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The Democrats' Limited Options

By Robert Samuelson

WASHINGTON -- Among Washington lobbyists, policy analysts, congressional staffers and journalists, the game last week was to figure out how the Democrats' capture of Congress will refashion legislative agendas. One answer is that we won't know until the leadership sets its political strategy, canvasses its members and consults interest groups. Another answer is: temper your expectations. Even forgetting possible vetoes by President Bush, the Democrats have less leeway to alter policy than their rhetoric implies.

Although Democrats didn't promise much -- they benefited heavily from unhappiness with the war in Iraq -- they still succumbed to exaggeration. Their sound bites ran ahead of plausible solutions. Consider three familiar themes. Bush's tax cuts for the wealthy; inaction on the minimum wage; and Republican opposition to negotiating Medicare drug prices with the pharmaceutical companies. All are of a piece. The Republicans are lackeys for the wealthy business class; they don't care much about the poor.

But what can the Democrats do? Let's see.

-- Tax Cuts for the Rich. Yes, Bush and Congress cut the top two income tax rates from 39.6 percent and 36 percent under Clinton to 35 and 33 percent. They also cut the top tax rate on capital gains (mostly stock profits) from 20 percent to 15 percent and the top rate on dividends to 15 percent (before, dividends were taxed as ordinary income with rates up to 39.6 percent). Because stock ownership is heavily concentrated among the rich, they benefited most from these cuts.

Suppose Democrats repealed them. The top rate would revert to 39.6 percent -- and so on. Given the Democrats' thunderous denunciation of these tax cuts, you might imagine that budget deficits would vanish and there'd be more money for health and education spending. Well, no. In fiscal 2007 and 2008, federal revenues would increase $42 billion and $63 billion, estimates the Tax Policy Center of the Urban Institute and Brookings Institution. Though big sums, they don't even cover the deficits, now running in excess of $250 billion annually.

Note: Most of Bush's tax cuts expire at the end of 2010, but Democratic leaders haven't pledged to repeal the tax cuts for the rich before that -- and they have pledged to protect Bush's middle-class tax cuts. Even undoing all Bush's tax cuts probably wouldn't eliminate budget deficits. Altogether, the tax cuts cost the government about $200 billion annually, estimates the congressional Joint Tax Committee.

-- The Minimum Wage. It hasn't changed since Sept. 1, 1997, when it went to $5.15 an hour. Looks bad for the Republicans. Democrats say they'll increase it, possibly to $7.25 in two steps by 2008. Unfortunately, the minimum wage isn't a powerful way to help the poor.

One problem: if you raise the minimum too much, you destroy jobs for the young and unskilled -- the people you're trying to help. Companies won't pay workers more than they're worth. Another problem: higher wages won't help many poor families because 40 percent have no workers and 35 percent have only part-time or part-year workers. Finally, many workers with wages around the minimum aren't poor. They're young or part-time workers from middle-class families.

Economist Jared Bernstein of the Economic Policy Institute, a liberal think tank favoring a higher minimum, thinks that almost 15 million workers might get a wage increase if the minimum went to $7.25. That would represent about 10 percent of all workers. But less than 40 percent of the wage gains would go to the poorest fifth of households.

-- Drug Prices. Democrats will move to lift the prohibition against the government negotiating directly with pharmaceutical companies over drug prices paid by Medicare. How much could be saved is unclear. The Department of Veterans Affairs already negotiates directly with drug companies. A study by Families USA, a liberal advocacy group, contends that the VA's prices on major drugs are 48 percent lower than Medicare's.

The administration says the comparison is misleading. The VA program serves a smaller population (4.4 million vs. 23 million for Medicare), and drug companies wouldn't provide such steep discounts for a bigger program. Moreover, the VA often gets lower prices by offering only one drug in a class -- and running a competition among suppliers. Medicare wants to provide more choice. Direct negotiations couldn't be easily grafted onto the existing drug benefit, which uses insurance companies. The insurers, says the administration, have already negotiated low prices.

On domestic policy, Democrats have few big opportunities. This creates a dilemma. They can either concentrate on symbolic acts (the minimum wage, the drug benefit) that sharpen their differences with Republicans. Or they can find less controversial matters, where cooperation seems possible, to advertise their fitness to govern. It will be difficult to do both. There's only one solace -- the Republicans face the same dilemma.

(c) 2006, The Washington Post Writers Group

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