POLITICS JANUARY 26, 2004
Everybody knew Howard Dean's proposal to repeal the Bush tax cuts would prove controversial in the general election. But during the Democratic nomination fight, too? Over the last few weeks, rivals have attacked Dean for saying that, as president, he would rescind even those parts of the Bush tax cut that are not directed at the very rich. "Some in my party want to balance the budget on the backs of the middle class," John Kerry declared recently, in a typical broadside. "Too many middle-class people are getting pummeled everywhere they turn." Several polls suggest that most Democrats agree: The middle-class tax cuts should stay. Indeed, the political backlash against Dean is becoming so intense that, last week, Dean started talking about introducing his own tax-reform plan, an idea he first floated months ago but seemed to have dropped.
Maybe advocating total repeal of the tax cuts really is political suicide. But, whatever Dean decides to do, there's another question that commentators rarely ask: In policy terms, is preserving part of the Bush tax cuts a good idea? Dean has said no, that, in the end, "middle-class people [would] get a better deal from President Dean." And he's almost certainly right. One reason the tax issue receives little policy analysis--as opposed to political analysis--is that it involves very daunting numbers. So let's keep the figures simple, starting with $4 trillion. According to the Urban-Brookings Tax Policy Center, that's roughly how much the Bush tax cuts are likely to cost in the ten years after 2005, when the next presidential term begins. That's a staggering sum of money and the central reason why all the Democrats running for president think at least some of the tax cuts should go. But which ones? While Dean and Richard Gephardt want to roll back all of them (more on Gephardt in a minute), Kerry, Wesley Clark, John Edwards, and Joe Lieberman argue for repealing only those tax cuts that target the very wealthy-- chiefly, reductions in the capital-gains tax, the estate tax, income-tax rates for the very wealthy, and various corporate income taxes. That would leave in place the child-tax credit, a rate reduction for the first few thousand dollars of taxable income, and other elements that benefit more downscale Americans. The conventional wisdom seems to be that, since the Bush cuts are so heavily weighted toward the well-off, the middle-class cuts must make up only a small fraction of their overall cost. But the conventional wisdom is wrong. Roughly speaking, the tax cuts Kerry and the rest suggest keeping amount to half of the cost of President Bush's cuts overall. In other words, the monetary difference between total repeal and partial repeal is a full $2 trillion. Although nobody talks about it, that's an enormous difference. The impact becomes clear once you realize that all the major candidates (again, excepting Gephardt) have proposed roughly the same amount of new spending, on everything from more generous college scholarships to near-universal health insurance. And all have pledged to significantly reduce the deficit, which, including the Bush tax cuts, could total $5 trillion over ten years. Doing those things simultaneously is just not plausible, since the new spending alone would probably soak up most, if not all, of the money available from partial repeal. Simply put, you can have the programs or you can make a significant dent in the deficit, but you really can't do both while leaving half of the Bush tax cuts in place. As Dean argues, "You cannot promise people tax cuts, college education, health care, and whatever else you want and say, 'Oh, it'll all be fine.'" The choice, then, really comes down to this: Is the middle class better off with the parts of the Bush tax cuts that Dean's rivals would leave in place or with the $2 trillion less in deficits that Dean would produce over the next decade? The case for Dean's approach starts with this crude analogy: Imagine, for a moment, you're a struggling middle-class family. You make just enough money to pay the electric bill, buy food, put gas in your car--but you also carry a huge credit card debt. Every month, the interest payments on the credit card get bigger, leaving less money for all the other necessities. Suddenly, your boss gives you a big raise. What do you do with the extra money? A vacation in the Bahamas would be nice; maybe a new car or furniture set, too. But, if you're smart, you'll pay down that credit card bill. If you don't, the balance will keep getting bigger, which means the interest payments will keep getting bigger, which means soon you'll have even less disposable cash than you had before the raise. And, when that happens, you can say goodbye to the travel agent and hello to the repo man, who'll soon be at your door for the furniture, the car, and maybe even your house. That's what the current tax debate is all about. Thanks to the Bush tax cuts, an already huge federal debt is getting even bigger. The government pays interest on its loans, just like a household paying down a mortgage or carrying a large credit card debt. The bigger the interest payments, the less money is left for other purposes. And, when the government doesn't have extra money, it's not vacations or luxury cars that get eliminated from the budgets: It's school lunches, health insurance for pregnant women, homeland security, or, eventually, Medicare and Social Security benefits. You can already see this taking place. According to an article in The New York Times last week, Bush's proposed budget for fiscal 2005 includes cuts in spending on medical benefits for veterans, housing subsidies for the poor, and job training for the unemployed--naturally, while proposing further new tax cuts. True, the government could just keep borrowing more money to pay its bills. But, eventually, the lenders would get sick of lending. At best, they would demand more money (i.e., higher interest rates) to keep underwriting American profligacy, which would slow down the U.S. economy. At worst, they would stop lending the money altogether, producing an Argentina-style financial calamity. It sounds insane, yes. But, just last week, the International Monetary Fund, which knows a thing or two about Latin American financial crises, issued a 60- page report warning that the United States had run up an "unprecedented level of external debt for a large industrial country," posing "significant risks" not only to the United States but to the entire world economy. The counterargument traditionally favored by conservatives is that, even if tax cuts drive up deficits in the short term, households will spend the extra money, making the economy grow faster and--eventually--generating more tax revenue for the government. But the Reagan-era tax cuts, which were supposed to pay for themselves in this way, never did. That's one reason most liberal economists now think that reducing the deficit actually does more for the economy, since, when the government borrows less money, the private sector can borrow more, thereby boosting growth and tax revenue. (This seems to be what happened during the late '90s while Bill Clinton was in charge.) Another counterargument, offered by Republicans and many Democrats alike, is a more straightforward moral appeal: The American middle class deserves, perhaps even needs, these cuts. "These are our people," Lieberman said in a recent debate. "They are hurting more today than I've ever seen them hurting in my adult life." And, indeed, when you consider the nation's growing income inequality--and the rising costs that parents, in particular, face from expenses like child and health care--the case for giving lower- and middle- income Americans tax breaks is pretty compelling, even if it means a greater financial sacrifice in the future. But there's a fatal flaw in this argument: It assumes the middle-class tax cuts are really directed at people with average incomes. They're not, at least not exclusively. They're good for households making up to $200,000 per year--a level which, according to Citizens for Tax Justice, is higher than 95 percent of U.S. households. Sixty percent of households, by contrast, make less than $45,000 per year. In other words, most of the so-called middle-class tax cuts actually go to people considerably better off than the average American. This is why two seemingly contradictory facts can be simultaneously true: Most of the money in the Bush tax cuts went to the wealthy, yet the partial repeal Clark, Kerry, and the others advocate would generate relatively little revenue. Ironically, if any of Dean's rivals can make a plausible case that his policy approach is superior to Dean's, it may be Gephardt. After repealing the whole Bush tax cut, he'd plow the entire savings into a very generous national health insurance plan. He wouldn't really reduce the deficit, true, but then neither would the Democrats urging only partial repeal. And, compared with them, Gephardt would probably do more for lower- and middle-income Americans. For example, according to estimates made on behalf of the Gephardt campaign, the average American making between $17,000 and $31,000 would get just $369 per year from the Bush tax cuts but the equivalent of $1,329 from the Gephardt health plan; Americans making between $31,000 and $50,000 would get just $742 from the Bush tax cuts but $2,182 from the Gephardt health plan. If you're willing to ignore the debt and want simply to throw money at the lower and middle classes today, then repealing the entire tax cut and transforming it into a national health insurance plan may be a better way to go. Again, none of this is to deny the obvious political perils of Dean's (and Gephardt's) approach. If Democratic spin-meister Chris Lehane (currently on Clark's payroll) can demagogue their proposals as a middle-class tax hike, think what Karl Rove could do. But the media has largely abdicated its responsibility to report on the substance of this issue, focusing almost exclusively on how Dean's stance will play in the campaign. Worse, on those rare occasions when reporters or pundits have dipped into the substance of the tax debate, they've gotten it wrong. Typical was this line in a late December article in The New York Times, apparently oblivious to the fact that Dean's numbers actually make sense: "[T]hough all [the candidates] have attacked the president for record deficits that could total $5 trillion over the next decade, none have offered more than hazy proposals for balancing the budget." A recent Washington Post editorial on Dean contained an even more unfair slight, attacking him for not being honest about the need to cut the deficit and save money for Medicare and Social Security--the very position that is getting him into so much trouble. "Mr. Dean's stance would be more responsible ... if he were not so quick to turn around and promise to spend all those tax savings and not so silent on how to address the looming crises in Social Security and Medicare." One reason Dean may not get credit for his stance on taxes is because it plays against his stereotype. A main narrative of this year's campaign is the way Dean is pulling the Democratic Party away from its Clintonian roots, a point Dean's rivals hammer home in their speeches about taxes. As Lieberman said in another recent debate, total repeal "would mean a middle-class tax increase. Bill Clinton was for a middle-class tax cut." Well, sure. But the cuts Clinton championed in his 1992 campaign were far more modest, worth just $350 per family and only available for families making less than $80,000. More important, Clinton also pledged to reduce the deficit in half in his first term, a major reason he ended up discarding the middle-class tax cuts altogether in his first budget deal. That budget agreement was instrumental in a key Clinton accomplishment: eliminating the deficit--something Dean would do much quicker than his rivals. Don't forget, too, that another staple of Clintonism was the pairing of rights with responsibility--the idea that government could only help citizens willing to take some responsibility and make some sacrifices for their own future. Here's Dean, explaining his position: "We cannot keep telling people we're going to give them all the programs they want and then there's not going to be any sacrifice." Who's the real Clintonite now? Of course, any discussion of how the Democratic candidates' tax plans would work out as policy are inherently surreal: It's virtually inconceivable that a Democrat would not only win the White House but bring in enough liberal Democrats to repeal the entire Bush tax cut. But the candidates' budget plans are important, because they tell us something about the men who stand behind them. If a candidate like Dean is willing to risk popular backlash by running against middle-class tax cuts, then he probably has far more resolve than his rivals to fight for fiscal responsibility. Maybe that's not the smartest thing to do politically, but it's the right thing to do substantively. Somebody ought to mention that once in a while.