If Democrats want to win the tax battle against President Bush, they need to get off the defensive, and soon. Instead of capitulating to his demands or jumping into a bidding war, Democrats need to change the subject of the debate from tax cuts to tax reform.
For two years now, the Democratic Party has been knocking at the knees over the tax issue -- too timid to oppose the Bush plan, too cautious to propose a compelling vision of its own. Along the way, Democrats forgot a central lesson of the 1990s: The only way to defeat big, irresponsible tax cuts is to show what they force the country to give up -- and to put forward a compelling, responsible alternative the country can afford.
It's not too late. Democrats should just say no to the new Bush tax plan, another headlong rush to reward wealth and privilege. The country can't afford to run up record deficits to open big new loopholes for those who have already got it made.
But it's not enough simply to oppose the Bush plan: The president is all too happy to accuse Democrats of wanting to raise taxes. To beat the Bush rap, Democrats have to go further and show that they alone have a plan to reform the tax code to reward work and responsibility, not wealth and privilege.
The Bush administration -- by its own admission -- is using the anemic economy as an excuse for permanent tax relief for the wealthy. Like the president's previous tax cuts, his recently proposed stimulus package further tilts the system in favor of the fortunate few. Nearly 70 percent of the benefits of its signature proposal -- ending the so-called "double taxation" of stock dividends -- will go to the top 5 percent of taxpayers. Couple that with his effort to accelerate the tax cuts passed in 2001, most of which also were geared toward upper-income earners, and his true aim becomes clear: a kinder, gentler tax code for America's rich and famous.
Like the first Bush plan, this one has another fatal flaw: We can't afford it. In his first year in office, Bush presided over the fastest run on red ink in the nation's history. Now he is on a pace to turn the record surplus he inherited in 2000 into a record deficit in 2004 and beyond.
But to expose President Bush's Achilles heel on taxes, Democrats need to put forward an ambitious long-term reform plan of their own. Simply tinkering at the margins won't do. "You've got to beat something with something," says Rahm Emanuel, a former Clinton White House adviser and newly elected Democratic congressman from Illinois. "And I'm not going to be a defender of the tax code."
Democrats need to shelve the John Maynard Keynes textbook and crack open David Osborne's Reinventing Government. The challenge they face isn't how to craft a better stimulus bill -- any Democrat could do that in his sleep -- but how permanently to overhaul the tax system so that it's fairer and less burdensome for middle-class Americans.
While that's no small task, a New Democrat tax reform movement is gaining momentum. Democratic reformers have been circulating ideas to simplify the complex web of tax breaks that are supposed to help families raise their children, pay for school, and build a nest egg. Here are some of their best ideas.
I. Rewarding Work and Family. Leave it to Washington to bury working parents with paperwork in order to get the most basic tax relief. Although family-related tax credits have been expanded in recent years, they remain far too complicated or narrowly focused for many of their intended recipients to benefit. In Chicago, for example, more than $100 million in refunds went unclaimed in 2000 because of the difficulty of applying for the Earned Income Tax Credit.
Want to replace 200 pages of the tax code with a single 12-line form and provide tax relief to working families? How about the Simplified Family Credit (SFC) being championed by Congressman Emanuel. "What makes the unified family credit so attractive is its simplicity as well as its progressivity," he says.
The Simplified Family Credit would replace four current programs -- the Earned Income Tax Credit, the Child Tax Credit, the Additional Child Credit, and the dependent exemption for children -- and provide more benefits to more families than all of them combined. Families would receive $1 in a refundable credit for every $2 earned -- up to the maximum credit amount of $3,500 for a family with one child, $5,200 for two children, and $7,000 for three children. By contrast, the EITC provides a maximum credit of $3,900 for a family with two children that earns $15,000.
Not only would the SFC be more generous than the EITC, it also would affect more families. The EITC evaporates entirely for two-child families that make more than $34,178. Under the SFC, families with two children that earn between $35,000 and $120,000 would be eligible for a $3,500 credit.
The cost for this reform proposal: $200 billion over 10 years. "If we're going to spend $200 billion trying to liberate and educate the children of Iraq, we can surely do that for America's children," Emanuel said.
II. Promoting Retirement Savings. Congress has larded the tax code with various tax-favored vehicles for boosting golden-years savings. "Each year, they say, 'Wouldn't it be neat if we did this little twist?'" said Paul Weinstein Jr. of Johns Hopkins University and the Progressive Policy Institute. The result is an indigestible alphabet soup of IRAs, SEP-IRAs, Simple Plans, and Keogh Plans.
The complexity of retirement savings incentives plainly inhibits participation. One survey showed that only 17 percent of employees knew of the different retirement programs geared specifically for workers. What's more, the tax system perversely provides the biggest incentives to save to those who are already saving the most, and provides little incentive for those who lack retirement funds to save. So how can this system be improved?
First, Weinstein suggests collapsing today's 16 different IRA accounts into one. His "universal pension" would resemble today's IRAs, but with a few improvements. Workers could direct cash from 401(k) plans into the new plans. That ensures portability, and guarantees that workers, not employers, will control the funds. In addition, every working American would receive $500 upon reaching the age of 25 to kick-start his or her personal kitty. This "Homestead Act for the Information Age," as Weinstein puts it, would cost about $50 billion over 10 years. Former House Minority Leader Richard Gephardt has already introduced a version of the universal pension as a bill.
That's a start for the tens of millions of individuals who don't participate in IRAs or 401(k)s today. Former White House economic adviser Gene Sperling suggests going further. Instead of repealing the estate tax, increase the per-couple exemption from $2 million to $5 million, thus freeing 99 percent of estates from the tax. Use the revenues saved (an estimated $600 billion over 20 years) to finance a "plan for progressive savings accounts outside of Social Security."
Under Sperling's plan, the government would provide up to $1,000 a year in matching contributions for savings deducted from paychecks -- a one-to-one match for middle-income workers and a two-to-one match for lower-income workers. If a family eligible for a two-to-one match were to kick in $700 a year and earn 5 percent on it each year, in 40 years it would amass a nest egg worth $250,000 in 2002 dollars. Private companies or the thrift savings plan now used by federal workers would manage these accounts. Aside from increasing national savings, such a program would harness the power of private markets to supplement existing retirement programs -- all of the potential upside of private accounts with none of the risks of privatizing Social Security.
The Bush plan would starve Social Security -- and strangle Social Security reform. It would also force tax increases down the road. The Sperling plan would put the baby boom well on the way to a secure retirement.
III. Streamlining Education Tax Incentives. Another area of the tax code ripe for streamlining and simplification is education tax incentives. The federal government provides a myriad of deductions, credits, and tax-favored accounts to help individuals and families save and pay for higher education. Despite these incentives, most families still struggle to find the money to pay for college. A more rational -- and more generous -- system of education tax breaks would help.
The Clinton administration expanded the number of incentives available to college and graduate students with measures like the Hope Scholarship and the Lifelong Learning deduction. As part of the Bush tax cut in 2001, Congress expanded Education Savings Accounts, which allow families to contribute up to $2,000 annually into accounts that can grow tax-free as long as the money goes to pay for a child's education. Other education incentives in the tax code include "529" accounts, the student loan interest deduction, and the higher education deduction. In all, there are seven different education tax breaks worth $8 billion a year that could be consolidated and made more generous.
Sen. John Edwards (D-N.C.) has already called for a single education credit with one set of guidelines that every family can understand. Weinstein also has a proposal in the works for a single, refundable tax credit that would be available to all students.
Like any meaningful change, none of these tax reforms will come easily in Washington. To pay for these reforms, the country will have to freeze Bush's tax cuts for the top tax rate or stop his total repeal of the estate tax -- changes that affect less than one-half of 1 percent of the population, but that Republicans are sure to fight tooth and nail.
Moreover, behind every arcane provision of the Internal Revenue Code lies a hired gun waiting to leap into action and earn his keep as a special interest lobbyist. Let's be honest: While some Democrats will see the value of family-friendly tax reform and embrace it, many would rather simply hang on to the tax revenue and spend it on future programs.
But Democrats may have few other options to challenge the president on taxes. They've already lost one fight with him on taxes -- not just in Congress, but at the ballot box as well. The country can't afford for them to lose another. Tax reform just may be their best choice.
