Deficits: The Battle Over Taxing The Rich

When Congress returns after the elections on Tuesday, it will face one of the most hotly debated issues in the campaign: raising taxes on the rich.

That's President Obama's position: to keep the Bush tax cuts in place, except for those on the wealthiest two percent as a way to reduce the dreaded deficit.

It's an idea already percolating among the governors: eight states have increased so-called "millionaire" income taxes so far, as a way of avoiding drastic budget cuts on health and education. And on Tuesday, voters could make Washington State the ninth.

But with our national debt in the trillions, budget experts will tell you that just taxing the rich isn't enough.

And he says his own Republican Party has gone too far with its anti-tax religion.

"Tax cutting is a religion. What do you mean by that?" correspondent Lesley Stahl asked Stockman.

"Well it's become in a sense an absolute. Something that can't be questioned, something that's gospel, something that's sort of embedded into the catechism and so scratch the average Republican today and he'll say 'Tax cuts, tax cuts, tax cuts,'" he explained.

"It's rank demagoguery," he added. "We should call it for what it is. If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn't come up with $50 billion, when the problem is $1.3 trillion. So, to stand before the public and rub raw this anti-tax sentiment, the Republican Party, as much as it pains me to say this, should be ashamed of themselves."

These frank words come from Ronald Reagan's old budget director. Stockman was the architect of the largest tax cut in American history.

But he doesn't let the Democrats off the hook. He says he cringes when he hears President Obama say things like this: "I believe we ought to make the tax cuts for the middle class permanent."

"We have now got both parties essentially telling a big lie," he told Stahl. "With a capital 'B' and a capital 'L' to the public: and that is that we can have all this government, 24 percent of GDP, this huge entitlement program, all of the bailouts. And yet, we don't have to tax ourselves and pay our bills. That is delusional."

"Why isn't this statement correct? We cannot really deal with the deficit until we get our recovery underway?" Stahl asked.

"The recovery has already happened. It is weak, it is tepid," Stockman said.

Asked how he can say the recovery has happened considering there is a ten percent unemployment rate, Stockman said, "The unemployment rate is not going to drop by any material amount any time soon. And we're going to be in a period of austerity. We've had a 30-year spree of really phony prosperity in this country."

Now our national debt is growing by $100 billion a month. For those who say cutting spending is the answer, Stockman says both parties have thrown in the towel on that.

"Even Republicans have said there's nothing significant we want to cut. They don't want to cut Social Security entitlements; they don't want to cut Medicare reimbursements to doctors; farm subsidies; education loans for middle class students. Certainly not defense!" he said.

Many of the states are in the same boat, facing huge deficits and few prospects for cutting, which is why Washington State is joining the movement across the country to tax the rich.

On Tuesday, voters will decide on Initiative 1098 that would create a state income tax, but only on the wealthy, of whom there are many: 133,000 millionaires and seven billionaires, including Bill Gates of Microsoft.

His father, Bill Gates Sr., has poured his own money into backing Initiative 1098.

The tax would bring in $3 billion a year, to be spent mainly on education, which has suffered cutbacks as the state reels under a massive deficit.

Washington is one of only seven states without any income tax. The proposal would create a five percent rate on income over $200,000 for individuals and $400,000 for couples; a nine percent rate kicks in at half a million dollars on individuals and a million for couples.

"Let's say a couple earns $500,000," Stahl said. "How much do you think they'll have to pay?"

"Well, they would pay $5,000, because that's five percent of the $100,000 on which they would pay," Gates explained.

"Oh, they would only pay on $100,000. They're exempt up to the $400,000," Stahl replied. "So they'd only pay on $100,000."

"Precisely," he replied.
"Well, that's not very much…if you earn that kind of money," Stahl remarked.

"Precisely," Gates replied.

His son Bill is on his side along with the public employees' unions. The other side is a who's who of the state's big businesses: Boeing, Amazon and even Microsoft.

Bill Gates is still chairman, but Microsoft CEO Steve Ballmer opposes the initiative, which is why they're calling this the battle of the billionaires.

"Is it awkward," Stahl said.

"The word awkward fits. Yes," Gates agreed.

Ballmer's side argues that the "soak the rich" tax would stifle high-tech innovation and lead to businesses moving out of the state. "60 Minutes" asked Microsoft, Amazon and Boeing for interviews but they all declined.

"Businesses are saying they'll leave," Stahl pointed out.

"Yes. But the real truth of the matter is that the people that own businesses are the people who will be paying the tax. And my analysis is they don't want to pay the tax," Gates said. "The rich guys don't want to pay the tax."

"Are you saying you just think they're greedy?" Stahl asked.

"No," he replied. "They're defensive. I guess you could call it greed, I suppose. Wanting to not write another check, sure," Gates said.

"Steve Ballmer?" Stahl asked. "He's worth $14 billion. You don't think he…"

"He's a very fine guy, too. The fact of the matter is there are 43 states in this country that have a state income tax. And in those states, the Microsofts or the ABCs, whatever, have not fled the state. I mean, it's just a gross exaggeration," Gates said.

But entrepreneur Bryan Mistele begs to disagree. "This initiative really is a nail in the coffin of small businesses and start ups in our state. It really impacts the tech community very heavily," he said.

"Nail in the coffin? You mean, kill it off?" Stahl asked.

"That's correct," Mistele said.

Mistele is the CEO of Inrix, a software company that monitors traffic around the world and provides data for GPS systems and sites like MapQuest. He says businesses would leave the state, especially high-tech companies like his that deal in data and aren't tied down by factories or assembly lines. He would consider moving some of his 60 employees to other states where he has offices.

Asked what other states he'd consider moving his business to, Mistele said, "Massachusetts, Florida, California."

"Massachusetts, income tax. Go ahead. California income tax," Stahl pointed out.

"Texas, Florida, Michigan, Colorado," he added.

"Okay, four out of the six have income taxes. I mean I've heard a lot of businessmen say what you're saying. And I keep wondering, 'Well, where are they going to move if they leave?'" Stahl remarked.

"Well, each state has its own competitive advantages. So by adding this additional burden, it makes us much less attractive," Mistele replied.

Adam Stites is another entrepreneur who opposes the initiative. Five years ago he moved his company, iStores, from Portland, Ore. across the Columbia River, to Vancouver, Wash., just nine miles away.

"It broke down to taxes," Stites explained. "Oregon has the highest income tax in the United States, and Washington has the lowest at zero percent."

iStores is the largest online retailer of paint ball equipment.

Stites has been hiring new staff for a new company he acquired that sells prank novelties. Under the new tax, he would have to pay $50,000 a year and that, he says, would hamper his ability to expand any further.

"This money, if it passes, will go specifically to education, 'cause they've been cutting schools and things like that. So what is Washington State supposed to do about its schools in terms of revenue?" Stahl asked Stites.

"I think the state, in aggregate, needs to take a look at its expenses," he replied.

"Like?" Stahl asked.

"I've had opportunity in Portland to see cars being washed by third party - washing firms, cleaning cars on the weekends, for state vehicles. I don't have someone who cleans my car in a van, and waxes...," Stites said.

When Stahl pointed out that's in Portland, Stites said, "It's in Portland, but I think it's indicative of government spending."

But the state budget has already been cut by $5 billion, and the governor, Christine Gregoire, says they're at the bone.

"To cut people off hospice I think is immoral. To cut children off health care, to cut their education so they don't have a chance at a decent future I think that would result in an immoral budget," Gov. Gregoire told Stahl.

She says she doesn't understand why so many of the state's high-tech CEOs, who are always complaining about the woeful state of American education, are so opposed to paying this tax for schools.

"These businesses that want the educated workforce, they're against this. What do they say to you when you challenge them on this?" Stahl asked the governor.

"I tell them I have the utmost respect for them. These are great CEOs. And I say to them, 'Here is the problem. You always want us to invest more in education. And now you say no. So, my question to you, if not this, then what? Don't just tell me no,'" she replied.

Asked what they say to her, Gregoire told Stahl, "They don't have an answer, Lesley."

The initiative was way ahead in the polls until the opposition started airing ads saying 1098 is a slippery slope.

Polls now show the middle class thinks they too will be hit with income taxes. And the high-tech entrepreneurs we met say there's a fairness issue: Bill Gates got to start Microsoft without an income tax.

And this is something you hear a lot: that they find it curious Gates is supporting an income tax now. "I believe the Gates' have already made most of their money, so they wouldn't be taxed under a new income tax structure in our state," Bryan Mistele said.

"They wouldn't be taxed at all? No," Stahl said.

"Well, for people who've already made their money and paid taxes in this state, that money wouldn't be taxed again. It's only for people who are earning new money in this state," he replied.

"Well, that's ridiculous. I mean, my son will pay a huge, huge income tax," Bill Gates Sr. told Stahl.

"He will?" Stahl asked.

"Come on, he's the richest man in the country!" Gates said. "How could anybody think he isn't going to pay a huge income tax?"

"What is the income?" Stahl asked.

"What does a person with 50 billion dollars have for income? This conversation isn't making any sense," he replied.

Bill Gates would pay multi-millions in taxes on the income from his investments.

"And he wants to. He's told you that? He's for this?" Stahl asked.

"Well, 'wants' to is a little strong," Gates said. "He is for it. He's very willing."

But, as David Stockman will tell you, that attitude is hard to find. "We've demonized taxes. All right. We've created almost the idea they're a metaphysical evil," he said.

Still, he says there should be a one-time 15 percent surtax on the wealthy that he estimates would cut the national debt in half.

"In 1985, the top five percent of the households, wealthiest five percent, had net worth of $8 trillion, which is a lot. Today, after serial bubble after serial bubble, the top five percent have net worth of $40 trillion," he explained. "The top five percent have gained more wealth than the whole human race had created prior to 1980."

"Of course it would never pass. There's the rub," Stahl remarked.

"There's the rub," he agreed.

The antipathy to raising any taxes or making any real spending cuts, whether in Washington D.C. or Washington State, is so intense, Stockman despairs that when Congress returns after the election, they'll do what they often do: nothing.

"I remember that great expression, 'Let's kick the can down the road,'" Stahl said. "That became kind of the mantra."

"Yeah, and it still is today," Stockman agreed.

"Just kick it down the road," she said. "We'll solve it tomorrow."

"Kicking the can down the road, except it's no longer a can," Stockman said. "It's a giant junkyard."