February
16, 2005
Democrats Should Get Ahead of Bush On Tax Reform
By
Mort Kondracke
Democrats have allowed President Bush to seize the initiative
on Social Security reform, but they still have time to beat
him to the punch on another priority: tax reform.
Bush has appointed a bipartisan tax reform commission that's
not due to report until July 31. That gives Democrats an
opportunity to put progressive ideas on the table early.
And for input, they should study two proposals, one a year
old and the other forthcoming, from centrist sources.
The first is the "radical tax reform" agenda
advanced last year by Maya MacGuineas, president of the
Committee for a Responsible Federal Budget and fiscal policy
director at the New America Foundation. The core of her
agenda is replacement of the regressive payroll tax with
a "progressive consumption tax" that would encourage
savings.
The other idea, known as "family-friendly tax reform,"
will be unveiled this month by the Progressive Policy Institute,
the think tank of the centrist Democratic Leadership Council.
It proposes to consolidate and enrich tax benefits currently
offered for retirement, college, home-buying and children.
It would pay for them by closing 100 corporate tax loopholes
costing $400 billion per decade.
So far, Bush's major approach to taxes has been to cut
them, to the tune of $2 trillion over the current decade
and more if these cuts are extended.
Aides say that Bush's ideas for tax-deductible health savings
accounts, retirement accounts and education savings accounts,
plus lower taxes on investment income, amount to piecemeal
tax reform - a gradual conversion of the income tax system
to a consumption-tax system.
Critics argue that this approach, "tax reform by subtraction,"
benefits those wealthy enough to save and those who currently
file itemized tax returns. They also tend to complicate
the tax system.
On Jan. 7, Bush charged his nine-member commission, headed
by retired Sens. Connie Mack (R-Fla.) and John Breaux (D-La.),
to recommend ways to simplify the tax code and "share
the burdens and benefits of the federal tax structure in
an appropriately progressive manner."
The prospect of a new tax reform debate has led Republicans
to float - or re-float - proposals such as a national sales
tax, the "flat tax" and Ways and Means Chairman
Bill Thomas' (R-Calif.) proposal to replace the corporate
income tax with a European-style value added tax on purchases.
It's time for Democrats to get into the game with something
beyond the idea, suggested by Sen. John Kerry (D-Mass.)
in 2004, to repeal Bush's tax cuts for people making $200,000
or more.
MacGuineas, in an Atlantic Monthly article in January,
said that such "left-leaning" proposals - raising
marginal tax rates on the highest-income brackets, for instance
- are "the wrong choice" because "the purpose
of the tax code should not be to punish rising incomes or
wealth creation."
"Besides," she wrote, "there are limits
to how much we can tax income and capital gains without
undermining our competitive position in the world."
She did argue that over the past several decades, the tax
system has become less progressive, less efficient and less
able to meet the government's obligations. Cuts in individual
and corporate taxes, increases in state sales taxes and
reductions in capital gains taxes have "shifted the
tax burden increasingly down the income scale from the rich
to the middle class and the working poor" - precisely
those who have profited least from the productivity gains.
Payroll taxes for Social Security and Medicare, the largest
federal taxes that most Americans pay, are especially regressive.
Wages are taxed at 15.3 percent whether the earner is making
$25,000 a year or $250,000.
And the Social Security portion (12.4 percent) applies
only to wages up to $90,000, so the $25,000 earner pays
a much higher effective tax rate than the $250,000 earner,
the bulk of whose income is exempt from the tax.
"And investment and employee benefits - which accrue
disproportionally to high-income earners - go entirely untaxed,
making the system still more regressive," she wrote.
"Moreover, given increasing global competition and
our graying population, it is very important that our tax
system not only encourage savings, but also discourage harmful
consumption."
To do this, she would eliminate the payroll tax and replace
it with taxes on the difference between what a person earned
and what he or she saved - a consumption tax like sales
taxes and value added taxes, but more progressively imposed.
Her idea is that people would pay no tax on the first $25,000
of spending, 10 percent on spending from $25,000 to $100,000
and 15 percent on spending above $100,000.
"The less you spent, the lower your tax rate would
be," she wrote. Low-income earners would for the most
part be taxed less onerously, since they spend less. Middle-
and high-income earners would have an incentive to save
their money, preparing for retirement and bolstering the
country's long-term economic prospects."
MacGuineas also proposes broadening the base of taxes by
closing corporate loopholes, limiting deductions on employer-provided
health benefits, taxing pollution and the use of nonrenewable
resources and imposing user fees on television's use of
the airwaves.
In the meantime, the PPI proposal calls for consolidating
current retirement, college, homeowner and "family"
tax breaks into single categories and making the benefits
richer for lower-income participants. The breaks would be
available to people regardless of whether they filed tax
returns, and in many cases would be refundable credits,
meaning they'd be available to people who earned too little
to pay income taxes.
One part of the proposal involves creation of universal
pension accounts that the government would open with a $500
"stake" and that workers would carry from job
to job. The "family" portion would consolidate
and enlarge per-child benefits currently available to $3,500
for the first child to a maximum of $7,000 per family. The
college tax break would double from the current $1,500 per
year to $3,000, and beneficiaries would have to agree to
perform two years of public service.
Bush has shown good faith in appointing a bipartisan panel
to consider tax reform. Democrats ought to write their plans
in the same spirit - not to score points, but to get something
passed that will make the tax system more simple and fair.
Mort
Kondracke is the Executive Editor of Roll Call.
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