The Democrats Can Win on Taxes

[MORTARDUDE]

The Democrats Can Win on Taxes THE WALL STREET JOURNAL

October 15, 2003

COMMENTARY


By RAHM EMANUEL

By arguing over which piece of George W. Bush's tax cut they would retain or rescind, the Democratic presidential candidates are passing up a big political and economic opportunity. The candidates should stop rearranging the Bush tax cuts and start proposing fundamental reform of the tax code.

Joe Lieberman's tax reform proposal, with its progressive structure, is a step in the right direction, but it needs more work in the area of simplification. Democrats need to become the party of tax reform and make President Bush own the cumbersome and regressive tax code he has created. The theme of the Bush tax code is this: With the help of their accountants and lawyers, the special interests win subsidies, shelters and loopholes, while middle-class families are buried under a crushing tax burden and piles of complicated IRS forms.

Payroll taxes, which are paid by middle-class Americans, now dwarf corporate taxes as the largest component of federal tax receipts. In fact, the corporate-tax burden recently fell to its lowest level since 1983. Moreover, according to the Center on Budget and Policy Priorities, the very wealthiest Americans, those in the top 1%, had in 2001 the largest share of the nation's total after-tax income since the Great Depression. The public's distaste for the current tax code is a direct result of this inequity. In a recent survey conducted by NPR and the Kaiser Family Foundation, 14% of respondents were upset with the amount they pay in taxes, 32% with the complexity of the system, and 51% with the wealthy not paying their fair share. By overwhelming margins, the public believes that the tax code is stacked against them and designed to benefit the well off.

Elections are about the future not the past. An argument about the 2001 and 2003 tax cuts would force Democrats into two strategic traps. First, they would forfeit the mantel of owning the future and would mire us in an argument about the past. Second, we would be walking into the president's argument on tax cuts versus tax increases. Wholesale tax reform enables the Democrats to frame the presidential election on our terms while sidestepping the political landmines his tax cuts have set for us.

An aggressive attack on the tax code should start with corporate expatriates. The president has blocked Democratic efforts to stop American companies from incorporating through a postal drop in island tax-havens that have cost Americans $5 billion over 10 years. Some corporations are actually rewarded with federal contracts while they move their corporate headquarters to Bermuda. Tyco, for example, avoided paying $400 million in U.S. taxes in the last three years by incorporating offshore, yet they were awarded $182 million worth of defense and homeland-security contracts in 2001.

Another example of abuse is the life-insurance policy known as "janitors insurance." Many corporations buy "janitors insurance" policies on the lives of hundreds of thousands of their employees. They receive $10 billion worth of tax subsidies as well as the "death benefit" when their employees die.

Nor should taxpayers be put in the position, as they would under the pending energy bill, to fork over another $20 billion worth of tax credits over 10 years to subsidize the core business mission of highly profitable energy companies.

These examples are only the tip of the iceberg. But they illustrate the inequity the public feels instinctively about the tax system.

With the code now spanning more than 45,000 pages, Democratic support for fundamental tax reform should go hand-in-hand with calls for simplification. As an alternative to the tax code, Democrats should embrace tax reform that actually helps working families. One such proposal with broad appeal is the "Simplified Family Credit." It would reduce 2,000 pages of the tax code down to one easy-to-use, 12-question form. In addition to simplification, the Simplified Family Credit maintains the progressivity in the tax code.

Under the Bush tax cut, a middle-class family of five earning $50,000 would owe $1,700. Under the Simplified Family Credit they would have zero federal tax liability and would actually gain an additional $550 credit. The Simplified Family Credit delivers both simplification and progressivity, and should be embraced by the Democratic candidates as a pillar of reforming the tax code.

Tax reform is more than a fiscal issue. It should also be framed as a values argument. As the scope of tax avoidance reaches massive proportions, we are left with one set of rules and obligations for the middle class and a far different set for special interests.

Tax reform for middle-class families is a potent issue, and the Democratic candidates should use it to their advantage. Sen. Lieberman is off to a good start, but we need to go further. The Bush tax cuts have placed a bigger burden on the middle class and left the special interests with a treasure chest of tricks and gimmicks. For Democrats, the campaign should not be waged merely against parts or all of George W. Bush's tax cuts but against his entire tax code. A tax code that respects the values and interests of the middle class should be the Democratic Party's battle cry in 2004.

Mr. Emanuel, a Democratic congressman from Illinois, was a senior policy adviser to President Clinton.