And why the next Foreign Policy crisis for the worlds number one power might well involve the worlds number two power. But first heres my take. Now that president obama has won reelection, the debate in washington has shifted from whether we should raise taxes to how and by how much. This makes sense. With a deficit over a trillion dollars, we will need a combination of increased tax revenues and spending cuts. The president and his allies including robert rubin have made the case that eliminating deductions simply will not get you enough money. You will actually have to raise tax rates. Thats probably true as well. But lets not give up entirely on the issue of deductions and all those other hidden subsidies that the simpsonbowles report accurately called backdoor spending hidden in the tax code. In order to sound like theyre not spending money, congress often tends to grant special exemptions to pace taxes. In hids excellent book red ink David Russell points out if you get a 1,000 exemption, its exactly the same as being paid a thousand dollars by the government. The simpsonbowles commission pointed out that when you add up all these tax expenditures, they amount to over a trillion dollars in foregone revenue. Considering that the total revenues are just 2 pngt 5 trillion according to the cb o. Russell points out if you got rid of all that, we could lower the Corporate Tax rate from 35 to 28 . But the larger benefit would be to reduce corruption in washington. Congressmen get cash for their campaigns. And in return for this, they often give away preferential treatment in the tax code to special interest groups, to company, to lobbies. Tax expenditures are plaerly valuable because unlike actually spending, which has to be renewed in every years buchlkt tax expenditures are in the code and the benefit is received every year. Its the gift that keeps on giving. Now, since we cant do much about Campaign Finance reform thanks to the supreme court, why not get rid of what the cash often buys. The largest tax breaks are not to corporations. Theyre to people for things like Home Mortgage deductions. Even these are vastly overdone or should be limited or phased out. Britain got rid of it with no adverse effects. Canada never had one. And yet they have a similar rate of homeownership to the United States. But forget about the economics for a moment. Just as a corruption cleansing mechanism, lets get rid of tax expenditures. If korng wants to give you money, let them do it the oldfashioned way. Write a check and do it again err year. Lets get started. Captions by vitac www. Vitac. Com so lets get right into it with our guests robert rubin was treasury secretary for four years in the clinton administration. Prior to that he was cochairman of goldman sachs. Paul oneill was treasury secretary at the start of george w. Bushs first term. Earlier he revived the fortunes of the industrial giant alcoa as its ceo. Welcome back, gentlemen. Bob, lets first talk about the tactics. It does appear over the last day or two that president obama has taken a stronger position on the fiscal cliff on the explore rags of the bush tax cuts than he had earlier. Hes asking for more in revenues, he seems to be willing to let the tax cuts skpiefrmt is that the right strategy here . Well, it depends where youre trying to get. I think i happen to agree with president obama about where he is substantively in terms of what he needs to do to get an effect ivg program as far as our long term tra jektly. I think some of his tactics, its very hard if youre not in the room to know what to do tactically but what he says to me is different than what you said. He said i have an objective. We cannot get there with tax expenditures. With the tax reduxes. Right. If it meets with the longterm fiscal trajectory, you can get ourselves in a much better place for the long term and you can significantly improve long range terms. You put all that together. What he then said is im willing to sit with people and compromise to find common ground. Its sort of what he says but not quite. He says beall have to Work Together if were going to meet that objective. What do you guess . Is he playing too hard ball with the republicans or is there room for compromise . I think he shouldnt focus at all on the republicans. I think he ought to focus on the American People. Thing is a restart opportunity for president obama and an opportunity for him to educate the people and lead us in the direction we need to go. You know, when i look at the fiscal cliff and sequestration and all these other things, i say to myself, we need to start with this fundamental question. Do we the American People agree that we should pay for the things we want and need . And if the answer to that is yes, which i think it ought to be. Then i tlinks a related question and that is when are we going to start doing it, right . So by the simpsonbowles plan we would have the next balanced budget in 2035. You know, thing thats a little far out for me, if were really serious about paying for the things we want and need. And so a think he could do is educate people about the existing tax codes. Here are two facts. The tax gap, that is to say the amount of money we dont collect which is due and owing according to a brookings study is 400 billion a year. Thats essentially tax cheating of various kinds. Of various kinds. 400 billion were not collecting now. Now, according to art laugher and his group who studied how much it costs our society to administer the current tax system, it costs us 431 billion a year to administer this system. You know, so on its face it say s almost a monkey could figure out beater way to collect the revenue for the things we need and want than fixing the existing tax system. I think would be great if the president of the United States said we should reason together about an effective system that fairly collects the revenue we need and we probably ought to start out by saying were going to start with blank page. It doesnt mean we can implement it overnight, but nows an opportunity where he could lead us to throw away the broken things that weve evolved into and set out a new course for the United States that will give us high prospects of growth and better standard of living for all the people in the United States. Do you think that this issue of fundamental tax reform should be part of this negotiating situation or for now try to fix things, move on, and let that larmer discussion take place later . Let me totally agree with something paul said and take a slightly different view on another which is what you just asked. I think pauls exactly right. Weve got to address our fiscal trajectory. Its imperative. And you can accomplish both purposes, short term and long term. If you address this longterm trajectory effect live i, you have a chance with job creation. In the short term youve decreased confidence. Then youd have an upfront moderate. Moderate stimulus to further improve growth. On the point that paul raises, in effect i think hes raises a point. We have slieltly different views. These were designed with some purpose and what i think we could do is debate all these purposes. Think as a practical matter with the time frame we have we cant have a full debate. I think if grow through all of that, i think as a matter of sun stance, as a matter of the effects you would have, these are the real limits of what you can do, fareed or what squlould do. In terms of practical politics, if were going have the effective deficit Reduction Program we had before and if you take the position that we shouldnt increase taxes on the middle income people and you aim at a reasonable balance between tax cuts and revenues, i think most of this is going to have to come from increasing rates in the top two brackets. Thats what you wrote in the new york times. I wrote that. If you really look at the numbers, there are serious substantive issues i just raise and then i said when you look at numbers, you will inevitably have to raise something more of the majority from the reeve news. And the rest you can do by reducing reductions and the like. Would i by fair . Weve got to take a break. Would it be fair that the substance of what youre seeing seems to suggest that you would like a valueadded tax. Simple, efficient, easy to collect . Yes, i want a valueadded tax and i want to use it to replace Corporate Income taxes and individual taxes and payroll taxes. And i want to do this. I would like for the prlt to declare the purpose of the tax system is to raise the revenue we need. Its okay with me, im probably more liberal on some of these things than you are, bob. Its perfectly okay for me for us for we the American People to say we want to give people certain benefits depending on their status. Thats oklahoma with me. But i want to write them a check. I dont want to do it through the gauze of a tax system that doesnt collect the revenue we need and is inherently unfair. We will have to come right back and talk about were going to talk about what the experience europes experience in austerity tells us for American Growth when we come back. [ male announcer ] citi turns 200 this year. In that time thereve been some good days. And some difficult ones. 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Northrop grummans Security Solutions are invisibly at work, protecting peoples lives. [ soldier ] move out [ male announcer ]. Without their even knowing it. Thats the value of performance. Northrop grumman. So i brought it to mike at meineke. We gave her car a free road handling check. I like free. Free is good. My money. My choice. My meineke. And we are back with bob rubin and paul oneill. I say in my opening commentary, paul oneill says if you want to provide subsidies for people, write them a check. Why do it in this hidden way through the tax code which first of all is permanent and perpetual and secondly, youre not being up front about it. Two comments if i may, fareed. One thing its not permanent. You can always change it through legislation. Number two, even if youre right, which im not sure that youre right, were not going redo the federal budget. If you think its important, i think charitable contributions and health care are important, then you have to maintain it in its current form. You would try to get rid of the corporate side. I think its like the individual side yochl view to take each one of them and decide on an individual basis. In the long run, i think paul is right in one sense. It probably makes more sense to have it all on the spending side. On the other hand as i said a moment ago, think there are a lot of important issues being observend and were not going redo the federal budget in any time that is remotely related to what we do now which is to get on a sound fiscal path both for the long term and thank god the creators of our country didnt believe we had to start with a mess and live with it. Were being the naive optimi optimists. Let me ask you, paul. The whole point about this deficit redux, simpsonbowles, all that, i understand that, but what do you learn from the fact that the European Countries that have been doing just that from greece and spain to most dramatically britain, britain has really had a very strong austerity program. Theyve seen growth plummet and britain has contracted more than in the great depression. Is there a danger their any of these deficit plans are going too far right now given how fragile the economy is . You know, my own view is if we plan for a better fuehrture the structure that we set up and are disciplined about how we spend our money and have a Broad National agreement how to spend our money, its okay to phase it in. We dont have to do it in the next three months or six months because if people see were going to have a stable system thats reasonable, efficient, economic, the markets will take off. The thing that investors want when i was running a company, i wanted stability. I wanted certainty about the future that i was going to face, and one of the things thats really been holding us back the last couple of years is this uncertainty and bickering about every single thing. So i think if we could get ourselves to a position where, say, we started with a 5 valueadded tax to learn how to do it and we promised in two years we were going to eliminate the Corporate Tax, i think about eliminating the Corporate Tax system and the individual tax system. Then i think people would say, wow, were headed off to a better place and we understand it and were all going to be better off. How do we get unemployment down . All this is, you know, talking about ways in which we can deal with what is essentially a theoretical problem. Right now the United States has no trouble borrowing. In fact, were borrowing at loi levels. Thats very dangerous fareed. I think something paul said is really important. Whats happening in europe would be a lesson to us. We still have time to phase this in. If you look in europe the lesson ought to be if you dont deal with the problems the holes get deeper and at some point you have to take much sharper measures. That means that can mean that you have to go through a difficult period to deal with what would otherwise be a deeply dangerous longterm situation. The lesson of europe is act now. But the reality all said, phase it in. And i would at least defer the implementation for the limited period with an enforcement behind that. Will any of this improve americas employment picture . Yes. For the very reasons paul said. If you have a sound Fiscal Program that dealt with our longterm imperative, then i believe, just as paul said, that it would increase Business Confidence significantly both because right now theres great uncertainty about future policy and Economic Conditions and because theres real concern about whether or government can function. In addition, if you properly functioned it you could have a moderately up front service. I think its the most important thing you could do. Bob rubin, paul oneill, glad to have you on. Up next, what in the world. Why the next policy crisis may come from an unlikely source. Ill explain it. Tdd 18003452550 lets talk about your old 401 k . Tdd 18003452550 you know, the one thats been lying around. Tdd 18003452550 tdd 18003452550 rollover your old 401 k to a schwab ira, and well help you tdd 18003452550 find new ways to make your money work harder. Tdd 18003452550 so if youre ready to teach your old 401 k some new tricks. Tdd 18003452550 tdd 18003452550 talk to chuck. Tdd 18003452550 rollover your old 401 k tdd 18003452550 to a schwab ira tdd 18003452550 and you can receive up to 600. Tdd 18003452550 see schwab. Com tdd 18003452550 for terms and conditions. Tdd 18003452550 call, click or visit tdd 18003452550 to open an account today. Good boy. 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[ all shouting ] put it down be cool everybody, just be cool does it price better on the side . No, it just looks cooler. The name your price tool, only from progressive. Call or click today. I got you covered. Thank you. Oh, youre so welcome. Now for our what in the world segment. If history is any guide, second terms are often disrupted by a Foreign Policy crisis. Its easy to see how that might happen over the next four years with iran or syria, but theres a distinct possibility that the next big Foreign Policy crisis will take place somewhere else. Perhaps thousands of miles away in asian waters over five islands and three barren rocks, all uninhabited except for a few goats. For months now, chinese and Japanese Naval forces have been con flonlts each other in the east china seas. Both countries claim a tiny set of islands. The japanese call them the sin ka cue islands, the chinese, the diaw use. The dispute involves energy. There are immense amounts of natural gas under the china saes. But above all it inkrofls history. Its two greatest powers, the two largest economies and militaries have an unresolved bitter relationship. China and japan have never had to occupy the global stage as equals. One has always dominated the other. For most of the past years china was the leader and japan accepted the role of a distant empire. That changed in the late 19th century as japan became the first asian country to modernize its economy and society and catch up with the wift. After the formation, japans military streng