Pin the Label on Tax Policy

Author: David E. Rosenbaum

Published: February 15, 2004

WHATEVER happens in the race for the Democratic presidential nomination, the general election campaign is shaping up as a showdown between candidates with competing philosophies on tax policy.

President Bush pushed large tax cuts through Congress in each of his first three years in office. Now, although he says the country is on a wartime footing, and despite the largest budget deficit in history, he wants to make those tax reductions permanent and add several new ones.

All the candidates for the Democratic nomination want to cancel at least some of the tax cuts enacted in the last three years. Senator John Kerry of Massachusetts, the front-running Democrat, would repeal the cuts for taxpayers with incomes of more than $200,000 but retain those for people who earn less.

Last week, voters got a preview of what to expect in the fall campaign when the president traveled to Springfield, Mo., to speak about the economy. "They're going to say, 'Let's not make the tax cuts permanent,' " Mr. Bush declared. "Now is not the time to raise taxes on the American people."

"People have got to understand and listen to the rhetoric carefully," Mr. Bush added. "When they say, 'We're going to repeal Bush's tax cuts,' that means they're going to raise your taxes, and that's wrong, and that's bad economics."

Mr. Kerry responded in a campaign appearance in Memphis. "If George Bush wants to stand there and defend people who earn more than $200,000 a year getting a tax cut instead of giving health care to Americans and instead of investing in education and job training," he said, "that's the debate we deserve for this nation, and I think it's a debate we will win."

Any candidate's specific campaign promises about taxes, of course, are a long way from becoming law. Bill Clinton built his successful 1992 campaign around the idea of the "forgotten middle class" and promised a middle-class tax cut. Once he was elected, he abandoned the tax cut and concentrated on reducing the budget deficit.

The tax increases he won in 1993 were imposed largely on the wealthy, but at least two changes - a higher gasoline tax and income taxes on some Social Security benefits - hit middle-income taxpayers.

Even if the winner of the election this November tries to fulfill his campaign promises, he may not be able to do so. Mr. Bush may not have the votes in Congress to make his tax cuts permanent over a likely filibuster in the Senate. If Mr. Kerry is elected, he may find it difficult to get any programs through Congress if it remains under Republican control.

Still, the difference in philosophies is important, because it establishes where the candidates intend to place emphasis if they are elected.

Gen. Wesley K. Clark withdrew from the Democratic race last week, leaving only two other candidates besides Mr. Kerry who have received more than 10 percent of the vote in several primaries and caucuses: Howard Dean, the former governor of Vermont, and Senator John Edwards of North Carolina.

Dr. Dean would repeal all the Bush tax cuts and use most of the money saved to pay for universal health insurance. He has talked about but never specifically proposed a reduction in the Social Security payroll tax.

Mr. Edwards, like Mr. Kerry, advocates canceling the tax cuts for the wealthy and retaining those benefiting the less affluent. Specifically, he would repeal the reduction in the top two tax rates and the new rates on capital gains and dividends for those with incomes of more than $240,000 and would retain the estate tax. He advocates new tax breaks to help middle-income families make down payments on homes and build private savings.

The Bush tax cuts are scheduled to expire toward the end of this decade. The Tax Policy Center, a project of the Urban Institute and the Brookings Institution, calculated that if the tax cuts were extended, $4 trillion would be lost in revenue over the 10 years from 2005, when the new president will take office, through 2014. If tax cuts were canceled for those with incomes of more than $200,000, about half of that revenue would be retained, the center found.

The details of Mr. Kerry's plan have not been spelled out. Presumably, for people who are not rich, he would retain certain tax breaks:

The 10 percent tax bracket, which covers the first $7,000 of a single filer's taxable income ($14,000 for married couples filing jointly).

The higher tax credit for children, now $1,000 a child but scheduled to drop to $700 for 2005 through 2008.

The tax break that reduces the likelihood that a working married couple would owe higher taxes than they would if they were single.

Mr. Kerry would certainly not allow the estate tax to be canceled, and he would return the top tax rate, now 35 percent, to 39.1 percent, where it was in 2001.

But it is not clear how Mr. Kerry would go about charging taxpayers with incomes of more than $200,000 a higher rate of taxes on stock dividends and capital gains than would be owed by people with smaller incomes.

In addition to making permanent the tax cuts approved in 2001, 2002 and 2003, Mr. Bush wants to create two savings accounts in which the earnings would accumulate tax-free, allow taxpayers who take the standard deduction to take an additional deduction for at least part of their charitable contributions and prevent many taxpayers from being hit with the alternative minimum tax for another year.

The savings accounts would have the effect of exempting from taxation a large portion of Americans' earnings from investments. These accounts would not lose much revenue for the government at first but would be very costly years from now.

Mr. Bush says that regardless of the budget deficit, now above $500 billion, his tax cuts are good for the economy.

On "Meet the Press" last Sunday, the moderator, Tim Russert, noted that every wartime president since Abraham Lincoln had raised taxes to help cover military expenses, and he asked Mr. Bush whether he intended to do that.

The president implied that he would not. "I believe that if you raise taxes as the economy is beginning to recover from really tough times, you will slow down economic growth," he said.

How about, Mr. Russert continued, not cutting taxes further until the budget is balanced? Mr. Bush would not make that promise, either.

Mr. Kerry labeled Mr. Bush's tax policies the height of folly. As for making the wealthy pay higher taxes, "he can call it what he wants," Mr. Kerry said last week, sharpening his argument for the fall campaign. "I call it fairness for all Americans."