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Don’t Kid Yourself – Whoever Wins, Taxes Rise – EPI Viewpoints

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Don’t kid yourself – Whoever wins, taxes rise

But with simplicity and fairness, the results won’t be too painful

By  Max B. Sawicky

You heard it here first: If President George W. Bush wins a second term, he will sign a tax increase into law. If a Democrat wins, you can expect the same. The budget is far too out of whack for any other outcome.

Growing deficits will eventually begin to damage the economy, probably with interest rate spikes followed by turmoil in industries like housing and auto.

The Bush administration says spending discipline can forestall the projected deficits. The fact is that high and growing deficits remain in the cards even with extraordinary spending restraint. Without tax increases or politically unpalatable service cuts, the only source of savings is a gigantic, wholly improbable 75 percent cut in so-called “discretionary spending” — the kind of spending used to finance rockets to the moon.

Of course, Congress just added a new entitlement — the drug benefit. Unless they opt to pay for it by reducing benefits for the tens of millions of baby boomers who will be retiring soon, the only alternative is tax increases.

If we put aside for the moment the current ridiculous fiscal path we’re traveling thanks to the ill-advised 2000 tax cuts, there’s a pleasant surprise even for the tax cutters. If we use pre-2000 tax law as our benchmark, we can preserve some tax cuts and regain enough revenue to improve the budget situation.

How to do it? The first goal should be simplicity. What are the chief sources of complexity in the income tax? One is the different tax rates for different kinds of income. Capital gains and dividends receive more favorable tax treatment than wages. Tax all income alike — it’s simple and fair.

Second, the 2000 rate reductions have to be reversed, starting at the top.

Does the result have to be spinach? No. The 1993 Clinton tax increase was leavened by expansion of the Earned Income Tax Credit (EITC). Folding in some tax cuts can take the edge off the difficult, inevitable political exercise of revenue recovery.

Once again, simplicity and fairness are the watchwords. For most people, the greatest source of complexity is the tangle of tax benefits for families with children — in particular, exemptions, the Child Tax Credit, and the Earned Income Tax Credit.

The solution is to simplify, consolidate and expand tax credits for kids. First, for every dollar of the parents’ earnings, starting with the first, allow a credit of 50 cents, up to a maximum of $2,000. Second, allow a credit against the payroll tax for every worker through the income tax. This combination would preserve the lion’s share of “middle class” tax cuts already passed, while helping those who have yet to see any such relief.

Reps. Dennis Kucinich, Barbara Lee and Bernie Sanders have introduced legislation along these lines in Congress. Sometimes criticized as out of the mainstream, these members are ahead of the curve this time. It is President Bush and the vast majority of legislators who have acquiesced to a patently unsustainable fiscal

Thinking out of the box is the preferred order of the day, because inside the box, budget policy is out of this world.

Max Sawicky is an economist at the Economic Policy Institute in Washington, D.C.