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[ chirp ] that economic storm is cloetser to the shores every day. you can call me nuts. you can call me chicken little but the political battle over extending the bush tax cuts is blowing the storm bands over our head. you don't need me to tell you that our economy is on the brink of weakening again. you feel it every day. the latest cnn orc poll shows just 27% of you say the economy is in good shape. 73% feel that the conditions are pretty poor. while rays of hope peek through the clouds from time to time, the u.s. economy is fragile right now. families are facing long-term unemployment. there are foreclosures, higher student loan payments, higher medical costs, so the notion that you may have to pay higher taxes by next year could make you to decide not to spend money you otherwise would have spent. i get it. everyone wants lower taxes. you can't have lower taxes. for years and years your federal government both political parties mismanaged the books and spent more money than they took in. our tax system is broken. half the country pays no income tax and the rich pay as a percentage of their income less than the middle class does. we have a tax system that needs entire overhaul and we have a lot of interest to pay on the debt that we have accumulated which is why at least for the moment you can't have a tax cut. what president obama wants to do is extend the tax cut that you have actually been living with for about a decade. back during the final years of the clinton administration the u.s. had a budget surplus. in the year 2000 the federal government took in $236 billion more than it spent. in the presidential election that year then texas governor george w. bush running against al gore pledged to give that money back to the taxpayers. >> we don't believe the surplus is the government's money. we know the surplus is the people's money. we're going to send some of that money back to the people that pay the bills. >> and send it back he did. when he became president thugh temporary tax cuts in 2001 and 2003 known as the bush tax cuts. the first of those tax cuts were set to expire back in 2010 but the economy was still shaky back then so vice president biden and senator mitch mcconnell struck a deal to extend them for two more years for everyone. now those tax cuts are set to expire again at the end of this year. it is part of the so-called fiscal cliff that economists are warning the u.s. could go over if congress doesn't deal with it. president obama says let's extend them for another year but and this is the key point, n for everyone, just for what he calls the middle class, families earning less than $250,000 per year or individuals earning less than 200,000. >> i believe that we should make sure the taxes on the 98% of americans don't go up and then we should let the tax cuts expire for folks like me, for the top 2% of americans. >> now, you probably heard that republicans want them extended for everyone which means the battle comes down to whether 2% of taxpayers, the wealthiest among us should stand in the way of everyone else continuing to pay the lower tax breaks. this is a conundrum for some but not for fur i zakaria. he proposes an unusual compromise between the right and left that no one get a tax extension. i assume you don't plan to run for office. >> this is good policy, not good politics. >> why should nobody get a tax break? >> first of all, if we were to say all the bush tax cuts were to expire, it would be simply getting us back to the rates that everyone paid under bill clinton's years in office, eight years, during which the united states had record and robust growth. secondly, we do have a deficit problem. with he are spending more than we take in and this is one simple way to do it. if you let the bush tax cuts expire, the united states budget deficit goes down to basically the lowest in the industrialized world. you no longer have a deficit problem. you have a long-term problem relating to medicare and health care costs and all the things people are worried about disappear. i think the argument that the economy is so weak that it can't withstand returning to these tax rates is probably not true anymore. the economy has slowly begun to recover. if you look at the housing market, it is clear that it has bottomed out. consumers have paid down debt. at some point we're going to have to get the fiscal house in order. this is the best mechanism. i have a secret weapon here which is i wouldn't -- that's my starting position. if you were to come and say to me we don't want to put all of these tax cuts in, let's phase this in over three or four years, i would say fine. why not instead then do a comprehensive tax reform? >> why not instead then do a comprehensive tax reform in everybody from every party says it. we have seen the tax code, 73,000 pages. it is impossible for anyone to understand and it seems inherently unfair to almost everybody. why don't we do it? >> we don't do it because this is what congress doles out in return for campaign contributions. this is the institutionalized corruption at the heart of the american system. we don't do cash and brown paper bags and pass them under bridges the way that politicians in the third world do. we do it openly on k street. what we are doing is essentially the same kind of corruption. what congress does it raises money for its campaigns. a congressman gets $50,000. nobody it paying him 50,000 dollars because they want coffee with him. he is not that interesting. what they are getting in return is a specific line in the tax code which is why our tax code is 73,000 pages. the french tax code, ali, is 1,000 pages long. the german tax code is 500 pages long. ours is 73,000 pages long. what does that tell you? we're giving away a lot of goodies in return for that cash. >> we may have the biggest tax code but you tend to point out that the american government compared to other developed governments is actually smaller. that is something i think people will find fascinating to hear. >> we have to keep in mind that when we think about america and we talk about tax rates and regulation, there are two-ways you can compare us against a mythical past that we don't really know about or just against the other rich countries in the world. if you look at the united states against the other rich countries in the world, we have a smaller government. we have lower taxes. we have lower regulations, so i am all for more regulatory reform, more tax reform. these are all important things. clearly that's not the big problem in america right now. the big problem in america i would argue right now is we haven't got our fiscal house in order. we're spending all of this money. to hear george bush talk about this as the people's money and so we should give it back, fine, it is the people's money but it is also the people's debt. we accumulated that debt doing things for people. >> because people want things from government sgr because people want things from government. they want medicare. they want medicaid. they want social security. >> let's show our viewers a chart of projected impact of some of the biggest things in the economy right now. when you look at the top group, that orange section, the yellow section is the bush era tax cuts. then you have that middle group, the orange section, which is a post 9/11 expenditures security wars in iraq and afghanistan, and the bottom is everything else including medicaid. the bush era tax cuts and the wars are half our estimated deficit, estimated debt. >> the important thing to notice is the bush era tax cuts and the wars as you say are about half of it, and that was in effect a policy decision that was a set of single set of policy decisions that could easily have not taken place. the blue, the other half, is an accumulation of loss of government programs that are frankly very popular and the reason they have risen is not because those programs have gotten bigger, it is because more of us have aged so the single most important reason that blue thing got bigger is medicare. more people have gotten older and since medicare covers them, more people are getting older. >> you're point is that's not a single policy decision we can take away, it is tougher. the other stuff is easier. let me go back to another point you made. that is six months ago i could have agreed with your position that it shouldn't be extended for anyone, these tax cuts. i am worried that given what is going on in europe and given the slowdowns in china and india, this is a couple billion people who are prospering at a greater rate and may be able to buy some of our goods and services and that we could be pushed into and i have had some economists tell me a 30% chance of recession. is this the right time to take that money away? >> so the ideal thing to do in my opinion would be not to try to stimulate the economy using tax cuts because the truth of the matter is people are not spending the money they're getting in the form of these tax cuts. we tried it. remember, the single largest part of the stimulus program was the tax cuts. before the stimulus bush and his last year in office and last months in office had the tax cuts and we've had two subsequent tax cuts. people aren't spending the money. they're paying down debt. they're maxed out. they're feeling poor. these tax cuts are not getting passed through to the economy. the best thing we can do is restore the federal government's fiscal balance sheet and let the government spend money on infrastructure, on broadband, on science and technology. ali, right now this week one of the most astonishing things happened. the federal government auctioned off debt. we tried to borrow more money. what turned out is the demand for american debt is overwhelming. if you adjust for inflation, here is what happened this week. people said to the american government we will pay you money to hold our money, so can we lend you money and we don't want interest rate. we will pay you a negative interest rate. we will pay you money. the federal government is getting all of this money as if it cannot find productive investments. we would be crazy, this would be the most mismanaged economy. it is fiscally irresponsible for us not to use this money to rebuild america. >> you have talked about rebuilding america for education and through infrastructure and other things. the criticism tends to be that the government can't seem to make the right decisions with regard to stimulus and spending it the right way and bblgz a whole bunch of little projects. will cain describes it as a christmas tree approach to decorating a stimulus. >> here is the answer and the answer is something that kay bailey hutchinson and president obama have jointly proposed which is an infrastructure bank. you take a certain amount of money from the federal government. you leverage it. you get a lot more from the private sector and you have an infrastructure bank that has a bunch of exports who determined what are the best infrastructure projects in this country and that means energy infrastructure, broadband, all of these things. guess what? congress doesn't want to do it because congress doesn't want infrastructure projects awarded on merit. they want it awarded on cronyism and political favors and bringing back pork to their project. the problem here again is that the best policy idea becomes politically unviable but we should -- that is the right approach. we do need -- the great deficit in america is that we have the worst infrastructure in the advanced industrial world, broadband, energy, physical. we have to rebuild it. >> thank you for joining us and setting off the show well. fareed zakaria is the host of gps. republicans claim the president's plan to let the bush tax cuts expire for the wealthy will hurt job creating small businesses. how many small businesses would really be affected? plus romney's economic advisor explains how cutting tax rates can be done without costing you more money. later, i have been saying that i am going to name names of the problem solvers. the first name i am going to name is the person at the root of our political problems in this country. [ male announcer ] if you believe the mayan calendar, on december 21st polar shifts will reverse the earth's gravitational pull and hurtle us all into space. which would render retirement planning unnecessary. but say the sun rises on december 22nd, and you still need to retire. td ameritrade's investment consultants can help you build a plan that fits your life. we'll even throw in up to $600 when you open a new account or roll over an old 401(k). so who's in control now, mayans? familying earns less than $250,000 a year or individuals earning less than $200,000 per year. according to mitt romney, this is what he said, successful small businesses will see their taxes go up dramatically and that will kill jobs. he said that on july 9th. remember that democrats say the only reason republicans want those tax cuts extended for everyone including the top 2% of earners is because they want to protect their wealthy donors. that of course is a tough charge to defend against so republicans need a better reason to want the tax cuts extended for the rich and calling it a job killing tax increase is arguably more effective. just because romney and the rest of the gop make that claim doesn't make it true. christine romans host of your bottom line joins me. why is the debate about personal income tax rates have anything to do with small business? >> it does. the irs allows small businesses to report business income on their personal returns and those businesses can be structured in different ways. for example, limited liability companies, partnerships, and s corporations. it is all very technical and each as their advantages and disadvantages. you don't have to be a tax accountant to understand what the debate is all about. all of these are flow-through entities because the business profits flow through the company back to the owners. those folks pay taxes on those profits at the individual rate. millions of american business owners do this, ali. >> how many of those millions of small businesses that use this flow through would be affected by letting the bush tax cuts expire for top earners. >> very few. most of them don't make enough money to be taxed at the highest income levels. in fact, congress's joint committee on taxation, the bipartisan group in congress knows exactly how many small businesses would be affected, just 3.5% of all small business filers would find themselves there at the top of the income tax bracket. that's 940,000 people. that means a vast majority of small businesses in the country, 96% would not see higher taxes under the president's plan. >> if mitt romney wanted to be more accurate, he could say something like 3 approxima.5% o successful small businesses will see taxes go up dramatically. what is his claim that returning taxes to the 2001 levels or that 3.5% is going to kill jobs? what's that about? that may not be true either because some of those so-called small businesses are often anything but sml businesses. these are not mom and pops. these are not the corner dry cleaner or the eye glass shop. we're talking in some cases about law partnerships, hedge funds, about celebrities who incorporate themselves in order to protect their assets against lawsuits or to write off expenses. many others who are simply people who work on their own. many of the 3.5% of of small businesses who would be affected are not job creating businesses in the first place. unclear that they would kill or create fewer jobs as a result of the tax cut expiring. in fact, in 2009 of the 400 richest taxpayers, 237 would be classified as small businesses because they reported income from one of those flow through partnerships or s corporations that christine was talking about. i want to bring in steven moore, an editorial writer with the wall street journal and enjoys telling me why i am wrong each week and i suspect you're about to do it again. i will give you a shot in just a moment. first, i have a little more to say about whether small businesses are as conservatives claim going to get hurt by the failure to extend the tax cut to the rich. let us for a moment assume they are, that some percentage of the 940,000 businesses are in fact job creating and that the expiration of their tax cuts will cause them to make less money. here is my proposes the solution. it is not for everyone and i am sure some accountants will disagree with me. say you file as an s or llc. why not switch over and become a standard corporation, a c corporation, and that way your business pays taxes at a lower corporate rate, you pay yourself a reasonable but not outrageous salary, below 200,000, and you could lower your personal income tax that way. i am just proposed a workable solution for a percentage of the 3.5% of all small businesses who may be affected by the expiration of the tax cuts and solved the job killing prosecute problem. tell me why i am wrong. >> you made my point that the taxes absolutely do affect behavior. what you described is exactly what will happen because under obama's proposal we'll actually have a higher tax rate on small businesses than we do on big corporations which makes absolutely no sense. why would we tax a small business with income of maybe a million dollars at a higher rate than general electric? you're right. what will happen under what obama proposes is a lot of those companies will become corporations. i am not sure that's a good idea. here is my fundamental problem with what you and fareed were talking about earlier on the show. i just think when you look at the income that is being targeted for these higher tax rates, you know this number, i have heard you say it before, 53% of that income is business income. it is not salaries. it is business income. a lot of that money gets reinvested in family-owned businesses and manufacturing companies and that maybe have 50 or $100 million of assets but are not corporations, and here is my problem. look, you're right. small businesses, there are tens of millions of small businesses in this country. a lot of them don't make any money at all and a lot of them are just maybe one or two employees. the major employers in this country do make more than 250,000 and they're the most likely to put out the help wanted signs and i just think it is very detrimental to raise the taxes at them at a time when we have such high unemployment. >> i know that it is that detrimental but we just got the conversation started. come back for round two. we'll take a quick break. enjoy the next few months because are you going to get hit with a tax bill you didn't see coming and we'll continue the battle when we come back. iness, do more business. in here, opportunities are created and protected. gonna need more wool! demand is instantly recognized and securely acted on across the company. around the world. turning a new trend, into a global phenomenon. it's the at&t network -- securing a world of new opportunities. ♪ [ feedback ] attention, well, everyone. you can now try snapshot from progressive free for 30 days. just plug this into your car, and your good driving can save you up to 30%. you could even try it without switching your insurance. why not give it a shot? carry on. now you can test-drive snapshot before you switch. visit progressive.com today. i am about to bust a big myth that letting the tax cuts expire is a job killer. steven is with us. only 3.5% of all small businesses, a number under a mill