their everyday household finances.

Lastly, revenue is half the equation for our nation's long-term fiscal sustainability. As the national debt continues to rise, particularly as a result of the COVID-19 pandemic and its economic fallout, revenue generation will be a key element of tax reform discussions moving forward. Next year, with the economy likely to remain in a delicate recovery from the recession, there is no doubt that leaders from both sides of the aisle will look to tax policy as a way to support businesses, families, and workers during these unprecedented times.

Meanwhile, many provisions of the Republicans' 2017 tax reform bill will begin to lapse over the next few years. What should Americans expect from tax policy in the next Congress and administration, depending on the outcome of the election? Is there any opportunity for bipartisanship going forward? We hope today's discussion provides valuable insight into the two parties' tax policy priorities.

With that, let me turn it over to our moderator, Rick Newman of Yahoo Finance. Rick, take it away.

RICK NEWMAN: Thank you, Ben. We have two terrific economists here to talk about this today-- Jason Furman-- Jason, you can raise your hand so everybody knows which one you are. Jason is an economics professor at Harvard who was chair of the Council of Economic Advisors in the Obama administration.

And Doug Holtz-Eakin-- the other guy. Doug, you can raise your hand. He runs the American Action Forum. That's a think tank. He's president there. He used to be Congressional Budget Office director and he was chief economic advisor to John McCain, when he ran for president in 2008. So we're in good hands here.

So guys, I don't want us to go through every facet of the Biden tax plan or the Trump-slash-Republican tax plan, but I think we should just talk about the items that seem most important and most plausible given political realities. So Doug, I think I'll start with you. And in bipartisan fashion, I will ask you not to be the token Republican discussing the Republican plan, but tell us what you think about Joe Biden's tax plan and the spending plans that come along with it. What do you think the top democratic priority might be in 2021 if Biden wins the presidency? And what might actually be doable in Congress?

DOUGLAS HOLTZ-EAKIN: So let me start out on the Republican side where, as you know, the president has said precious little with great detail. He says he's issued more tax cuts, and it's not quite clear exactly what that means. I think if you go up on Capitol Hill and talk to Republicans, what they're looking at is the expiring provisions of the Tax Cuts and Jobs Act, the full expensing for business, the rate structure on the individual side-- those provisions. And they'd like to make that permanent.

So lock in the reforms that they thought were desirable. If they had the capacity to do it, they'd love to clean up the TCJ, which is, charitably, one of the worst drafted pieces of legislation ever and really has a [INAUDIBLE] since. So they'd like to do that-- to clean up if they'd all get the chance. And I think that's their top priority.

If you go over on the Biden side, there's a lot more detail. And I'd say, you know, it's quite clear that the goal was to tax those people making $400,000 or more more heavily in a variety of ways using rates and other methods. I think the big problem over on the Biden side is one that Jason's very familiar with-- Joe Biden's promise to raise about $4 trillion in taxes over the next 10 years, but he's also promised to spend anywhere between $5, $7-- and I've seen estimates higher trillion. And how do you fill that gap? Well, he hasn't said.

And when Mitt Romney found himself in the same position, Jason pointed out, well, by process of elimination, you got to be raising a lot of taxes on the middle class. And so Biden can be open to this notion that if, unless he's clear that he's dialing back his spending, he's also promising to raise taxes on the middle class. So I think we've got some interesting debates coming forward.

And when you get to the feasibility thing, I think the most important thing to realize is we're going to come out of this pandemic recession at a very slow pace, and we will emerge with a fiscal situation that is fundamentally unsustainable. So what they want to do may be very, very different than what they have to do. And they're going to have to find some places where they can agree to raise some revenue, quite likely, going forward. And that's going to put pressure on everybody.

RICK NEWMAN: Jason, go ahead. Do you want to address that question of whether Biden is likely to raise taxes on the middle class?

JASON FURMAN: Sure. Let me just step back. I mean, at the core of the Biden tax proposal is an appreciation and a view that we're starting at a very low level of revenue as a share of GDP. Last year, it was 16% of GDP, which is about as low as it's been in the last 50 years, except in the immediate aftermath of a recession. But for something like this in the business cycle, we haven't been that low in 50 years.

Under the Biden plan, revenue would get back up to 19% of GDP. Now, not all of that is Biden's proposed tax increases. That also includes the fact that baseline revenue is expected to rise to some degree over the coming years. 19% of GDP is the same as taxes as a share of the economy in the second half of the Clinton administration. It's towards the upper end of the historical range, though.

It's below the 21% of GDP that the Bowles-Simpson Fiscal Commission called for in their plan. So that gives you a sense of where the overall taxes lie in the Biden plan. Relative to the--

RICK NEWMAN: Jason, let me ask you--

JASON FURMAN: Sure.

RICK NEWMAN: Let me ask you this question if you don't mind. So just to get back to this question of middle class taxes, there's a lot of analysis on this showing from the Tax Policy Center-- and people can go find this analysis and I encourage them to-- showing that Biden's plan, in fact, would not raise taxes on people below $400,000 in income. But there could be some minor decline in disposable income because of other economic changes.

That, to my mind, is to say he does not intend to raise taxes on the middle class. But I guess you could make the claim that he does. Is that a political problem, Jason?

JASON FURMAN: Yeah, so he has drawn a bright line at 400,000. I do not think I could see any scenario-- and realistically, he's going to go below 400,000. I think, politically, the difficulties he's going to face will be getting all the tax increases he's proposed, not that he might get some above and beyond what he's proposed. That exacerbates the budget challenge we were talking about, of course.

But I think things will be resolved in the direction, either of less spending or more of a gap between spending and taxes. I think it's exceedingly unlikely it was resolved in the form of more middle class tax increases.

Yes, there is a-- you know, when you distribute a corporate tax change in something like that, some of it will show up in different income groups than the very top, so there's some effectively indirect tax changes that affect households below 400,000. They're relatively small. In many cases, they're dwarfed by other policy proposals of his, like expanding the child allowance $3,000 a child. I don't think anyone really thinks that's quite the same thing as raising taxes on someone. So I don't think that opens up a real political issue for him.

RICK NEWMAN: Doug, I have a question for you.

DOUGLAS HOLTZ-EAKIN: Yep.

RICK NEWMAN: So-- and by the way, I think the presumption here is not only that Biden wins, but that he would have to have Democrats take control of the Senate so that Democrats control both houses of Congress for any of these proposals to go through. But let's say that happens, which might be a 50% likelihood.

What do you-- of Biden's plan, what do you think would be the easiest tax hike and spending that goes along-- what would be the easiest thing to get through Congress?

DOUGLAS HOLTZ-EAKIN: In that scenario, raising the top rate. I think that's going to be a, you know, no-brainer for Democrats. And if they control both the House and the Senate, I fully expect the legislative filibuster to go away. So they're not going to need 60 votes. It'll be, Katy, bar the door. And so they'll do that, and they'll do more.

RICK NEWMAN: So that would be raising the top rate from 37%, which is where President Trump's tax cut lowered it back to 39.6%, where it used to be. And I mean, rich people can afford that, I think.

DOUGLAS HOLTZ-EAKIN: But, but--

RICK NEWMAN: Is it fair to say?

DOUGLAS HOLTZ-EAKIN: But-- but, I mean, ask yourself, is that really what will happen? Or will Congress pass something that raises it to 45? Is he going to veto that? So you have no idea whether it's going to land in that scenario.

RICK NEWMAN: Even though Biden's proposal hits 39.6, you're saying if Democrats have control, it could end up being higher than that?

DOUGLAS HOLTZ-EAKIN: Yes. I think that's a real possibility.

JASON FURMAN: I-- I mean, I think for better or worse-- and, you know, in some cases, better, in some cases, worse-- you know, a lot of Democrats are very nervous about revenue increases. And--

DOUGLAS HOLTZ-EAKIN: Yeah.

JASON FURMAN: --he's proposed a plan that is-- gets you back to, as I said, late Clinton, in terms of revenues and shared GDP. But it's pretty ambitious because there's a big gap between the low revenue we're at now and that. I think that will be challenging enough.

I do agree with Doug. The lowest hanging fruit is going to be repealing the parts of the Tax Cut and Jobs Act that went directly to high income households. The problem is that raises $150 billion, which is less than 10% of the total amount he's seeking to raise.

I think and interesting question will be on corporate taxes. There, I think there's scope for a corporate tax plan that would reform the corporate tax code, raise additional revenue, and also increase economic growth. And the key to that is that what matters in corporate taxes isn't just the tax rate, it's also the tax base.

Now, he has not proposed expensing. He has not proposed eliminating the interest deduction. Those are ideas that Doug has supported in the past. I've supported in the past.

DOUGLAS HOLTZ-EAKIN: Absolutely.

JASON FURMAN: If he added them to his plan, you'd gets some economic growth. He has proposed closing a lot of loopholes involving overseas taxes, strengthening a provision from the Tax Cut and Jobs Act called GILTI. I think it was one of the parts of the act that was drafted very quickly, has a number of flaws in it as a result of that drafting, and if you look at the modeling--

DOUGLAS HOLTZ-EAKIN: Jason's been charitable.

[LAUGHTER]

JASON FURMAN: And if you look at the modeling from the Penn Wharton Budget Model, they say that his revenue increases by closing some of the overseas loopholes actually add to economic growth while raising revenue. So there are places where raising taxes is a trade-off. I don't think the trade-off is very large when you're talking about most of the ones that Biden has proposed. There's a few places where it's actually an affirmatively good thing, and we can get an extra growth while getting extra revenue.

RICK NEWMAN: So Doug, let me go back to you on this question. We should also just point out that a base-- a baseline part of Biden's plan is raising the corporate rate from 21% to 28%, which is about half of the way back to the 35% where it was. You can say whatever you want to say-- else you want to say, Doug-- but is that plausible?

DOUGLAS HOLTZ-EAKIN: So that's plausible, but I don't think it's a good idea. I think if you could, you know, sort of dial the clock back to before Donald Trump became president, there was a bipartisan agreement that we had a big problem in the corporate tax code. And getting that rate down to somewhere in the range of our developed country competitors was an important part of solving it.

Tax Cuts and Jobs Act did that. And you know, one of the biggest pieces of evidence is we used to have an annual national frenzy over corporate inversions and headquarters going overseas. And the Tax Cut and Jobs Act just stopped that debt. And it's over.

We have fixed a lot of the things that were wrong. It's not perfect by any means. I'm afraid if we go back to 28, it might be OK right now, but everyone else is going the other direction. And we're going to find ourselves badly out of line in a number of years, and that'll be a problem. So there are other places to go in corporate code-- the base, as Jason said-- before they start jacking up the rate. I think that would be a mistake.

But more generally, I think you've got to understand what-- what Biden is saying now is-- you know, I understand it, and he's quite disciplined about it, and he is not deliberately going to raise taxes on the middle class. And that all makes perfect sense. But he's going to walk into the presidency with-- with big pressures to immediately get rid of the cap on state and local income tax-- taxes-- the deductibility. That's the number one legislative priority of [INAUDIBLE] Democrats.

And so he's-- that's already helping out some rich people on that front. And he's promising to spend at least 20% GDP, if not more, and he can't possibly make that match up with his tax proposals. And so unless he wants to identify some priorities and say, these are the things I really care about for the first 100 days, this is it. He's going to have a tax plan that's driven by whatever Congress picks up out of his spending proposals and pushes through.

And in the scenario you described, it's easy for me to imagine the Clean Energy Plan becoming, you know, a lot of legislative object. And that's an enormously unrealistic and expensive venture. That means that taxes will have to go up a lot, and where do you get it? I don't know.

RICK NEWMAN: Let me just ask you guys--

JASON FURMAN: Rick, can I say something quickly about that corporate rate?

RICK NEWMAN: Let me just ask you guys-- if you could give a quick-- very quick answer on this-- should Biden or should the Democrats undo that $10,000 limit on state and local taxes? Doug, first.

DOUGLAS HOLTZ-EAKIN: No. No, there should be zero. You shouldn't be able to deduct them at all.

RICK NEWMAN: OK, Jason.

JASON FURMAN: You should not get rid of it. I'd be fine with zero.

RICK NEWMAN: OK, good. So let me ask you about another corporate idea. So this was not--

JASON FURMAN: Rick, could I quickly say something on the corporate rate, though?

RICK NEWMAN: Yes, go ahead.

JASON FURMAN: You know, in the Tax Cut and Jobs Act, we saw something that I've rarely ever seen in Washington. the Business Roundtable, which is the main organization on behalf of the country's largest corporations, was asking for a 25% rate. The main lobbying organization got more than they asked for when the rate went all the way to 21%.

RICK NEWMAN: Right.

JASON FURMAN: And so the idea that a rate in the neighborhood of 25-- and I think 28 is in the neighborhood of 25-- it's just north of what the big business lobbying group was asking for. I think it's hard to say that that's a problem. I think it is especially hard to say that's a problem if you are addressing some issues with the tax base, if you're addressing some of the ways in which companies shield their income overseas, which-- which Biden has proposed.

So I wouldn't worry about a rate like that. I'd worry about 35. I definitely wouldn't want to go back to that. There are certainly people in the Democratic party--

RICK NEWMAN: So I have one other question on--

JASON FURMAN: --that want to do that-- that Biden rejected that view.

RICK NEWMAN: So I have one other question on--

DOUGLAS HOLTZ-EAKIN: But Jason, [INAUDIBLE] this conversation in 1988, you would have said, oh, I wouldn't worry about 35. We're way better than everybody else. And pretty soon, we weren't. And so I think that's a complacency we've ought to guard against.

RICK NEWMAN: Times change. OK, one other question on corporate tax, and we'll move to some of the Republican ideas. And there are fewer of those, so that won't take as long.

[CHUCKLING]

But Biden also adopted this idea of an alternative corporate tax. And he really kind of borrowed this from Elizabeth Warren, I think, after the primaries were over. But the idea here is that, if companies that report profits to shareholders but then they, on their taxes that they send into the IRS, which are private-- we don't get to see them-- but if they use all these deductions to zero out their tax, that they should pay some minimum tax. There's some cognitive dissonance there, because companies that do that are offering often-- almost always using legal tax breaks that Congress passed into law at other points in time.

So Biden is saying, oh, let's undo that a little bit with this alternative tax. Is this a good idea in any form? Doug, you go first.

DOUGLAS HOLTZ-EAKIN: No, it's a terrible idea for two reasons. Number one, you shouldn't have a tax system and an alternative tax system. You should have one tax system that you believe raises revenue in a fair and efficient fashion. And stop trying to sort of cobble these things together.

The second is, there's a reason there's a difference between taxable income and book income. And a lot of it has to do with the use of legal tax deductions, like expensing. And to sort of bring in this alternative minimum tax and undo the incentives you set up in the first one makes no sense whatsoever.

RICK NEWMAN: Jason.

JASON FURMAN: I think alternative minimum taxes are always an admission that your tax system has failed. I'd rather-- always rather fix the tax system as a whole. Sometimes, maybe it's not possible to fix it, and so it's a necessary evil to go down that route.

In this particular case, I think I'd want to hear a lot of questions answered about feasibility, design, and how it would work in practice deal with international companies, deal with changes in accounting roles, and the like before I was sure that it was worth this. And even better would be get rid of the loopholes that give rise to the problem in the first place.

RICK NEWMAN: So let me ask about a couple of the Republican ideas at this point. So Trump has not really offered much, but he did, a couple of months back, say he wants to cut the payroll tax. And he's got this idea that he wants to defer the payroll tax until the end of the year. But then, he says he wanted to get rid-- or either reduce or get rid of it altogether.

That payroll tax funds Medicare and social security, so that seems problematic, at least. He has also floated the idea of some other vague middle class tax cut. So Jason, I'll ask you first, I guess. If-- do-- these both seem like gimmicks to me, honestly. Is there any chance that this-- these could actually happen?

JASON FURMAN: No. There's no one outside of Donald Trump that was interested in his payroll tax idea for good reason.

RICK NEWMAN: Doug.

DOUGLAS HOLTZ-EAKIN: Jason likes it more than I do.

[LAUGHTER]

RICK NEWMAN: OK, so let's talk about some of those expiring provisions, then, of the Tax Cuts and Jobs Act, because I think that really represents the only other thing we've heard from Republicans about tax-- tax [INAUDIBLE] for the next few years. If I get this right, those don't expire until 2024. Is that right? Or '25, even?

DOUGLAS HOLTZ-EAKIN: Yep.

JASON FURMAN: '25.

DOUGLAS HOLTZ-EAKIN: Yeah, that's right.

RICK NEWMAN: So aren't those the kind of things that are never going to get resolved three or four years ahead of time and we're going to have to approach yet another fiscal cliff or whatever cliff it's going to be at the end of 2025 before Congress gets this done?

DOUGLAS HOLTZ-EAKIN: Normally, yes. I think that that's exactly the dynamic we've always seen. Here's the counterargument. And you know, it may not-- may not fly.

Suppose the president gets re-elected. He's promised middle class tax cut. He's not going to have the situation where he controls the House and the Senate. That's not going to happen. So what plausibly could get done?

Well, the only thing I can imagine that would get done would be to make permanent some pieces of the-- the Tax Cuts and Jobs Act in exchange for getting rid of ones that the Democrats don't like. And so you know, you take the SALT cap and you negotiate what you can get on permanence of expensing or individual's rates, and you call that a middle class tax cut.

You know, beyond that, I think it's going to be very difficult to imagine a substantial tax policy coming out of the White House and getting passed.

RICK NEWMAN: Jason, what about the idea of something that might involve the earned income-- income tax credit? That's actually pretty popular among both parties, isn't it? Is there any bipartisan legislation that would seem possible if control of Washington is split?

JASON FURMAN: Look, I'd love to see the earned income tax credit increase, but I'm not sure, frankly, how popular it actually is among Republicans. In 2017, they get a $1.5 trillion tax cut, of which precisely zero dollars was the earned income tax credit. Paul Ryan had a proposal that I think was a $20 billion EITC proposal, maybe a bit more than that. It didn't show up in the legislation. They couldn't make room for it out of $1.5 trillion. So I don't know how popular it is.

But yes, I'd love to see it happen. I think the evidence for it is very strong. The--

RICK NEWMAN: Let me ask you this-- do you think--

JASON FURMAN: The--

RICK NEWMAN: Is that something-- I mean, that's the kind of thing that would really require strong presidential leadership. Let's say Joe Biden wins, but he has a split Congress. Republicans retain control of Senate. Do you think in that scenario we could see some increase in the EITC?

JASON FURMAN: Probably. We've seen a lot of bipartisan budget agreements in the past been a central feature of bipartisan ones, so I'd love to see that. But going back, if what we get is divided government and that results in, you know, tax cuts-- big ones-- are they for the middle class? Are they for the rich? We're already at incredibly low revenue as a share of GDP.

DOUGLAS HOLTZ-EAKIN: Yeah.

JASON FURMAN: I'm not that worried about the deficit, but I wouldn't lighten it a lot. And it's not like I'm seeing a lot of appetite by anyone for spending cuts. And I don't have a lot of appetite for spending cuts, myself, to be frank. Doug has more.

And when it comes to the expiring tax cuts that expire at the end of 2025, I think anyone who wants to continue them should pay for them. And the whole idea was tax reform revenue neutral. That's where the whole conversation started. This was a budget gimmick to stay within Senator Corker's $1.5 trillion.

There was a set of arguments made that the corporate side paid for itself because of growth. I think those arguments were overstated, but I think there was a bit of growth to be had out of the corporate provisions. On the individual side, I think there's very little argument that growth is paying for the cost of extending them.

And so as a result, you know, anyone that wants to extend those provisions should identify something else that they're going to get rid of or are willing to do in order to extend them. And I think to treat these like a normal extender or like we treated the Bush tax cuts would be very problematic going forward. The conversation needs to be very different--

[INTERPOSING VOICES]

RICK NEWMAN: --running out of time here, and I want to get to one last thing. And I'll throw this question to you, Doug. No one's talking about this, but the Medicare trust fund is going to run short of money very soon. I mean, it could be within two or three years. Could that be the-- I mean, no one is saying, when I get-- when I get in, I'm going to start raising taxes to pay for more Medicare. But I mean, is that something that's going to have to happen in the next president's first term?

DOUGLAS HOLTZ-EAKIN: No. In principle, yes. But we've set the precedent of general fund transfers and social security. It's just-- there's a lot of ways to get the money over to Medicare, as well. So I can easily see this being papered over and without real fundamental dealing with the financing and spending of those programs.

There's no appetite for reform in spending. Jason's right about that. And there's no appetite for a big tax increase. So I think the odds are bigger for some sort of gimmick.

RICK NEWMAN: Jason, last word. Anything you see happening on Medicare funding in the next president's first term?

JASON FURMAN: I agree with Douglas. You know, anyone betting on gimmicks is probably not going to lose a whole lot of money. I think there are some smart reforms of continuing to drive forward--

DOUGLAS HOLTZ-EAKIN: Yeah.

JASON FURMAN: --reforms of payment models in Medicare, changing the structure of cost sharing, and the like. I don't know whether or not these are in Biden's proposals or Trump's proposals, for that matter. But I think there are some smart things you could do to make Medicare more effective, improve quality, and reduce costs. And so hopefully, we'd be aggressive about those.

The list of things on that category, though, isn't large enough to get all the way to where we need to. So that's why, ultimately, I think we need additional revenue for Medicare and overall.

RICK NEWMAN: I wish we had more time to go in that, but you can't shove too much tax policy down people's throat all at once. So maybe we can come--

[LAUGHTER]

[INAUDIBLE]

This has been a great discussion, so thank you very much Jason Furman of Harvard University and Doug Holtz-Eakin of the American Action Forum. Ben Gitis of the Bipartisan Policy Center, back to you.

BEN GITIS: Thank you, Doug, Jason, and Rick for a terrific conversation. Tax policy is always a hot topic during presidential elections. It's one with so many different implications for American's household finances and the economy at large.

Republicans and Democrats clearly a very different visions for our tax code. But at BPC, we are focusing on key areas with potential for durable progress, like working family tax credits. Over the coming months, we will be putting forward policies that pave the way for bipartisan action.

We'll discuss these tax credits and other important issues at BPC's virtual policy summit during the second week of December. To learn more about our work, visit BipartisanPolicy.org.

On behalf of BPC and Yahoo Finance, thank you for joining us. This was the second in our election series, which is available on Yahoo's digital platforms. Next week's segment will focus on student debt in the 2020 race. Have a good day.