This is a rush transcript from "Your World," January 24, 2011. This copy may not be in its final form and may be updated.
NEIL CAVUTO, HOST OF "YOUR WORLD": Austan Goolsbee, his former top economic adviser, joining me right now.
Austin, I guess the president’s pitch will be she pays a lower rate than her boss, Warren Buffett. By the way, if I am Warren Buffett, I will start giving this lady a lot more money because she’s become a poster child and she deserves a raise.
Leaving that aside, what do you think the effect will be?
AUSTAN GOOLSBEE, FORMER CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS: The effect of that as a policy or the effect of that in the speech?
GOOLSBEE: Well, I happen to agree with the Warren Buffett insight that, first, just on income tax rates, it doesn’t make a lot of sense that his secretary would be paying a higher rate than him.
And what people are forgetting in this discussion is, everybody working on your first $105,000 of your income, you’re also paying 7 percent plus of Social Security and Medicare payroll taxes. So if you start looking and compare a guy that makes $500 million a year to someone who makes $50,000 a year, I just don’t think that makes sense.
(CROSSTALK)CAVUTO: So, here’s what we have to do, then.
(CROSSTALK) CAVUTO: OK, but here is what we have to do, then. Let’s say that you accept that point of view, and that that’s not right. Then you can bring her income tax rate down, or you can raise Warren Buffett’s capital gains rate up. Right now, as a long-term investor, like Mitt Romney, he’s paying about 15 percent.
Now, let’s say she is paying 28 percent. I don’t know for sure, but I think it’s about that. Should you raise that rate, the capital gains rate, to 28 percent? Should you effectively double it to make it at least comparable?
GOOLSBEE: You could do it -- you could try to equalize those rates in multiple ways, as you say.
Over the last 10 or 12 years, we’ve cut the highest capital gains tax rate basically in half. And the overall taxes paid by the 400 richest people in the country have been cut in half. So, the same people saying that it would be crazy for that number to go back up, what were they saying when it was cut in half?
This is about the lowest rate that it has ever been in U.S. history since we’ve had an income tax.
CAVUTO: Well, it is supposed to go up, it is supposed to go to 20 percent next year. And then it’s going to be just indexed to whatever the income rate is, so there’s an argument to be made whatever income rate you’re at, you just pay that on your gains and investments.
GOOLSBEE: That’s what Ronald Reagan did.
CAVUTO: But leaving aside the fact that you are already paying taxes on the income that you’re paying taxes on again, I guess what I’m asking you...
CAVUTO: Well, you are.
But I want to...
(CROSSTALK) GOOLSBEE: Well, hold on a second. Hold on. Hold on.
CAVUTO: What would induce you to invest in a corporation or an enterprise when the cost of getting in -- when you know the cost of getting in could effectively double? You’re thinking if I am taxed at 15 percent on that, I might go in and take the risk. If I know that the tax will be closer to 30 percent, I might not take the risk, right?
GOOLSBEE: Well, maybe.
I would say three things. I think, number one, there is an issue there. That’s why no one is talking about that. The president enacted setting the capital gains rate to zero if you are investing in or starting your own small business. So, I think there is, to be fair, an argument to be made about that.
Now, I think, when we did the reverse, if that was a magic elixir, then how do you explain what happened? George Bush cut the top tax capital gains tax rate to about the lowest it’s ever been, and it didn’t unleash massive growth in the country. So I think the argument that...
CAVUTO: He had lowered income rates. He had already lowered income rates. So, at least he was doing that.
(CROSSTALK)CAVUTO: But you are saying in the case where the income rate would go up...
(CROSSTALK) CAVUTO: Wait. No, listen. I will let you answer.
CAVUTO: The president wants to raise the top income rate. That’s fine. But he also then wants to raise the capital gains rate. Something’s got to give here, right?
GOOLSBEE: Well, all I’m saying is, if we look in periods in the U.S. history like through the ‘90s, where the rates were modestly higher at the top, the capital gains rates were modestly higher at the top, and we didn’t see a catastrophe. In fact, we saw a great flowering of entrepreneurship in the country.
If we looked at the 2000s, where they cut the high income rates by trillions, and we didn’t see a massive explosion of entrepreneurship, I find it hard believe that going back to the...
CAVUTO: Wait. But you are ignoring the fact that Bill Clinton cut those -- the investment rates. He did hike the top rates.
GOOLSBEE: I agree.